What a difference a year makes. Just 12 months ago, in March 2015, oil prices had dropped to $50 — about half of what a barrel fetched the summer before. Oil producers were hurting, but they could also imagine that the markets would soon correct, the slide would stop and prices might rebound.
Today, oil prices have been cut in half again, and there’s no correction in sight. Demand for oil remains slack, thanks to the slowdown in the global economy and to policies aimed at cutting oil consumption. Supplies remain high while investment in production has crashed. For oil sellers and for the governments that rely on oil revenue, it’s a nightmare. Cheap oil, they hope, will rekindle demand and the prices that suppliers can charge will rise again.
They’re free to hope. But over the past year, another striking trend has darkened the long-term outlook for purveyors of fossil fuels: serious policy on climate change.
For nearly two decades, governments have been going to international meetings on climate change — but not actually getting anything done. But that climate stalemate changed in December. That’s when, in Paris, 196 countries agreed on a new approach to climate cooperation. The Paris agreement gives each country the flexibility to make its own pledge to cut emissions. The parties will periodically convene and review how well each country has done in meeting their pledges. These opportunities to check progress will smoke out the countries that are not making genuine efforts and could yield more cooperation over time.
This pledge and review approach is why Paris was considered such a success – and why climate policy is far more credible than it was a year ago.
A new report released today by the World Economic Forum illuminates how the energy industry is already dealing with these diverging pressures. (Full disclosure: I am on the advisory board, although not responsible for the content of the report.) Ever since 2009, the forum team has been ranking each country on how its energy system performs across three dimensions: a) offering abundant energy to its citizens from diverse, secure supplies; b) reducing emissions of warming gases and other pollution; and c) making energy affordable so that economies can grow quickly.
For decades, when most policymakers talked about energy policy they focused on just one of these dimensions: secure supply. They assumed that countries with the biggest supplies of oil, coal and gas were the most secure. But when you look at all three dimensions, the big suppliers actually do quite poorly. Many countries with the highest-ranked energy systems are actually big energy importers — especially importers of oil. They do well because they have diversified their supplies while keeping energy affordable and clean.
The forum report also points to big tensions between the traditional concept of energy security and the need, as agreed in Paris, for the world to make deep cuts in emissions. Below are the rankings.
Because the team has been using the same indicators for years, we can increasingly see trends over time, including in how countries rank. Three points stand out.
1. Countries with just a single source of energy have fallen in the rankings. That includes OPEC members.
The most striking trends in the rankings, shown for the latest year in the figure, relate to countries that have not diversified their energy sources.
Japan has tumbled 28 spots since 2009, mainly as a result of the ongoing troubles from closure of all the country’s nuclear plants. A few plants are now restarting. At the same time, Japan now has much higher carbon emissions, which has dragged down the country’s ranking. Nigeria’s rank has fallen 26 spots — now at 108 — because the crash in world oil prices reduced the nation’s revenues from fuel exports, cutting into GDP.
Indeed, none of the OPEC members do well on the forum’s index because all of them are highly dependent upon oil not just for their energy supplies but also for their whole economic growth strategy. As a group, OPEC scores well on the traditional energy security indicator: the sheer supply of energy. But on other dimensions in the forum index — economic growth and environmental sustainability— their performance is abysmal.
2. Persian Gulf nations may be facing more political turmoil as oil revenue falls
Last fall, the International Monetary Fund warned that countries whose leaders use oil revenue to stay in power might have trouble once that revenue drops. The figure below, also from the report, shows that all the big oil producers in the Persian Gulf are spending a lot more than they take in at current oil prices. The result may be more political turmoil.
Around the world, the oil exporters that see disaster looming as prices drop are trying to reform. The changes needed are massive to open these economies to outside investors while also reducing economic dependence on the sale of oil — for example, through the promotion of manufacturing, services such as banking and tourism, and other activities that don’t hinge on hydrocarbons.
The best example of that forward thinking today is in Mexico where, despite huge constitutional and political challenges, the government is cutting is dependence on oil. It is also adopting reforms that will bring in foreign firms with capital and technology to improve how the countries looks for and produces oil and gas.
3. No country can do well on every measure – because energy policy involves tradeoffs.
Some countries, notably the Nordic nations, have always scored well on the forum index because they have clean energy systems that are dominated by hydroelectricity and their economies are balanced. Some (notably Norway) are big energy exporters as well.
But almost no major economy scores in the top 10 of the forum’s energy performance index shown above. The one exception is France, thanks mainly to reliance on low-emission nuclear power — a power supply that the French government is now trying to reduce.
The problem here is that the world’s various energy goals are in conflict. Security requires diversity. But some of the most promising technologies for cutting emissions could result in too much reliance on a single power source and other risks to reliability of the power system, as happened in Japan with nuclear power.
Indeed, the countries that have done the most to keep emissions low have relied heavily on just one source of energy — often hydropower or nuclear power. Making those energy systems secure will require more diversity in supplies. Globally, wind and solar still account for less than 3 percent of the energy supply.
Most countries that have made deep cuts in emissions have also relied heavily on electric power grids because it is easier to control pollution from large plants and deliver clean electricity. The latest reports from the IPCC, which have looked at how the world can make deep cuts in emissions in the future, have made the same point: a much cleaner world is probably a more electrified world.
Over the past four decades, most of the debate over energy security has focused on oil. But the forum’s report suggests that in the coming few decades, the pivotal problems for energy security will center around electric power.
Electricity will bring issues that are quite different from oil-centered fears of energy security. Making electric systems more secure will require incentives to invest in large, expensive electric grids and to integrate new sources of power, such as wind and solar. It will also require dealing with new threats, such as the kind of cyberattacks that Russian hackers allegedly launched against Ukraine and which are looming for the rest of the world’s power system.
David G. Victor is professor of international relations at the School of Global Policy and Strategy at the University of California at San Diego and the author, most recently, of “Global Warming Gridlock: New Strategies for Protecting the Planet.” He chairs the World Economic Forum’s Global Agenda Council on Governance for Sustainability.