The Big Picture: IEA, Opec Trade Places

• For oil producers, the energy transition looks much more real -- and scarier -- than it did just a month ago. • The International Energy Agency’s (IEA) Net-Zero by 2050 report, investor revolts at the majors and a landmark court ruling against Royal Dutch Shell have hammered home the energy industry’s new direction. • The geopolitical dynamic between producers and consumers has been turned upside down, with profound implications for the world’s political economy. All of a sudden, it feels like the 1970s in reverse. Oil producers and consumers are at loggerheads, with one side pushing hard on policies that upend and threaten the other. But this time, consumers are in the driving seat -- and producers firmly on the defensive. Back in the 1970s, the Nixon/Kissinger-era oil crisis saw consumers facing asphyxiation of supply of the commodity most needed to run their economies. Today it is producers who face massive demand destruction under an accelerated energy transition. It’s playing out in much slower motion than the supply crises of 50 years ago, but existential threats still abound. Put simply, oil is being driven by politics again -- but this time, Opec is on the receiving end, and does not like it. Saudi Energy Minister Prince Abdulaziz bin Salman last week described the IEA report as "irresponsible," while Qatari Energy Minister Saad al-Kaabi said the "euphoria" around the energy transition had become "dangerous" (IOD Jun.3'21). The threat to producer economies is bad enough. But the current trend also raises fundamental strategic questions. Security of supply is no longer the energy policy priority in the West, with major implications for the US security umbrella extended to the Mideast region. Warnings of a supply crunch seem to fall on deaf ears. The petrodollar system was already beginning to unravel, but plunging revenues will jolt producer political economies, including the social contracts that help maintain stability. Debate Grenade Under the pathway outlined by the IEA, Net Zero by 2050, the global oil market will require just 24 million barrels per day and an oil price of $24 per barrel. But more significant than any map of an energy world three decades from now, the report is a clarion call for action today: No investment in new projects or oil fields from now, oil demand never recovering to 2019 levels, and no new fossil fuel boilers by 2025. From a producer perspective, the 2050 vision laid out by IEA’s pathway looks like an economic death sentence -- although it is noteworthy producers have not offered any alternative, more oil-friendly, pathway. Some have slammed the vision as unrealistic, and funding and governance bottlenecks will almost certainly rule out wholesale global adoption of the IEA’s net-zero guidance. "With this scenario there are going to be shortages of oil," argues one peer reviewer of the report. But this is not to say the report doesn’t need to be taken seriously. It has thrown a grenade into climate debates and served as a much-needed wake-up call. Now consumers know what is required to meet their own net-zero targets, while producers have a much clearer idea of the threat they face. New EU energy policy out mid-July will probably be consistent with the IEA pathway (EC Jun.4'21). Discussions going into critical UN COP26 climate talks in Glasgow will be framed by the report, either as a reference point to emulate or a set of targets to undermine. New Mission Statement For the last half century, the central role of OECD energy watchdog the IEA has been to foster a policy environment aimed at safeguarding oil supplies (EC May21'21). But with the net-zero report, security of supply appears only important in so far as “how do you keep the lights on during the transition,” argues Jonathan Stern of the Oxford Institute of Energy Studies, another of the report’s peer reviewers. “It is clear the Net-Zero report is a watershed moment for IEA,” he says. This apparent change in IEA mandate will likely make for a more confrontational producer-consumer relationship. The net-zero pathway will cause some economic pain, but the IEA sees overall global GDP growth at 0.4% greater than a business-as-usual scenario, and indeed some producers, notably in the Mideast Gulf, should be able to create significant renewables and hydrogen industries (EC May21'21). Net zero will also bring benefits to global health from reduced pollution, while at the same time tackling energy poverty, the IEA argues. A painless energy transition was never going to be possible. But in failing to lay out who will pay what price, and when, the IEA inevitably feeds into producers’ worst fears over the energy transition. While undoubted benefits exist, not least escape from the worst impacts of a climate catastrophe, there are “high costs for the transition to the net-zero emissions [scenario] and economic dislocations that would exert downside pressure on the economy,” writes economist Ken Koyama, another peer reviewer. Geopolitics Upended