Battling for a Shrinking Market: Oil
Producers, the Renewables Revolution,
and the Risk of Stranded Assets
Thijs Van de Graaf
A full appreciation of the geopolitics of renewables necessitates a close look at not
just the winners but also the losers of the energy transition. The incumbent fossil
fuel industries are often portrayed as potential losers, and thus key obstacles, to
such a renewable transition. The oil, natural gas and coal industries are no doubt
large-scale, politically powerful and well-entrenched industries. Fossil fuels still
provide no less than 80% of worldwide energy. They exhibit a high degree of
‘lock-in’(Unruh 2000) with the transportation sector being almost completely
reliant (93%) on petroleum products, whereas coal is the leading energy source for
electricity generation worldwide (with a market share of around 40%). Coal-ﬁred
power plants entail large up-front investments and have long operating lifetimes
(typically 30–50 years). The same goes for large-distance oil and gas pipelines,
liqueﬁed natural gas (LNG) tankers and terminals, or offshore oil rigs.
It should come as no surprise, then, that the fossil fuel industries have put up stiff
resistance to a large-scale transition to renewables. The coal industry has touted the
idea of ‘clean coal’and the innovation promise of carbon capture and storage
(CCS). Major oil companies have notoriously sponsored climate-denial campaigns
(Oreskes and Conway 2011), and they have continued to invest in the development
of new reserves, including risky ones such as tar sands, deep-water ﬁelds and shale
reserves. The natural gas industry has attempted to position itself as the provider of
an important ‘bridge fuel’in the low-carbon transition. Likewise, the nuclear in-
dustry has ﬂoated the ‘nuclear renaissance’discourse, although it has arguably
taken a blow after the Fukushima nuclear accident (Geels 2014).
The goal of this chapter is to examine how a particular set of actors within the oil
industry is coping with the rapid spread of renewable technologies in the global
T. Van de Graaf (&)
Department of Political Sciences, Ghent University, Ghent, Belgium
©Springer International Publishing AG 2018
D. Scholten (ed.), The Geopolitics of Renewables, Lecture Notes in Energy 61,
energy market. The impact on the operations of the private international oil com-
panies is brieﬂy discussed, but much more attention is given to the oil-exporting
states and their national oil companies. After all, 90% of oil reserves are in state
hands. If these are left in the ground because of a global transition to renewables,
many oil exporting countries will suffer economic losses. As we will see, not all oil
producers will be affected equally by a surge in renewables. The future looks bleak
for countries such as Saudi Arabia and Russia that are heavily dependent on oil
revenues and have few competitive industries beyond fossil fuels. Others with a
broader economic base, like Iran, may fare better. Ultimately, their fate hinges on
which strategy they choose: short-term adaptation or long-term transformation.
4.2 Analytical Approach and Structure
Energy has long been overlooked in the ﬁelds of international relations, political
science and international political economy (Van de Graaf et al. 2016). Only oil has
received some attention, but it has been approached almost exclusively from
hard-nosed, geopolitical perspectives. Furthermore, studies of the geopolitics of oil
(or gas for that matter) have generally been disconnected from broader issues of
decarbonization and climate change policies. This is related to the fact that the
extant literature on global oil politics is preoccupied with security of supply issues,
and tends to overlook the demand side.
This chapter hopes to help ﬁll this gap. While doing so, it speaks to two different
strands in the literature on the political economy of energy. First, it draws on the
literature on the nature and types of technological innovation. This chapter argues
that the rise of renewables and related technologies (e.g. batteries and the electri-
ﬁcation of transport) represents a ‘disruptive’challenge to the oil industry.
A particularly useful perspective in this regard is the so-called ‘S-curve’of inno-
vation, according to which a particular technological innovation ﬁrst grows slowly
but then reaches a tipping point, after which it is adopted on a massive scale
(Christensen 2013). Second, it relates to the literature on the resource curse and
rentier states. The resource curse thesis, sometimes also referred to as the ‘paradox
of plenty’(Karl 1997), holds that abundance of natural resources is correlated with
poor economic performance (Sachs and Warner 1995), low levels of democracy
(Ross 2001), and civil war (Collier and Hoefﬂer 2004). The prospect of peak oil
demand turns the ‘resource curse’hypothesis on its head since it is the loss of
resource rents, rather than their abundance, that will warp the domestic political
economy of oil-exporting countries if oil is increasingly displaced by renewables.
This chapter proceeds in the following manner. The next section reviews the
advantages of oil, which propelled it to the most important energy source in the
global economy. Section 4.4 discusses the likelihood of peak oil demand.
Section 4.5 looks at how private international oil companies are affected by these
disruptive shifts in technology, and how they have responded. Section 4.6 examines
how OPEC producers would be affected by a global transition to renewable energy,
98 T. Van de Graaf
and looks speciﬁcally at how it affects their power. Section 4.7 considers possible
strategies that OPEC countries might decide to follow in the face of dwindling
demand. The subsequent section homes in on the geopolitical consequences of a
global shift away from oil. A ﬁnal section concludes and discusses the results.
4.3 The Indispensable Fuel and the Making
of the Modern World
It is hard to overstate the economic and political importance of oil. Throughout the
twentieth century, oil has been the material basis of global economic life (DiMuzio
2012). Oil is the single largest source of the world’s energy supply, accounting for
one-third of global energy consumption (BP 2017). More than 90% of the energy
used in transportation still comes from oil-based fuels, a proportion that has
changed little since the oil shocks of the 1970s (IEA 2013, 510). Thanks to the
geographical concentration of oil reserves, oil has also shaped patterns of conﬂict
and cooperation in international politics (Colgan 2013). It has warped the domestic
politics of oil-exporting states in ways that are not always benign (Ross 2012), and
it has even affected democracy in the leading industrialized countries (Mitchell
Ever since the ﬁrst modern oil well was drilled in Pennsylvania more than
150 years ago, the oil sector has expanded signiﬁcantly. Over the last century, and
especially after World War II, oil demand has grown in step with economic output.
Since 1965, oil consumption has risen from about 30 million barrels a day to more
than 90 million barrels a day in 2015 (BP 2017). Conventional wisdom holds that
the oil market will continue to expand for at least the next 25 years. The
International Energy Agency’s (IEA) central scenario, for instance, sees oil demand
rising from 92.5 million barrels per day in 2015 to 103.5 million barrels per day in
2040 (IEA 2016, 111). The energy outlooks of international oil companies all
project similar, or even stronger demand growth (Van de Graaf and Verbruggen
2015). ExxonMobil (2015), for instance, sees global liquids output rise to
112 million barrels per day over the same period.
