Oil’s long goodbye – what it means for the Gulf

As global oil demand continues to rise, albeit slowly, it is widely recognized that future technological advancements could potentially cause demand to drop to zero by the end of the 21st century. Nevertheless, recent economic studies suggest that, in the short term, we may actually witness an increase in oil consumption. This phenomenon has significant ramifications for Gulf countries.

For now, disregarding the challenges posed by the near-strangulation of the Strait of Hormuz, oil demand remains robust and steadily increasing. However, numerous factors are driving analysts to predict a terminal decline in oil demand starting in the middle of this century. These factors encompass sustainability pledges, the rise of alternative technologies like electric vehicles and solar energy, and oil-consuming nations' aspiration to attain greater energy security.

If these predictions hold true, it seems plausible that dwindling oil demand would lead to reduced production. Yet, this logical inference may prove to be misleading, as demonstrated by a recent study by University of Chicago professor Ryan Kellogg. Employing simulations to forecast oil trends, Prof Kellogg identifies two opposing forces that make it uncertain whether diminishing oil demand will indeed result in a decrease in oil supply, or if it will encourage oil-rich nations to boost their production.

One possibility, termed the "disinvestment" case, is based on the fact that oil production is a lengthy process requiring substantial upfront capital investment. For instance, discovering a new well and initiating extraction operations typically takes around five years, with a majority of the expenses incurred during that initial period.

Consequently, if producers anticipate a substantial decline in oil demand, it is logical for them to postpone investments in new wells. After all, the market for their output might vanish (or be significantly reduced) by the time operations begin to function optimally, while the hefty initial expenditure will still need to be met.

Consequently, under these circumstances, oil production would follow its natural course of gradually diminishing as existing operational fields deplete, leading to global oil supply mirroring the decline in oil demand and, thus, maintaining relatively stable oil prices. The other potential scenario, identified by Prof Kellogg as the "green paradox," posits that, although environmental policies might seemingly lower oil demand, they could inadvertently result in a sharp surge in oil supply, leading to excessive oil consumption during a transition period.

This occurs if oil-rich nations aim to prevent their reserves from becoming "stranded assets," meaning they seek to extract as much oil as possible now before the valuable resource becomes commercially unfeasible in the future. In practice, the world will not strictly conform to either the disinvestment or the green paradox scenario.

Both scenarios will likely manifest to varying degrees, potentially cancelling each other out or allowing the stronger force to prevail. Considering the strategic importance of oil, predicting its actual outcome carries substantial implications for carbon emissions, supply chain logistics, resource-related conflicts, and even economic planning, particularly for Gulf states' aspirations.