Some countries cannot afford to stop producing oil
A look at oil rent by country
No one should be surprised that there are few oil-reduction targets after COP28. From the Washington Post article, U.N. climate talks chart a complex course away from fossil fuels (12/15/2023)
The agreement taking governments forward calls for “transitioning away from fossil fuels,” a declaration mostly absent in close to three decades of U.N. climate talks. It emerged from a complex set of geopolitics.
“Major Gulf oil exporters aligned with big fossil fuel consumers, such as China and India, in pushing back against fossil fuel goals that Europeans and island nations described as essential,” Harlan explained. “In a sign of the twisted interests, some of the countries calling to phase down oil and gas — the United States, Canada, Norway and Australia — are simultaneously planning expansion projects.”
What does “transition away” mean?
“Rather than shutting down oil wells, as ‘phasing out’ would suggest, by using the wording ‘transitioning away’ the U.N. is effectively calling on countries to first reduce demand,” wrote Bloomberg’s Javier Blas. “It may sound like splitting hairs, but it’s an important distinction. That’s why Saudi officials emerged from the COP28 summit smiling. In future gatherings, they can argue that they will keep pumping oil until there are signs that transition is underway.
Why is it so difficult to set objectives for reducing the use of fossil fuels, particularly oil? Money! Oil is a significant contributor to GDP in many countries. First, four definitions before I go to a few graphs to illustrate the issue.
Oil Rent: “Oil rents are the difference between the value of crude oil production at regional prices and total costs of production.” Oil rent is given as a percent of a country’s GDP. The data is for 2021 and from the World Bank.
Crude Oil Production: “Crude oil production is defined as the quantities of oil extracted from the ground after the removal of inert matter or impurities. It includes crude oil, natural gas liquids (NGLs) and additives. This indicator is measured in thousand tonne of oil equivalent (toe).” The data is for 2021 and from the OECD.
GDP per Capita: Data is for 2021 from the World Bank and in current U.S. dollars.
Oil Reserves: “This is oil that we know with reasonable certainty can be recovered in the future under existing economic and operating conditions. Proven reserves decrease when we extract oil, and increase as new resources are discovered or become economically viable to extract.” The data for 2020 is from Our Word in Data. The units are tonnes, but the actual amount is less important than the relative differences between countries.
The x-axis in Figure 1 shows GDP per capita, the y-axis shows oil rent, and the size of the dot reflects the country's oil production. There are seven countries where oil output exceeds 20% of GDP, with Libya and Iraq exceeding 40%. In addition, countries such as Libya and Iraq have a low GDP per capita. This is equivalent to telling an economically weak household to cut more than 40% of their income. In fact, the majority of countries with oil rents over zero are poorer. Can you even tell a family that's struggling to reduce their income by 5 or 10%? As a side note, it is undeniable that the majority of these nations distribute oil revenue unequally. Nonetheless, I believe that the typical individual in these countries is worse off without oil production.
Both Saudi Arabia and the United States are big oil producers, but oil accounts for 25% of Saudi Arabia's GDP, whereas it accounts for nearly none in the United States. If Saudi Arabia stops producing oil, its GDP per capita falls from $25,000 to below $20,000. Can anyone really blame Saudi Arabia for refusing to halt or even reduce oil production? Is the international community willing to pay these countries to stop producing oil? This demonstrates why the simplistic slogan “just stop oil” does not reflect the complexity of oil production.
Figure 2 is nearly identical to Figure 1, except that the size of the dot denotes proved reserves. There are only minor variations because the magnitude of output is often proportional to the size of the reserves. Interestingly, the dot sizes for Canada and the US are flipped.
It is worth highlighting Saudi Arabia once more. Although the next graph reveals that Saudi Arabia does not have the largest reserves (quiz question: do you know who does? ), it is the largest dot on the graph. The main point here is not only that oil is a major element of Saudi Arabia's economy now, but that they are well-positioned for oil to be a significant part of their future economy. This is true for the vast majority of oil-producing countries. The argument then is not whether the world should pay these countries to cease or reduce production now, but whether the world should pay them the worth of the oil in the ground to keep it in the ground. Climate activists who believe that eliminating oil is simple are not dealing with reality.
What interests me is that the oil-producing countries are willing to accept the “transitioning away” language. They are essentially betting that the world will continue to buy oil. I believe they are correct.
Figure 3 is one more graph. Venezuela has more oil reserves than Saudi Arabia, but they don’t show up in Figures 1 or 2. Part of the reason for this is that oil is more difficult and expensive to extract, and Venezuela has so far failed to meet the challenge. Except for Venezuela, all of these countries are extracting significant amounts of oil. I anticipate them to continue until they either run out of oil or the expense of extraction exceeds the value of the oil.
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