On the face of it, there seem to be good reasons to believe that oil will continue
to play the pivotal role in powering the world economy as it has done over the past
decades. First, new discoveries and technological advances have largely dispelled
fears of peak oil. Such fears were especially widespread around 2008, when oil
prices rallied to a record level of almost 150 dollars a barrel. While the Great
Recession drove oil prices down, they recovered quite quickly and hovered above
100 dollars a barrel from 2011 to mid-2014. Many analysts believed that oil prices
were there to stay (Hamilton 2014). However, advances in unconventional pro-
duction of oil—most notably shale oil, ultra-deepwater, and oil sands—have
completely upended that view. These advances have demonstrated that the oil
market is, in fact, not characterized by scarcity but rather by abundance. Costs have
4 Battling for a Shrinking Market …99
come down across the entire upstream sector in recent years, which goes a long way
to explaining why the shale oil industry has been so resilient to the price fall after
2014 (IEA 2017).
Second, oil has unique physical properties that make it highly attractive as an
energy source and as a feedstock. Its high energy density—nearly twice as much as
coal by weight, and around 50% more than liqueﬁed natural gas (LNG) by volume—
and liquid properties make oil is easy to transport and to store. Unlike natural gas or
coal, oil can be moved over distance with comparatively few energy and labor
inputs. The chemical properties of oil make it valuable as a feedstock for the
manufacturing of new materials, including plastics, synthetic ﬁbers, and a range of
chemicals (Bridge and Le Billon 2013). There are readily available economic
alternatives to the use of oil in power generation, buildings and industrial boilers, but
less so for the use of oil as a fuel in transportation—especially for trucks and
plains—and as a feedstock petrochemicals (IEA 2016, 116–117). At present, most
renewable energy is distributed generation such as solar or wind, which are geared
toward the electricity sector and which, by themselves, are unable to challenge the
dominance of the internal combustion engine, for instance, or provide an alternative
feedstock for the use of oil in the chemical sector.
Third, even though the threat from climate change has created acute incentives to
decarbonize the economy, policy-makers have failed to act on it. While almost 200
nations have agreed to limit global warming to “well below 2 °C”in the Paris
Agreement of late 2015, current pledges will still see temperatures rise by 3.4 °C
above pre-industrial levels (UNEP 2016). The decision by the Trump administra-
tion to withdraw the United States from the Paris Agreement only adds more doubt
about whether the pledges will actually be met. Moreover, not all fossil fuels will be
equally impacted if carbon mitigation policies are put into effect. Coal is the dirtiest
of all fossil fuels, not just in terms of carbon emissions released after combustion
but also in terms of air pollution. Putting a price on carbon, whether through a
cap-and-trade system or through a tax, would thus hit the coal sector far worse than
it would hit the conventional (or ‘easy’) oil sector. This explains why so many oil
companies are actually in favor of a carbon price. McGlade and Ekins (2015)
estimate that around a third of oil reserves are “unburnable”in a 2 °C world,
compared to half of natural gas reserves and up to 80% of coal reserves. Ironically,
fossil fuels are still heavily subsidized on a global scale, even to a larger extent than
renewables (Van de Graaf and van Asselt 2017).
4.4 Assessing the Likelihood of Peak Oil Demand
In spite of oil’s abundance, low cost, high energy density, and liquid properties,
there is a case to be made that oil demand will peak and decline in the near future.
The global economy is getting more efﬁcient, with less oil burned per unit of gross
domestic product (GDP). Figure 4.1 shows the declining oil intensity of global
economic growth. What is more, oil demand in the industrialized countries of the
100 T. Van de Graaf
Organization for Economic Cooperation and Development (OECD) has already
declined in absolute terms from over 50 million barrels per day in 2005 to
45.6 million barrels per day in 2015 (BP 2017). Oil demand has fallen in Japan
since 2003, in the European Union since 2005, and in the United States since 2007.
In other words, the fall in oil predated the Great Recession of 2008–2009. The
industrialized countries now use the same amount of oil as they did in 1995–1996,
even though their economies have grown much bigger over that period. The
European Union is even back at consumption levels last seen in 1984 (BP 2017).
Most projections conﬁrm that oil demand in the OECD is not experiencing a
cyclical downturn but rather a structural decline—meaning that oil demand is
displaced by demand for other types of energy. The IEA’s central scenario sees oil
demand in the OECD dropping from 41.5 million barrels per day in 2015 to
29.8 million barrels per day in 2040 (IEA 2016, 111).
The key reason why the OECD’s oil demand might never return to its 2005 peak
is that the position of oil in its main market, transportation, is increasingly coming
under strain. Oil use in industry, buildings, and power generation declined dra-
matically in the wake of the oil shocks of the 1970s, and have remained relatively
ﬂat since 1980. The transportation and petrochemical sectors have been the last
vestiges where oil has remained dominant, and it is the growth in these end-use
sectors that have fueled overall petroleum demand growth. Yet, a number of
long-term trends are biting into the oil demand from the transportation sector:
vehicle ownership rates have reached a ‘saturation’level, fuel economy standards
become ever tighter, and alternative fuels (e.g. biofuels or natural gas) and vehicle
technologies (e.g. electric vehicles) are gaining market share (IHS CERA 2009).
In mainstream projections, the decline in the OECD’s oil demand is expected be
more than offset by an increase in oil demand from the non-OECD countries. In the
IEA’s central scenario, India will add 5 million barrels per day, China will add
4.1 million barrels, and the Middle East will add 3 million barrels per day to global
Fig. 4.1 The declining oil intensity of global economic growth, 1975–2014. Sources Oil
consumption data from BP (2017), GDP in constant $2010 from World Bank (2017)
4 Battling for a Shrinking Market …101
oil demand by 2040 (IEA 2016, 115). There are at least three reasons to doubt
whether these countries will need as much as oil as that.
First, projections such as these are very sensitive to growth assumptions. If these
economies do not grow as rapidly as projected—for example, if the global economy
remains mired in secular stagnation (Summers 2014), oil demand will turn out to be
Second, technological advances and market shifts might start to challenge the
dominant position of oil. In the short term, the shale gas revolution, along with
increased LNG export capacity in countries such as the US, Qatar and Australia has
already helped to create a global gas glut, which has strengthened the position of
natural gas as a tough competitor for oil. In the medium term, the dramatic fall in
the costs of alternative energy technologies such as solar and batteries will likely be
a game changer for oil markets (UNEP and BNEF 2016; Sussams and Leaton
2017). These two reasons—sluggish growth and the rise of renewables—are
probably sufﬁcient to ﬂatten off and reverse oil demand growth in the 2020s, even
before climate policy kicks in (Helm 2017, 83).
