By Daniel Litvin – A version of this article appeared on The Guardian comment website, ‘Comment is Free’ – Click here to view
As this article went to press, two major global summits were being held, each representing an apparently distinct, geopolitical chess game.
The first, in Abu Dhabi, was the meeting of OPEC, the Middle East dominated oil producers club. At this gathering, OPEC countries were due to negotiate among themselves whether and by how much to increase oil output. With the oil price reaching near-record highs in November (albeit dipping more recently), this game was being anxiously watched by major oil-importing nations, such as the US, European countries, and China.
The second summit, in Bali, was the meeting between the world’s governments to discuss climate change (these talks looked set to be dominated by the big economic powers – that is, mostly oil-importing nations). The goal here was to try to come to an agreement on limiting global greenhouse gas emissions in the period after the Kyoto protocol expires in 2012. This was expected to be difficult given the multiple players and interests at stake.
But, whatever the outcomes of the two summits in the immediate term, the major oil importers may be missing a trick if they do not now begin to exploit the linkages between the two issues: for if they succeed in striking a new climate deal, whether at Bali or at later stage, they have the opportunity to gain powerful extra leverage over the long-term oil-market approach of OPEC countries – and this in turn could provide extra cement for agreement between themselves over climate change. Oil importing countries have traditionally developed separate international negotiation positions around these two issues (with energy ministries typically focusing on oil price concerns, and environmental ministries working on climate change). In this case, however, it makes sense to develop a strategy with an eye on both chess boards.
Certainly oil importing nations urgently need to identify extra forms of leverage over OPEC. Whatever happens to the oil price over the next few months and even if, as some predict, the OPEC meeting in Abu Dhabi ends up agreeing a modest increase in output, the global oil supply situation over the next decade or so looks alarming – and one of the main solutions to this lies in persuading OPEC to commit to bigger increases in its long-term production capacity.
Global demand for oil is expected to rise by over 30% by 2030, yet many major oil fields outside OPEC are in decline (see “survey of energy security” in ‘News and insights’). This means that OPEC, sitting on some three quarters of the world’s proven reserves, will need to supply much of the extra oil.
Yet if it is to do so, it will need to invest tens of billions of dollars more each year in supply capacity. Some such investments are now underway (for example, OPEC member Saudi Arabia, worried about the effect of the recent high oil price, has been trumpeting its expansion plans). But more such commitments are needed across more OPEC countries – and for beyond this decade. The obstacles to this are not just OPEC’s strategy of setting overall limits on members’ output, but also the restrictions many OPEC countries place on foreign investment in oil, plus the internal pressures they face to divert revenues for maintaining capacity to politically-popular public projects. Yet without an even more substantial gearing up of OPEC’s long term capacity, the next decade or two could see the oil price hitting even more worrying levels – with all the risks that poses to the oil importers’ economies.
So what exactly is the extra leverage over OPEC which the oil importing countries can gain from an agreement at Bali or beyond to move ahead with post 2012 greenhouse gas limits? It is the signal that there is now the political will to bring about major internationally-agreed reductions in the use of fossil fuels (the main source of greenhouse gases) – and as part of this, potentially to put a big dampener on future oil demand. This is no small bargaining chip: most OPEC economies, and the governments or regimes which run them, would be seriously shaken if their principal source of revenue were to be squeezed in this way.
Interestingly, in a sign of its own growing worries about the issue, OPEC recently stated it shared the “international community’s concern” over climate change and began talks on a fund to research ways to make fossil fuel use more climate friendly (such as through technologies to sequester carbon underground).
This casts helpful light on the overall quid-pro-quo which the importing countries, if united at Bali or beyond, could offer OPEC: while we are now committed to deeper cuts in greenhouse gas emissions beyond 2012, such an offer could go, we will work jointly with you to safeguard your revenues from oil in the coming decades (such as through joint investment in carbon sequestration) – but provided you work with us to substantially boost your oil supply capacity in this period.
In turn, the attraction for the oil importing nations of being able to present such a common front to OPEC should provide at least some help to them in finding common ground over climate change. These countries will need to overcome a set of fierce disagreements over the details of any climate deal – for example, between industrialised countries such as the US, and fast-growing nations, such as China, over how to divide the burden of cutting emissions. But all such countries have a powerful economic interest in seeing a lower oil price and securer supplies of energy in coming decades. And coming to an agreement, either at Bali or after, will put them in a better position to demand that of OPEC.
No doubt negotiating on climate change with an eye to the oil price presents risks. Any offer to OPEC needs to be presented as an opportunity to safeguard its long-term revenues, rather than as a threat – otherwise an adverse reaction may result, particularly from hawkish OPEC members such as Venezuela and Iran. In general the oil importing countries need to be sensitive to OPEC nations’ own legitimate desire for economic security. At the same time progress over post 2012 greenhouse gas limits presents them with an opportunity not just to help stabilise the world’s overheating climate but to gain more control over its overheating oil market. They would be foolish not to seize it.
© istockphoto.com/Klaas Lingbeek-van Kranen