Emissions Cuts Could Hurt Oil Revenue - Arab Environment Watch

Source: Wall Street Journal

With some of the world's fastest-growing oil consumers under pressure to cut carbon emissions, big petroleum-producing states are beginning to fret over a long-term drop in crude-oil revenue.

For years, oil-producing states have worried about rich nations like the U.S. cutting back on energy consumption through conservation or turning to nonoil alternatives such as ethanol and other biofuels.

But Saudi Arabia and other big Gulf states now fear that emerging markets like China -- the biggest driver behind the growth in world oil consumption -- may also cut crude demand as dozens of countries converge in Copenhagen to try to hammer out a pact to reduce carbon emissions.

Those fears and the potential impact on future government revenue could erode Gulf Arab states' support for any deal in Copenhagen, Gulf officials said.

Senior officials from the Organization of Petroleum Exporting Countries, which includes a handful of Gulf states, are expected to attend the second half of the Copenhagen meeting next week. These officials include the oil cartel's secretary-general, Abdalla Salem El-Badri, who is expected to make a presentation, and some oil ministers from OPEC member states.

In effect, the recent pledges of major nations to reduce "carbon intensity" equate to commitments by these fast-growing economies to make their factories, power plants and cars dramatically more efficient.

China and India announced plans in recent days to reduce the energy intensity, or the amount of carbon-dioxide emissions per unit of gross domestic product, of their economies over the next decade. China, which increased vehicle fuel-efficiency standards in recent years, wants to cut its carbon intensity by as much as 45% from 2005 levels by 2020 while India has targeted a reduction of as much as 25% from 2005 levels over the next decade

On Wednesday, Malaysia, a relatively small oil consumer, announced plans to sharply reduce its carbon intensity over the next decade.

Because China and India account for the bulk of growth in world oil demand, any serious measures to conserve could put a big dent in future consumption, analysts say.

Amy Myers Jaffe, a senior fellow in energy studies at Rice University's Baker Institute, estimates that 4.5 million barrels a day of Chinese oil demand alone may not materialize over the next two decades if the country makes big inroads on improving energy efficiency and using more alternative energy resources.

To Saudi Arabia, the world's biggest oil exporter, such a development could squeeze trillions from the kingdom's future oil revenue, said Mohammad Al Sabban, the chief Saudi negotiator on climate-change issues.

Saudi Arabia estimates that OPEC, of which the kingdom is the biggest member, stands to lose at least $6 trillion in oil revenue over the next two decades if an effective Copenhagen deal takes effect, Mr. Al-Sabban said figures could be even higher depending on "whether these policies (to reduce oil demand) continue to be selective and bias against oil products."

Analysts say such estimates may well be overblown, but such a projection could still hurt future investment in crude production capacity in Saudi Arabia and other Gulf oil states.

"If we think demand is not going to be there, why should we invest huge amounts of our money," said a senior official from a Gulf oil-producing state.

The official added that Gulf states' support for a Copenhagen deal could also be withheld if they aren't assured billions of dollars in financial compensation.

"We will protect out interests, like everyone else," the official said.

Some analysts think China's recent announcement to increase energy efficiency doesn't represent much of a change from existing policy and is more of a rhetorical bow to industrialized nations ahead of the Copenhagen summit.

China has already, for example, been reducing costly energy price subsidies to encourage more prudent consumption. Analysts also said developed nations like the U.S. will want to verify that China is actually fulfilling its voluntary commitments.

"There is no way to solve this problem by giving developing countries a pass," Todd Stern, the chief U.S. negotiator at the United Nations climate summit said Wednesday during a briefing in Copenhagen. The U.S. is ready to provide some financing to help poorer countries face the immediate challenges of climate change, but the money would mostly be focused on the poorest nations, with little left for major emerging economies, he said. "I don't envision public funds -- certainly not from the U.S. -- going to China," he said.