A third and ﬁnal reason why the demand for oil might soon stop rising and then begin
to fall back again, are the government policies to mitigate the ﬁnancial and environ-
mental costs of oil consumption. A prime example is the recent curtailing of oil sub-
sidies in countries such as China, India and Indonesia, the main engines of oil demand
growth in Asia over the comingyears. Policies to combat air pollution could also favora
transition away from oil. India’s energy minister Piyush Goyal has unveiled a plan in
2017 to make every car electric by 2030 (Agerholm 2017)—quite a bold move for a
nation that is expected to be the world’s fastest-growing oil consumer over the next two
decades (IEA 2016). Ambitious deployment targets have been announced by key
consumer countries (IEA 2016, 123), as well as major car manufacturers (including
Volkswagen, Honda and Renault-Nissan), and electric vehicles (EVs) might displace
as much as 16.4 million barrels of oil per day by 2040 (see Fig. 4.2). Moreover, it is not
just national governments that are driving these changes:a number of cities have beenat
the forefront of experimenting with novel transport services based on vehicle and
ride-sharing concepts or autonomous driving capabilities. The pursuit of alternative
urban transportation models would allow countries like India to leapfrog the US
car-centric model. Incrementally, these changes will dampen demand in a market that is
already over-supplied, suggesting greater volatility and lower oil prices.
The ultimate reason why oil demand growth might not take place as projected is
of course the urgent imperative to mitigate climate change. To keep average global
warming “well below 2 °C”by the end of the century, as agreed in the Paris
Agreement, oil demand has to peak by as early as 2020 according to the IEA’s 450
Scenario (see Fig. 4.3). Even so, there are two reasons why oil may have to be
curtailed even more sharply and rapidly than envisioned in the IEA’s 450 scenario.
First, the IEA’s only corresponds to a 50% likelihood of staying below 2 °C, which
is tantamount to playing Russian roulette with the fate of our planet. In recent years,
as climate science has progressed, it has increasingly become clear that 2 °C should
not be seen as a “safe”target, because severe impacts will begin to kick in much
earlier (UNFCCC 2015). Second, even for that questionably safe target, the IEA
102 T. Van de Graaf
assumes “overshoot”, with atmospheric concentrations actually reaching higher
levels than 450 parts per million (IEA 2015, 5). In any case, and without relying on
unproven and potentially dangerous negative emission technologies, energy sector
emissions need to fall to zero by 2060 for a 66% chance of 2 degrees (IEA
Fig. 4.2 Comparing levels of oil demand displaced by EVs across projections. Notes Asterisk
Current growth rate is derived from Bloomberg data and assumes EV sales increase by 60% year
on year. “NDC_EV”is the scenario assuming a level of climate policy action consistent with the
nationally determined contributions of Paris, combined with lower EV costs.
“BNEF”= Bloomberg New Energy Finance. “NEO”= New Energy Outlook. “WEO”= World
Energy Outlook. “NPS”= New Policies Scenario. Source Sussams and Leaton (2017, 24)
Fig. 4.3 World oil demand and price across three IEA scenarios. Notes The Current Policies
Scenario assumes no changes in policy. The New Policies Scenario takes account of broad policy
commitments, even if these plans have not yet been implemented. The 450 Scenario corresponds
to a 50% chance of keeping global warming within 2 degrees. Source IEA (2016, 110)
4 Battling for a Shrinking Market …103
Needless to say, climate mitigation action has huge implications for the fossil
fuel industry. To have a 66% chance of staying within the 2 °C bounds, around
30% of global oil reserves are deemed “unburnable”by 2050, even if one assumes
widespread adoption of carbon capture and storage (CCS) (McGlade and Ekins
2015). Figure 4.4 shows the geographical distribution of unburnable conventional
and unconventional oil reserves up to 2050 in a 2 °C scenario with CCS. This study
suffers from restricting the period to 2050. What really matters is that post-2011
cumulative emissions stay below 270 billion tons of carbon forever (Millar et al.
2016). Still, the basic insight that the bulk of oil reserves should stay in the ground
remains valid. Canada should not touch any of its tar sands, the US should leave its
tight oil reserves in the ground, while the Arctic should be left unexploited.
Africa Canada China and
Gigabarrels of oil
Fig. 4.4 How much oil is unburnable in a 2 °C scenario before 2050? Note “Conv.”and
“Unconv.”stand for conventional and unconventional oil resources respectively. Source Author’s
creation based on data from McGlade and Ekins (2015)
104 T. Van de Graaf
4.5 The Impact of Peak Oil Demand on Private
The history of capitalism can be read as a large sequence of what Schumpeter called
‘creative destruction’(Schumpeter 1942). Technological innovation has disrupted
many previous industries and corporations that failed to adapt have gone bankrupt,
as new ones have entered the market. Recent examples are Kodak, the world’s
iconic ﬁlm company, which ﬁled for bankruptcy in 2012, and Research in Motion,
which produced the once ubiquitous BlackBerry. Both companies completely
missed the rise of new technologies, which made their offerings obsolete. Big oil
companies could be facing a ‘Kodak moment’as the industry is disrupted by the
growing electriﬁcation of transport.
The corporate landscape of big oil has exhibited a remarkable degree of stability
during the twentieth century. Many of the biggest oil corporations still active today,
like ExxonMobil, ConocoPhillips and Chevron are actually descendants of
Rockefeller’s Standard Oil Company, which dominated the US oil industry in the
late nineteenth century until 1911, when it was broken up by the US Supreme Court
for violation of antitrust laws. Some parts of Standard Oil ended up with British
Petroleum (BP) and Royal Dutch Shell.
The incumbent oil companies have responded in different ways to the rise of
renewables and the specter of oil demand peaking well before supply. Some
companies are still very much in denial that their business is being disrupted.
ExxonMobil, for instance, projects demand for liquid fuels to climb as high as 20%,
to 112 million barrels per day by 2040 (ExxonMobil 2015). Shell, on the other
hand, believes that shifting consumer preferences and technological shifts could
impact its business. In a sharp departure from other oil majors, Ben van Beurden,
Shell’s chief executive, recently said that oil demand could peak in the second half
of the 2020s. Earlier, Shell’s chief ﬁnancial ofﬁcer had said that peak oil demand
could happen in just 5 years—that is, in 2021 (Katakey 2016). In general, the
European majors have been more proactive and the American companies more
reactive on the issue of climate change and the rise of renewables. This is tied to the
differing institutional contexts and company histories (Skjærseth and Skodvin 2001;
Levy and Kolk 2002).
