IEA’s Net Zero: Private to Socialist Investment (OPEC, Russia gift?)

Ed. Note: Michael Lynch’s Shifting Oil Industry Structure and Energy Security Under Investment Phase-Out’s (EPRINC: 2021) challenges the quest of Faith Birol/ International Energy Agency to cease investment in the petroleum industry. A summary of and excerpts from Lynch’s study follow.

“If we want to reach net zero by 2050 we do not need any more investments in new oil, gas, and coal projects.” (Faith Birol, IEA, 2021)

“… efforts to discourage the production of oil are entirely misplaced since consumption is not driven by supply but demand.” (Michael Lynch, below)

Introduction by Lucian Pugliaresi, President, Energy Policy Research Foundation, Inc.

In May of this year, Fatih Birol, speaking as head of the International Energy Agency, stated publicly that “The pathway to net zero is narrow but still achievable. If we want to reach net zero by 2050 we do not need any more investments in new oil, gas, and coal projects.” Mr. Birol’s comments notwithstanding, large parts of the world continue to rely upon a wide range of petroleum products to sustain and improve their living standards.

If such a strategy is pursued without a commensurate reduction in demand, it would inevitably lead to rapidly rising prices for fossil fuels, diminished living standards, and even potential shortages. It would also lead to serious concerns about the energy security of the member states of the IEA, which Mr. Birol heads. Oddly enough, the central mission of his organization is to promote the energy security of the developed world.

This paper by Michael Lynch examines the emerging policy and structural developments in U.S. crude oil production that are likely to cause larger volumes of world oil production to shift to two producing centers, the Middle East and Russia. Policy initiatives to address concerns over U.S. energy security have their roots in the 1973-74 Arab oil embargo.

The resulting gasoline lines and shortages of the so-called Arab oil embargo commanded enormous public fear and political upheaval (shortages were
clearly exacerbated by national wage and price controls in place at the time) and U.S. policy makers subsequently undertook a broad range of responses to address growing concerns over energy security for decades after the embargo.

Energy security was not only tied to the level of U.S. import dependence, but also from a concentration of low-cost oil reserves in unstable regions of the world. This concentration of resources presented two important cost and security risks to the U.S. economy; (i) a few producers could restrain
output resulting in oil prices becoming higher than would prevail in a more competitive environment, causing large wealth transfers from U.S. consumers to foreign oil producers, and (ii) the growing potential of a damaging “price shock” to the U.S. economy from supply disruptions in major producing centers, either as an instrument of national policy or from war and terrorism.

These economic and security risks were addressed through a broad range of policy responses, including development of strategic petroleum stocks in the U.S. and among its allies, energy efficiency programs, greater fuel diversification, and the promotion of new supplies outside legacy production centers.

More recently, the development of technological advances such as hydraulic fracturing saw the U.S. emerge as a major new world oil producer. Over the last ten years, the U.S. crude and related liquids production provided over 80 percent of the growth in world oil supply as the U.S. emerged as one of the world’s largest oil and gas producers.

As Michael Lynch points out, public concern that rising worldwide emissions of carbon dioxide in the atmosphere is harmful to the climate has encouraged government policy initiatives to encourage (and sometimes mandate) reductions in carbon emissions. Public and private initiatives are underway to limit carbon emissions, including processes to capture carbon and subsidies and mandates for both alternative fuels and new energy production technologies.

In an attempt to accelerate reductions in carbon emissions, many governments in the developed world (OECD) also are attempting to reduce fossil fuel use by limiting supplies through indigenous production cuts. As the paper makes clear, these initiatives offer considerable potential to take us “Back to the Future.” Before we embark on this journey, we should at least have a clear understanding of the consequences.

Paper Excerpts (Lynch)

Peak Oil Demand Fallacy. The idea that peak oil supply was near (or passed) was always based on bad math, ignorance about the oil industry, and questionable assumptions.

Peak oil demand is however quite possible, although as I have noted elsewhere, stone is still a major commodity despite the Stone Age ending millennia ago. However, it seems increasingly likely that oil demand will be
suppressed somewhat by climate change policies of one sort or another, and this has some important consequences for energy security and the market longer term.

Of course, efforts to discourage the production of oil are entirely misplaced since consumption is not driven by supply but demand. (Indeed, curbing supply to reduce demand is a proven fallacy on which many nations’ narcotics policies are based on.) This is especially true when not all oil producers are likely to cooperate and allow production to decline. (Natural decline rates mean that a complete cessation of investment would cause production to decline by 5-10% per year, depending on the region and type of oil.)

Conclusion

The IEA has suggested that, to reach the more extreme climate goals of Net Zero emissions in 2050, the oil industry should cease developing new oil and gas fields. However, since only the private sector is likely to follow such advice, oil production will become increasingly concentrated in the Middle East and Russia, which will not only affect market behavior but could have negative consequences in future oil supply disruptions.

The ability of the IEA to implement its Emergency Sharing System during such a disruption will decline dramatically, and a severe recession in such
a case is significantly enhanced. This policy advice could prove as detrimental as the 1980s insistence by the IEA that scarce (sic) natural gas should not be used in power generation, which resulted in a major increase coal burning.

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November 11, 2021 at 01:10AM

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