The Arabian Gulf should convince the rest of the world to end high-cost hydrocarbon production, or it will see its oil reserves left worthless by efforts to curb global emissions, said Jeffrey Sachs, an economist at Columbia University.
“My advice for this region is to say [to producers outside the region]: ‘don’t do more exploration in the Arctic, don’t do more exploration in the ultra-deep sea, don’t do more development in the tar sands … to make even more surplus [hydrocarbons] that will lower the price more and strand even more of our assets’,” said Mr Sachs, who is also a special adviser to the United Nations on the Sustainable Development Goals. He was speaking at a lecture held at the Emirates Diplomatic Academy, an Abu Dhabi research centre.
“This region is the low-cost provider. So if you are going to strand assets, strand the high-cost [hydrocarbon] assets, not the low-cost assets. That’s the argument that the region should make.”
Asset stranding refers to the destruction of an asset’s value as societal change renders it obsolete. Hydrocarbons could become stranded assets if moves towards a low-carbon economy are successful, economists and environmentalists believe.
Limiting global warming to a 2 degree Celsius increase in global temperatures, the figure agreed at December’s Paris climate summit, would probably require the world to produce no more than 900 billion tonnes of carbon dioxide. That is the equivalent of burning between one fifth and one third of existing global hydrocarbon resources, said the Intergovernmental Panel on Climate Change.
Under this scenario, most current hydrocarbon assets would not be used. That is why Mark Carney, the governor of the Bank of England, said last year that climate change, and moves to fight it, could spark a “fundamental reassessment” of the assets of major oil producers.
Mr Sachs cited research that indicated that the Middle East would have to keep about 38 per cent of its oil reserves underground to meet this target. That amounts to 263 billion barrels of oil, and a major share of the region’s future wealth.
While there is significant uncertainty about exactly how much of the Middle East’s oil reserves would become redundant, Mr Sachs said, “it’s likely, very likely, that some of what is there that is economically reachable can’t be used”.
That is why the Gulf should seek to convince the world to use its oil, which has a far lower cost of production than its global rivals, he said.
Missing the 2 degree target would have direconsequences.
“Abu Dhabi will be underwater,” Mr Sachs said. One study projected that the Arabian Gulf would become uninhabitable by 2100, as the combination of extreme heat and excess humidity would make it impossible for humans to survive.
The 2 degree target means that oil majors will suffer in the long-run if they invest in high-cost hydrocarbon production.
“The world does not have the unlimited, insatiable demand for oil and gas, which has been the assumption of mainstream world politics during the twentieth century,” he said.
“The oil companies still say in their brochures ‘to meet the needs of the energy industry in the twenty-first century, we need to go drill in the Arctic, we need to go drill in the deep sea’. They’re going to lose a lot of money for their shareholders if they do that, because this oil that they’re trying to develop at high cost cannot be used.
“If the region says we’re going to ignore all of it, it’s inconvenient, we don’t want to think about the carbon budget, that would not serve the region’s interests, because that would just be part of the continuing free-for-all, which will not be tolerated in the world sooner rather than later,” Mr Sachs said.