Oil companies have in recent years been confronted with greater public pressure
to address the possible disruptions to their business model from climate policies and
the concomitant rise in renewables. A global divestment campaign has sprung up,
leading schools, universities, hospitals and charities to disinvest their funds from
fossil fuels. It is modeled after earlier divestment campaigns such as the ones
against the tobacco industry or Apartheid. Yet, a key difference with prior cam-
paigns is that there might be a strong business case for carbon divestment. If
governments get serious about limiting global warming to 2 degrees, a lot of current
reserves of the oil majors are to be left in the ground. This means that the valuation
of those companies is inﬂated, creating the risk of a ‘carbon bubble’—an invest-
ment bubble that would arise if shares in fossil fuel companies would become
4 Battling for a Shrinking Market …105
‘stranded assets’in a climate-constrained world (Carbon Tracker 2011; Ayling and
Gunningham 2017). As of June 2017, a total of 5.45 trillion US dollar had been
divested from the fossil fuel industry. Among the institutions divesting ﬁgures
Norway’s oil-based wealth fund, the world’s largest sovereign wealth fund.
In recent years shareholders and non-governmental organizations (NGOs) have
called on IOCs to publically disclose the risks posed by climate change to their
business models. Oil giants Shell, BP, Exxon have supported shareholder resolu-
tions for greater transparency of the ﬁnancial risks related to climate policy and the
shift to renewables. In April 2015, the G20 asked the Financial Stability Board, an
international body that monitors the global ﬁnancial system, to develop a tool that
can be used by corporations to disclose climate-related ﬁnancial risks. From a legal
perspective, fossil fuel companies that fail to be transparent about the damage their
operations pose to the world’s climate could be liable in the same way as tobacco
companies were for not telling the truth about the health damages from smoking
(Olszynski et al. 2017). Exxon is currently under investigation in the US because it
knew of the dangers of climate change since the mid-1980s but it kept on spon-
soring climate denial campaigns and allegedly misled regulators and investors
(Barrett and Philips 2016).
Most of these companies are in favor of some form of carbon pricing. Putting a
price on carbon would especially hurt coal, the most carbon-intensive fossil fuel,
and less oil and natural gas. A host of European majors (BP, Shell, BG Group, Eni,
Statoil and Total) in June 2015 sent letters to the UNFCCC and the President of the
COP21 Paris conference, as well as to the media, calling for the establishment of
carbon pricing where it does not already exist and an international framework to
link different carbon markets (Lund et al. 2015). It is worth noting that major
American oil companies advocated against President Trump’s withdrawal from the
Paris Agreement (Nussbaum and Carroll 2017). At the same time, however, oil
companies are also involved in other advocacy efforts that could be seen as
undermining climate action. Chevron, for instance, has expressed unease with
California’s ambitious climate policies (Nasiritousi 2017).
Many oil companies are cleaning up their energy portfolios by investing more in
natural gas, which creates less carbon dioxide than oil when burned. Shell’s 2016
takeover of BG Group, a British ﬁrm with large gas reserves, is a case in point.
Others are early movers into the renewable industry itself. Dong Energy,
Denmark’s largest energy group, clearly leads the way. Originally a state-owned oil
and gas company, over the past years it has established itself as a renewable energy
giant, particularly with regard to offshore wind farms. In 2017, it sold off its oil and
gas business (Magew 2017). Total offers another example. In 2011, it acquired a
majority stake in SunPower, one of the world’s biggest solar ﬁrms, and in 2016 it
acquired French battery specialist Saft as well as Lampiris, a Belgian supplier of gas
and renewable energy.
It remains to be seen to what extent these moves mark the advent of a new era
for Big Oil. The example of BP offers a cautious tale about whether this bet on
renewables will be sustained. In 2000, BP Amoco launched a marketing campaign,
in which it branded its name as “beyond petroleum.”That strategy has now largely
106 T. Van de Graaf
been abandoned. BP pulled out of solar power and shut down its advanced biofuels
research program in 2014. It tried to sell its US wind operations but held off when it
could not get a good enough price. Going even back further in time, Exxon was
even a global leader in solar power research in the 1970s and 1980s (Crooks and
In sum, it is clear that the transition away from oil will wreak havoc on the oil
companies. A prolonged, and possibly indeﬁnite slump in oil prices will make the
industry an ex-growth sector, with serious consequences for the availability of
capital and labor in this sector. As Cairns (2014, 84) observes: “Prospective pro-
fessionals, especially more promising minds, may shy away from training in an
industry that is expected to be subject to increasing taxation, reduced rents, and
societally mandated attempts to develop substitutes for its product.”Early movers
into alternative businesses (renewables and batteries research and manufacturing,
hydrogen, carbon capture and storage, nuclear energy) might be able to transform
themselves and survive the transition to a post-carbon society; others are likely to
be less successful. However, IOCs are not the only actors who will be negatively
affected. As the next section delineates, countries that depend heavily on oil export
revenues will be hit the hardest.
4.6 The Impact of Peak Oil Demand on Oil Exporters
The transition to a society that is less based on petroleum and more on renewables
will affect oil-exporting states in various ways. Table 4.1 gives an overview of the
top-20 oil exporting countries. Next to oil export ﬁgures, it gives an indication for
how dependent these countries are on oil export revenues. A higher ﬁgure generally
means that these countries have a less diversiﬁed economy, so this ﬁgure can be
used as an indirect measure of the size of a country’s non-oil economy. On this
basis, the major exporters can be loosely grouped into three classes. Extremely
dependent economies are dependent for more than 30–50% on oil rents (e.g. Saudi
Arabia, Kuwait, Iraq and Oman). Highly dependent economies have a dependency
rate of around 15–20% (e.g. United Arab Emirates, Iran, Venezuela and Algeria).
Medium dependent economies is a class of countries whose GDP hinges for about
10% on oil revenues (e.g. Russia, Nigeria, Kazakhstan and Qatar).
The table also includes another metric, oil income per capita. Instead of relating
oil revenues to GDP, which introduces all sorts of biases (Ross 2012,15–17), this
indicator relates oil revenues to the population size. It tells something about “how
many oil dollars a regime can direct at each citizen, for public goods, patronage, or
coercion”(Smith 2012, 210). The combination of high oil rents and high oil income
per capita typically marks the situation of a “rentier state”: a state where the
government relies heavily on external, non-tax revenues from the export of natural
resources, especially oil and gas (Mahdavy 1970; Beblawi and Luciani 1987;
Anderson 1987). Rentier states have an implicit social contract in which rulers tend
to use their oil revenues to “buy off”support from the population. Democratic input
4 Battling for a Shrinking Market …107
from society is thus sacriﬁced in exchange for a share of the extractive wealth
accrued through foreign sales of crude. Those who do not accept this so-called
“rentier bargain”are confronted with the strong repressive apparatus affordable to
the rentier state (Gray 2011; Ross 2012). The reliance on oil wealth thus gives these
states a large degree of autonomy vis-a-vis their citizenry, and it is often associated
with incoherent economic policies, the entrenchment of crony capitalists and mil-
itary elites, and the decline of agriculture and industry through a process known as
the ‘Dutch disease’(Gelb 1988; Schwarz 2008; Morrison 2009; Ostrowski 2013).
