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Having It Both Ways: GCC Oil Faces Peak Demand

Reports by Antoine Halff & Robin Mills • December 15, 2021

This report represents the research and views of the author. It does not necessarily represent the views of the Center on Global Energy Policy. The piece may be subject to further revision. Contributions to SIPA for the benefit of CGEP are general use gifts, which gives the Center discretion in how it allocates these funds. More information is available at Our Partners. Rare cases of sponsored projects are clearly indicated. For a full list of financial supporters of the Center on Global Energy Policy at Columbia University SIPA, please visit our website at Our Partners. See below a list of members that are currently in CGEP’s Visionary Annual Circle.

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Executive Summary

Global efforts to address climate change offer difficult choices for the oil- and natural gas-reliant economies of the Gulf Cooperation Council (GCC). While swings in commodity prices over the decades have led to calls for economic diversification, some countries are now planning in earnest how best to adjust to the prospects of peak oil demand as the world strives to meet Paris Agreement and Glasgow Pact goals and an increasing number of nations commit to net-zero carbon emissions by midcentury. The issue is no longer simply about volatility and cyclicality of the oil market but rather a secular, structural, irreversible decline in global oil consumption, and the choices facing producers to support their hydrocarbon-reliant economies are fraught with risk.

This paper, part of the work by Columbia University’s Center on Global Energy Policy on oil and gas and the energy transition, examines two broad actions being taken by petrostates to remain relevant in a decarbonizing world: demand defense and demand creation.

Demand defense involves many tactics, including price and volume policies that drive out high-cost competitors and ensure maximal use of the generally lower-cost oil reserves held by GCC states. These states can, for example, encourage the development and deployment of technologies such as carbon capture, utilization, and storage that may make continued use of fossil fuels during the transition more palatable. They can also adopt oil and gas production techniques that generate a smaller carbon footprint, such as curbing gas flaring and venting practices to reduce methane emissions, and electrifying offshore installations. In addition, they can attempt to support demand by investing in improved vehicle fossil fuel efficiency to cut the environmental impacts and the cost of travel.

In addition, GCC countries can look to create new demand for their oil and gas reserves, tapping into new or growing businesses and regions. Petrochemicals for products with anticipated demand growth such as plastics and other non-metallic materials is an area of intense focus. Investing in new energy creation, such as hydrogen production, is also being considered through pilot projects. And while most oil producers have a keen interest in capturing existing high oil demand in China and India, others are looking to emerging economies, mostly in Africa and parts of South Asia, which still face energy poverty. With the right infrastructure investments, these regions could create substantial new demand as fossil fuels substitute for unsustainably harvested biomass, which can result in better—if not zero-carbon-ideal—health, environmental, and climate impacts.   

The routes GCC countries take in adjusting their economies to peak oil demand have major implications for the region as well as for the pace and scope of the global clean energy transition, including the following:

  • Policies encouraging higher oil demand, if not offset elsewhere, are likely to draw strong opposition from environmental organizations and financial institutions.
  • Countries that are large oil and gas exporters will want to preserve markets for both these fuels as much as possible. Major oil producers with natural gas export potential may look to develop sales of the fuel due to its perception as a greener alternative to energy sources such as coal, at least during the transition to full decarbonization—though natural gas too is under growing environmentalist challenge.
  • Increased use of fossil fuels will lead to higher carbon dioxide emissions, particularly in the near term, and potentially necessitate a faster decline in overall emissions thereafter. This could expose oil producers to trade restrictions or even boycotts.
  • Extended use of fossil fuels and the related climate damage is likely to harm a number of leading oil exporting countries directly through drought and desertification, flooding of low-lying coastal areas (including important energy facilities), loss of fisheries, and heat waves and near-intolerable summer weather, and indirectly via political destabilization and refugee flows.
  • Because of these geopolitical and environmental risks, any actions to foster oil demand would have to be accompanied by robust and realistic measures to offset increased emissions or reduce them in other sectors, along with a clear communication campaign. Such a campaign would need to tout the benefits of new oil use in, for example, producing products with environmentally superior characteristics and reducing energy poverty in lower-income countries.
  • Investments in refineries, petrochemical facilities, and improved internal combustion engine vehicles are tantamount to doubling down on an oil-fueled future. Stranded-asset risks loom large. Major GCC oil exporters may seek to privatize a portion of their resources as well as hedge against peak oil demand by investing profits in nonoil technologies such as biomaterials; battery technologies and related minerals; electric vehicles, charging stations, and associated retail; and wind and solar power.
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Having It Both Ways: GCC Oil Faces Peak Demand

Reports by Antoine Halff & Robin Mills • December 15, 2021