A wide range of energy-economy models forecast losses to the members of the
Organization of the Petroleum-Exporting Countries (OPEC) and other exporters if
oil demand falls (e.g. McKibbin et al. 1999; Bartsch and Müller 2000; Barnett et al.
2004; Bauer et al. 2016; Waisman et al. 2013). Some studies argue that OPEC
countries will gain rents, in the order of a few percent, due to atmospheric CO
stabilization targets. The explanation is that conventional oil reserves are cheaper to
Table 4.1 Key indicators of top 20 oil exporters
Country Oil exports
Oil rent (% of
Oil income per
Saudi Arabia 7.38 37.67 7800 Yes
Russia 4.78 8.46 2080 No
Iraq 2.83 39.87 1780 Yes
UAE 2.50 20.36 14,100 Yes
Canada 2.23 1.16 2530 No
Nigeria 2.11 9.43 370 Yes
Kuwait 2.04 51.95 19,500 Yes
Venezuela 1.81 14.47 2130 Yes
Angola 1.66 28.39 2400 Yes
Iran 1.49 18.44 1600 Yes
Kazakhstan 1.38 10.83 2370 No
Mexico 1.27 3.62 610 No
Norway 1.62 5.24 13,810 No
Oman 0.82 34.38 7950 No
Algeria 0.70 15.24 1780 Yes
Azerbaijan 0.68 20.62 2950 No
Colombia 0.67 4.58 430 No
Brazil 0.60 1.56 240 No
0.60 0.50 150 No
Qatar 0.56 10.55 24,940 Yes
Notes Oil exports are the averages for the period 2012–2016. Oil rent ﬁgures are the averages for
2012–2015, except for Venezuela (2012–2013 average) and Iran (2012–2014 average). Oil income
per capita shows the estimated value of oil and gas produced per capita in 2009
UAE = United Arab Emirates
Sources OPEC (2017, 60), BP (2017), Ross (2012)
108 T. Van de Graaf
produce and have less carbon content than unconventional reserves (such as
Canadian tar sands or shale oil) and most of their liquid substitutes. Yet, ‘if climate
policy is implemented through energy efﬁciency standards and substitution to
renewables, then energy demand will drop, but the price of oil will not increase’and
so OPEC will not gain (Persson et al. 2007, 6347; Johansson et al. 2009).
A shift away from oil to renewables creates three separate investment risks for
the energy industry: ‘the extent of existing fossil fuel reserves that will be left
unexploited (‘reserves left in the ground’or ‘unburnable fossil fuels’); the capital
investment in fossil fuel infrastructure which ends up failing to be recovered over
the operating lifetime of the asset because of reduced demand or reduced prices
(‘stranded assets’); the potential reduction in the future revenue generated by an
asset or asset owner assessed at a given point in time because of reduced demand or
reduced prices (‘carbon bubble’)’(IEA and IRENA 2017, 106).
A crucial question for the future is whether petrostates are doomed to face
economic and political collapse, or whether they can stave off some of the worst
consequences of the shift away from oil and make a smoother transition to
post-rentier states. This question is taken up next.
4.7 Can Petrostates Adapt to a Post-Oil World?
The rise in renewables is not something that is happening in some distant future, but
it is happening now and is transforming energy markets and systems across the
globe. The uptake of technologies typically follows an S-curve, which means that
the global spread of EVs, solar panels, et cetera might accelerate in the near future.
Oil rentier states are likely to experience economic hardship and political turmoil, as
their oil revenues fall and their social contract falls apart. The downturn in global oil
prices since 2014 provides a harbinger of things to come. After a long period of
high and stable oil prices between 2011 and 2014, oil prices began to decline in the
summer of 2014 due to sluggish global demand and, especially, the enormous surge
in shale oil production in the US. In the span of just four years, the shale revolution
had added about 3 million barrels per day in oil production. The effects of this
additional volumes were long masked by unplanned outages in producer states, but
they ﬁnally began to inﬂuence the price from July 2014. The decision by OPEC not
to cut production in November 2014 only added to the global supply glut and the
downward pressure on the oil price.
The oil price drop is related to structural changes on the supply side (the shale
revolution) and the demand side (shifting consumer preferences, the secular stag-
nation of the economy, and the rise of alternative energy). While this does not mean
that the oil business is no longer a cyclical business, the oil market is unlikely to
return to the status quo ante. As the shift away from oil progresses, the market will
go through a long-term decline. The oil price will continue to exhibit the boom-bust
pattern that has always characterized the petroleum market, but the long-term trend
will be downward.
4 Battling for a Shrinking Market …109
The price fall since 2014 has exposed much of the economic vulnerability of the
oil rentier states. Oil prices plunged by 77% from June 2014 to January 2016. All
petrostates have experienced economic hardship (Van de Graaf 2016), and those
with pre-existing (e.g. Venezuela where the oil sector has been mismanaged under
Chavez) or other signiﬁcant problems (e.g. Russia which faces sanctions from the
West since the 2014 Ukraine crisis) have had a particular difﬁcult time. Venezuela
has hovered on the brink of bankruptcy, while Russia’s economy shrank two years
in a row (2015 and 2016). In early 2016, countries such as Azerbaijan and Nigeria
sought emergency loans with the International Monetary Fund and the World Bank.
Looking at how these petrostates responded to the crisis might be illustrative of
what options they have at their disposal in the longer term, when oil is gradually
displaced by renewables. Here, we discuss three strategies: racing to sell oil, pre-
serving oil rents by curbing production, and domestic economic reform.
4.7.1 Strategy #1: Racing to Sell Oil
For decades, oil exporting countries have lived under the basic assumption of
Hotelling’s rule of optimal extraction of exhaustible resources: the owner of oil can
leave the resource in the ground as a physical asset, or sell it and invest the proceeds
in the ﬁnancial markets (Hotelling 1931). This view is turned on its head if oil
demand peaks well before supply—for example, through governmental regulations
that prohibit oil use or through the substitution of oil by other sources. The upshot
of oil demand destruction is that oil, in effect, is no longer an exhaustible resource
(Dale 2015). Producers will then ﬁnd out that oil under the ground might someday
be less valuable than oil produced and sold today. The future value of oil deposits is
likely to decline and this anticipated depreciation puts pressure on the reserve
holders to sell as much of their oil now and invest the returns in capital markets
(Van de Graaf and Verbruggen 2015; van der Ploeg and Withagen 2015).
Situations where the oil-producing countries competitively reduce prices in order
to make zero-sum gains in market share at each other’s expense are generally
referred to as ‘price wars’(Fang et al. 2012). Price wars have occurred several times
on the global oil market, most notably in 1986 when Saudi Arabia decided to ﬂood
the market with oil to enforce quota discipline within OPEC. More recently,
OPEC’s decision in November 2014 not to cut production in the face of drastically
falling prices is widely interpreted as a price war against US shale oil (Van de Graaf
and Verbruggen 2015). If the drop in prices is larger than the increase in a country’s
oil output, than oil revenues are bound to come down. Oil exporters such as
Venezuela, Russia and Brazil need to balance their budgets and therefore often keep
supply up even when prices are falling.
Of course, if producers engage in a race to sell as much of their oil as possible,
they could foster a price collapse, which could lead to some recovery of the market
for oil and may hook consumers to oil again. This is an example of what Sinn
(2012) has termed the ‘green paradox’, according to which the introduction of
110 T. Van de Graaf
climate policy is an incentive for oil exporters to accelerate the extraction of their
reserves and, hence, exacerbate global carbon dioxide emissions. Yet, there are
reasons to doubt whether conventional oil producers will be able to turn the tides of
lower oil demand through accelerated oil extraction. Cairns (2014) shows that
‘green paradox’concerns are overblown in the case of oil production. Oil producers
simply cannot rapidly increase oil production as they desire because of natural and
technical capacity constraints. The productivity of a well decreases after an initial
period of capacity production through what is known as ‘natural decline’. The shale
industry operates on a much shorter time cycle but, by itself, it is not able to play
the role of swing producer (McNally 2017). Moreover, shale oil is located at the
mid to high end of the industry cost curve, even though the production costs have
come down. Average oil play costs are currently at around 48–65 dollars per barrel.
Under a scenario where oil demand comes down fast (e.g. aggressive climate
policies), oil prices would probably not rise above 50 dollars per barrel, rendering
the bulk of shale oil uneconomic (Harvey 2017).
4.7.2 Strategy #2: Preserving Oil Rents by Curbing
Oil producers may also attempt to cooperate and collectively attempt to agree on
production quota to preserve their oil rents through higher prices. The coordination
may be done among the fourteen members of OPEC, which currently supplies
about 40% of the world’s oil, or among any ad hoc coalition of oil producers. This
is exactly what has happened in the oil market recently. In November 2016, OPEC
agreed to cut output by 1.2 million barrels per day, its ﬁrst coordinated production
cut in more than a decade. Crucially, the cartel secured a reduction of 558.000
barrels per day from 11 non-OPEC countries, including Russia, Mexico and
Kazakhstan. The reductions were supposed to take hold in January 2017 and last for
6 months. Yet, with crude prices stuck near 50 dollars a barrel for month, it soon
became clear that the output cuts had done little to drain bloated inventories, so the
24-nation coalition decided in May 2017 to extend the cuts for another nine months.
There are two key reasons to doubt whether such a quota strategy would help
exporters preserve their oil rents. First, OPEC countries have a poor track record of
cartel discipline. A recent study found that OPEC countries cheated on their quotas
a staggering 96% of the time in the period 1982–2009 (Colgan 2014). In sharp
contrast to previous production cuts, however, OPEC demonstrated remarkable
compliance with the quotas. This is partly due to Saudi Arabia cutting by more than
agreed. The Saudis want higher prices because of the planned initial public offering
(IPO) of their oil industry’s crown jewel, Saudi Aramco. The 11 non-OPEC
countries have implemented only two-thirds of their promised cuts so far. There is
little reason to believe that OPEC countries, let alone a much broader coalition of
4 Battling for a Shrinking Market …111
exporters, will suddenly demonstrate much higher compliance rates than the ones
recorded in the past.
Second, OPEC might be well placed to stabilize the market in response to
temporary shocks to supply or demand, but it is not able to balance the market in
response to structural shifts that disrupt the oil business. For example, at the height
of the great recession in 2008, as oil prices plunged from 145 to 35 dollars a barrel,
OPEC reduced supply by nearly 3 million barrels per day, stabilizing the market
and boosting prices. On the supply side, as the Arab Spring caused signiﬁcant
turmoil in several oil producers in the Middle-East and North Africa, other OPEC
producers—most notably Saudi Arabia, Kuwait and UAE—increased their supply
to offset partially these disruptions (Dale 2015). These were more instances of crisis
management than of genuine market management, however (McNally 2017). Saudi
Energy Minister Khalid Al-Falih echoed that view at a speech in March 2017, when
OPEC remains an important catalyst to the stability and sustainability of the market…but
history has also demonstrated that intervention in response to structural shifts is largely
ineffective…that’s why Saudi Arabia does not support OPEC intervening to alleviate the
impacts of long-term structural imbalances, as opposed to addressing short-term aberra-
tions…. (Al-Falih 2017).
The adoption of a laissez-faire policy by the Saudi oil minister Al-Naimi at a
notorious OPEC meeting in November 2014, defying wide expectations that the oil
producers would cut supply, has been interpreted by some commentators as proof
of OPEC’s demise. This view is misguided for at least four reasons: (1) OPEC
never really acted as a cartel, let alone a powerful one; (2) thanks to its cheap
production costs, OPEC’s oil will remain competitive in a low-cost environment;
(3) the group has always proved to be ﬂexible and resilient to major external
shocks; and (4) OPEC is still attractive to its member states, most notably as a
source of prestige, as is illustrated by the recent re-entries of Indonesia (a net oil
importer, which has left the organization again in 2016) and Gabon (Van de Graaf
4.7.3 Strategy #3: Domestic Economic Reform
Domestically, the responses of the petrostates can be grouped into two categories:
measures aimed at short-term adaptation and policies geared toward long-term
transformation of the domestic political economies. In terms of short-term adap-
tation, there are several measures that oil exporters can take during a low-price
period. If they have made savings during the boom period, they can tap into their
foreign exchange reserves, following the standard model of precautionary savings
(Bems and de Carvalho Filho 2011). Saudi Arabia, for instance, sat on what looked
like a comfortable 730 billion dollars in 2014, the result of windfalls reaped during
the boom period of 2011–2014. However, it has burnt through these reserves at a
112 T. Van de Graaf
rapid pace. By April 2017, the reserves had already dropped below 500 billion,
eliminating much of the savings made after 2011 (Shahine 2017). Like other
producers, Saudi Arabia also needed to borrow money, ﬁrst through the local bond
market and then also through international bonds. Its deﬁcit swelled to a historic
15% of GDP in 2015, and the government began to implement (unpopular)
domestic austerity measures, reducing fuel subsidies, raising electricity taxes and
cutting public sector bonuses and beneﬁts.
Needless to say, these are politically sensitive moves in a country where the
social contract is such that the government redistributes oil wealth and the citizens
acquiesce to the ruling of the Al Saud family in closed circles of power (Cordesman
2003; Hertog 2011). Yet, such measures—tapping reserves, austerity policies,
borrowing from debt markets and currency revaluations (as Russia has done)—
bring only short term relief. Actions such as these do not fundamentally change the
nature of these oil exporters as rentier states. Even Saudi Arabia’s (belated) move
into the reﬁning business will not bring much relief (Krane 2015). In the past,
downstream integration was a useful strategy to mitigate the volatility of crude
prices, but it is a futile strategy when oil demand starts to go into structural reverse.
Over the longer term, these exporters face the challenge of diversifying their
economic base. ‘Sowing the oil’to diversify the economy has been a longstanding
goal for many oil exporters. There is sound evidence that export diversiﬁcation is
associated with higher long-term growth and that countries that get ‘locked in’to
dependence on a limited range of products do less well in the long run (Lederman
and Maloney 2007; Gelb 2010). Diversifying the economy can overcome the
‘crowding out’of other productive activities, usually the manufacturing sector, that
often results from petroleum dependence (Sachs and Warner 2001; Karl 1997). It is
one of the few strategies available for resource-rich countries to ensure economic
growth beyond the point where their oil reserves are depleted or, indeed, world oil
demand enters into structural decline.
The recent price fall seems to have stimulated more long-term thinking in a few
petrostates. Take Saudi Arabia, the world’s largest oil producer. In 2016,
Mohammed Bin Salman, the recently appointed crown prince of Saudi Arabia,
unveiled plans to offer up to 5% of Saudi Aramco, the state-owned oil company, in
an initial public offering (IPO) planned for 2018. Its listing could become one of the
largest IPOs ever. Oil minister Ali Al-Naimi was sacked in May 2016 after holding
the post for more than two decades. Just days earlier, Mohammed Bin Salman had
announced bold economic restructuring plans, dubbed “Saudi Vision 2030”. The
aim is to reorient the Saudi economy away from dependence on oil revenues by
2020, and towards a newly conceived private sector. In June 2016, Saudi Arabia
approved its “National Transformation Plan”, outlining a number of concrete ini-
tiatives to be implemented by various ministries to realize the aspirations of “Vision
2030”, including increasing efﬁciency, diversifying the economy, cutting public
spending, reducing subsidies, increasing the role of the private sector, and priva-
tizing major public assets.
Several oil exporting states, particularly from the Middle East, are also trying to
get into the renewables business, particularly the UAE with its ﬂagship ‘Masdar’
4 Battling for a Shrinking Market …113
project. Their drive for renewable energy is motivated by several factors. The
demographic and economic boom of the Gulf oil producers during the past few
decades have also made them major consumers of energy. Hot weather conditions
and lack of natural water resources have necessitated the use of increasing amounts
of oil and gas for power generation required to air-conditioned homes and ofﬁces
and desalinate sea water. Replacing these fossil sources of energy with renewables,
could free up more hydrocarbons for exports (Reiche 2010; Sultan 2013).
Even so, only few petrostates have managed to truly break free from their
dependence on oil revenues. Malaysia and Indonesia have successfully diversiﬁed
as manufacturers, while Dubai has attracted foreign investment in infrastructure,
services and business thanks to the creation of a massive special economic zone
(Gelb 2010). It is doubtful that these experiences can simply be copy-pasted by
other large oil exporters. On a per capita basis, Malaysia and Indonesia never
produced as much oil and gas as the members of OPEC (Ross 2012). The Dubai
model of development is not easily reproducible because the country so heavily
depends on expatriate labor and skills, with nationals constituting only 10% of the
population (Gelb 2010).
4.8 The Geopolitics of Too Much Oil
For most of the past century, the geopolitics of oil have been guided by perceptions
of scarcity (e.g. Stern 2016). The concept of “peak oil”is central to this dominant
understanding of energy geopolitics. It was coined in the 1950s by M. King
Hubbert, an American geophysicist working for Shell. Hubbert posited that, for any
given geographical area, the rate of production over time would resemble a
bell-shaped curve. The production of petroleum was thus projected to climb until it
reaches a plateau, after which it would enter a terminal decline. When oil prices
reached their all-time high in July 2008, there was a widespread belief that “peak
oil”had ﬁnally arrived. The projections of ever-rising energy demand added to the
belief that oil prices would keep on rising (Hamilton 2014), coupled with the rapid
depletion of existing oil ﬁelds, were believed to only intensify the scramble for oil
and gas reserves. The general expectation was that these developments would only
inﬂate the power of OPEC and other big producers such as Russia (Klare 2009).
Recent events such as the build-up of tensions over a group of oil-rich, disputed
islands in the South China Sea are often interpreted as part of this global “race for
what’s left”(Klare 2012).
This prevailing view of scarcity-induced conﬂict over oil and gas resources is
ﬂawed. Rather than facing an imminent shortage of hydrocarbons, the world still
hosts plenty of oil and gas resources. Moreover, key shifts on the demand side are
eating into oil’s global market share. Oil abundance is not a new condition. In fact,
the perennial problem for the oil industry has always been to socially organize
scarcity (Bridge and Wood 2010, 565). From the 1861 Oil Creek Association, over
the monopoly of Rockefeller’s Standard Oil, the quotas of the Texas Railroad
114 T. Van de Graaf
Commission, the Seven Sisters oligopoly, and the would-be cartel of OPEC, the
history of oil is littered with examples of producer attempts to curtail the supply of
oil (Yergin 1991; McNally 2017).
To the extent that oil prices would remain “lower for longer”as oil is increas-
ingly displaced by other fuels and renewables, we can expect to see more
socio-political instability in countries that are heavily reliant on hydrocarbon rents.
It is important to note that the oil price fall in the 1980s played a key role in
bringing the Soviet Union to its knees, and a decade later low prices continued to
cripple efforts by Russian President Yeltsin to liberalize and reform the economy
(Helm 2017, 26). The level of vulnerability is the highest in the Middle East and
North Africa, where there is a large share of relatively young people that all need to
ﬁnd suitable jobs, and where the state’s dependence on oil rents is the highest (see
Table 4.1; de Jong et al. 2017). As Smith Stegen argues in this volume, the losers in
a renewable energy world will be those countries with strong hydrocarbon lobbies
that have offered few incentives for renewable energies.
Of the major oil producers, Saudi Arabia arguably has the most to lose. Its
population has grown from 4 million in 1960 to 30 million in 2015. The median
age is around 18. Keeping this young population content was already a big chal-
lenge for the Al-Saud dynasty and it is set to become only more difﬁcult when oil
prices start sliding (Helm 2017, 119–120). Iran, by contrast, has a lot of advantages.
It has a much broader economic base, a longer tradition of trading, and lower
fertility rates. Like Iraq, the country oil production is much under its potential due
to years of sanctions (Helm 2017, 123–124). This might in the long run turn out to
be an advantage, as these economies prepare themselves for a post-oil age. Russia is
also a major loser from the shift away from oil. Even though it is less dependent on
oil revenues than Saudi Arabia and some smaller Gulf states, its endemic corrup-
tion, autocracy and lack of an industrial base will leave the Russian economy in a
precarious state when oil revenues dry up. When the Russian economy sinks in a
post-oil future, “there will be a tension between the need for external enemies to
play out the Russian nationalism theme and the lack of money to pay for further
adventures”(Helm 2017, 142).
The US comes out as a clear winner. Thanks to surging shale production and
declining domestic demand, it is the only major power that is moving steadily
towards energy self-sufﬁciency by the 2020s. While this is neither tantamount to
autarky, nor will it insulate the US from the vagaries of the international market, it
brings both economic and strategic beneﬁts. Low energy prices have directly
beneﬁtted the US economy and the domestic energy revolution has also helped
drive a decline in the US trade deﬁcit, because of the reduced need for hydrocarbon
imports (Dale 2015). Strategically, the US may want to revisit its old “Carter
doctrine,”according to which it spreads a security umbrella over the Persian Gulf
(O’Hanlon 2010; Klare 2016). This might be a good thing for the US since the
Middle East has cost the US a lot of time, money and blood.
A possible US military retreat from the Persian Gulf might further create anx-
ieties in China and other big Asian consumers over their energy security. In a future
world of low oil prices and decarbonization, however, China might thrive in other
4 Battling for a Shrinking Market …115
ways. Thanks to the authoritarian power of the state, it has assumed top positions in
the production of clean energy sources, and the withdrawal of the US from the Paris
Agreement seems to have only strengthened its resolve in that regard. Like Europe
and Japan, China is heavily dependent on oil imports and if these are displaced by
homegrown renewables, this might lower these countries’energy import bills and
reduce their strategic vulnerability to security of supply disruptions.
Clearly, oil abundance does not strip hydrocarbons from their geopolitical
content. Quite the contrary, the existence of too much oil and gas could equally
trigger geopolitical strife, conﬂict, and war. In a context of abundance, oil producers
stand to beneﬁt from situations in which their direct competitors cannot produce at
full capacity, for some reason or another. The continued unrest in Libya, Syria, and
Iraq, for instance, plays into the hands of all other oil exporters since it helps to
keep oil prices high while also preventing large additional oil supplies from
reaching the international markets. In a ‘benign’interpretation, such outages are the
result of purely internal political dynamics. In Libya, for example, oil production
brieﬂy restored after the 2011 toppling of the Gaddaﬁregime, yet strife among
different clans and factions has since curbed the country’s oil output.
A more ‘malign’interpretation, however, allows room for deliberate destabi-
lization of rival oil producers by outside forces. For example, the radical ﬁghters
known as IS (Islamic State) that have seized large parts of Syria and Iraq have
allegedly received ﬁnancing from Gulf petrostates. Emboldened by its own tight oil
revolution and the prospect of exporting oil again in the near term, the United States
has taken the lead in setting up oil sanctions against Iran and recently also against
Russia, backed up by ﬁnancial sanctions (Van de Graaf 2013; Van de Graaf and
Colgan 2017). While it is questionable that the oil producers in the United States
proﬁt directly from these sanctions, they certainly helped to ease tensions in Riyadh
about a US-driven oil glut in the wake of the fracking revolution (Weinberg 2014).
This interpretation of recent events illustrates how the geopolitics of energy
could evolve in the coming years. The central stake would not be to conquer foreign
oil and gas ﬁelds, but to unlock or close production ﬁelds for global markets in
order to obtain the maximum revenues (rents) from the limited oil quota left over
for human use in the coming decades (Verbruggen and Van de Graaf 2013). Oil
producers would be catalogued, as is now already done quite often in an implicit
manner, in ‘friendly oil sources’and ‘hostile oil sources’. The ﬁrst category refers
to countries that accept and protect foreign investment. It is centered on the axis US
(with NATO allies)—Arab Gulf states (assembled in the Gulf Cooperation Council
without Qatar). Hostile oil is led by Iran with a few committed allies (e.g.
Venezuela). Many oil producers are drifting in between, several of them dazed by
violent events or aggression.
116 T. Van de Graaf
Major changes are afoot in the world oil market on both the demand side and the
supply side. The switch from fossil fuel to renewable energy and new low-carbon
technologies is already underway, and is expected to accelerate. While climate
policy is helping to steer the world in the direction of renewables, breakthroughs in
technological innovation and cost reductions are propelling this shift forward. In
other words, the rise of renewables depends ever less on the “push”of govern-
mental regulations and ever more on the “pull”of market forces. The shift is
disruptive to the oil industry and spells trouble for the major producers, who need to
adapt or risk going out of business. The switch away from oil puts into question old
assumptions of oil economics, including Hubbert’s peak oil hypothesis and
Hotelling’s rule of efﬁcient resource extraction.
In the short term, say to 2020, the oil markets are faced with oversupply as the
shale industry and rising production from conventional producers such as Iran and
Iraq has created a global glut. This has brought down revenues of oil exporters and
international oil companies. The challenge for the longer term, say to 2030
and 2040 is summed up quite well by Dieter Helm:
Longer term, new technologies in electricity generation, storage, and smart demand-side
technologies, together with electric cars and the shift towards digitalization and new
electricity-based technologies in manufacturing, will increase demand for electricity, but
not fossil fuels (Helm 2016, 191).
Fossil fuels will still be used in the decades to come, but quite possible at lower
prices. These tectonic shifts create an existential risk for many oil producing states.
No petrostate has developed a credible “Plan B”in preparation of a post-carbon
future. Oil exporters such as Venezuela, Nigeria, Brazil, and Russia are already
experiencing economic havoc and political turmoil as a result of the sharp drop in
crude prices since 2014. There are also wider geopolitical ramiﬁcations. The US
comes out as a clear winner, but oil-import dependent economies such as China,
Japan and Europe will beneﬁt as well. Due to its large and young population and
extreme dependence on oil revenues, Saudi Arabia will arguably be the biggest
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