The history of OPEC – the cartel, of some of the world’s largest crude oil producers, has been one of historic co-operation or divergence. When OPEC acts in concert, it can awe the world in either direction; see the terrifying oil shocks of the 1970s or the unprecedented 2020 deal that removed nearly 10 mmb/d of supply to stabilise the market in response to Covid. The addition of Russia and other countries into the broader OPEC+ club bolstered the firepower of the group, but also ratcheted up the tensions within. Because when OPEC fails to agree, the results can also be spectacular, leading to unfettered production and devastating price wars. Typically, the instigators of a showdown tends to be Saudi Arabia (or Russia in OPEC+), or one of the more recalcitrant members like Iran, Iraq or Nigeria. But the latest rupture has come from an unlikely quarter. The previously pliant United Arab Emirates is now holding up OPEC+’s path forward as an unlikely source of drama.
It was supposed to have been easy. After several months of routine meetings followed more routine approval of cautious monthly eases of the group’s supply quotas, the July OPEC+ meeting was expected to be more of the same. Resurgent demand amid economic re-openings and accelerating vaccinations dampening the potency of new Covid-19 variants saw oil supply/demand balances tighten. OPEC+ discipline was key to this, allowing crude oil benchmark to rise to their highest levels in nearly 3 years, with US$70/b being a sweet spot that satisfies domestic budgets and consumption concerns. Ahead of the July 1 OPEC+ meeting, the ministerial panel had recommended that the group adds 400,000 b/d in volumes every month from August to December, and that the wider agreement itself should be extended in full to December 2022 (from its original end date of April 2022). This would be more cautious than required by the market but, the OPEC+ ministers argued, was necessary in case Covid resurgences turned into another series of devastating waves.
The loggerheads over the recommendations was always expected to be between Saudi Arabia and Russia: the former representing the voice of caution and a need for discipline, while the latter argues that additional barrels can still be absorbed by the market as it attempts to flex its production prowess. But, as is turns out, all members of OPEC+ had reportedly signed up to the new recommendation. All except one.
The history of the UAE in OPEC is one of alliances. Along with Kuwait, the UAE has always been #TeamSaudi within the club, supporting the kingpin across the various heated discussions and decisions. In the realm of geopolitics, Saudi Arabia and the UAE are staunch allies. They did, after all, engineer a remarkable blockade of Qatar for nearly 4 years in response to alleged support of terrorism through links with Iran. But the strength of alliances ebb and flow. And in January this year, the break between the two allies was starting to show.
Key behind this is the UAE’s grievance that it had been handed an unfair baseline – the level which all OPEC+ countries are expected to measure their production cuts or increases against. The current level for the UAE is 3.2 mmb/d, and it argues that this should be raised to 3.8 mmb/d if it is to endorse any extension. And the logic behind that is the UAE has been investing heavily in output expansions and is itching to capitalise on that, particularly since it wants extra liquidity to boost its attempt to convert its Murban crude futures contract into a regional crude benchmark. Both Saudi Arabia and Russia have rejected the argument for re-calculating the output target, fearing that everyone else in OPEC+ will ask for the same treatment. This impasse – which is essentially UAE vs everyone else – could potentially unravel the deal that took several weeks of intense negotiation and the assistance of the White House to broker.
In the absence of a new deal, there is a fallback deal. And that is to maintain supply levels at July levels for the rest of the year. But that itself is a risk, since global oil supply is lagging behind demand, and the inflationary effects of elevated crude oil prices are starting to show. Keeping production flat – assuming there are no breaches of compliance – risks further price spikes, and other producers rushing in to fill the gap at the expense of OPEC+ market share. Which is the last thing OPEC+ wants, especially is the rush is from US shale producers.
But an even more dramatic scenario could see a full-scale rebellion of the UAE against its quotas and potentially its exit from the cartel, a possibility strategically ‘leaked’ to reporters back in January. This would break OPEC+ unity, risking a free-for-all situation that could crash prices is other producers follow suit and trigger a punishing price war. In a show of just how close this nightmare scenario is, Saudi Energy Minister Prince Abdulaziz bin Salman has publicly stated that he has not spoken to his counterpart in Abu Dhabi as the July 1 meeting stretched further and further with all parties attempting to come to a compromise. And a compromise is still the most likely resolution, since it is against all interests to jeopardise the stabilised crude oil situation with a price war now. The most likely result is that – after plenty of sound and fury – OPEC+ will endorsed the supply increases for August to December, but not extend the duration of the deal beyond April 2022.
How long and deep will this chasm grow between Saudi Arabia and the UAE? How will this fundamentally reshape the politics within OPEC+? On all evidence right now, it seems like it could be quite a while. Because this is bigger than just oil. Riyadh and Abu Dhabi have been on a crash course for a while now. The UAE has been developing its own foreign policy themes, which are increasingly independent of its Saudi ally – see its recognition of Israel and its position on Yemen. Saudi Arabia’s call for international firms operating in the Middle East to move their regional headquarters to Riyadh has also been interpreted as a threat to Dubai. And in a chilling reminder of the Qatar blockade, travel between the two countries has been restricted. The healing of this rift will be key, not just to the future of OPEC+ but the incendiary geopolitical dynamics of the regions, especially with the incoming return of Iran from the cold to the oil markets and the wider world. OPEC+ has just experienced an earthquake, and now it is time to see what the aftershocks are going to be.
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Two very different economic blocs. Two pathways to a carbon-free future, one younger and one more mature. And one more with plenty of ambition but hamstrung by inaction. Between China, the EU and the US, three of the most powerful economies in the world all agree that pursuing a carbon neutral future is necessary if the planet is to limit global warming levels to 1.5 degrees Celsius above preindustrial levels, as committed under the Paris Climate Agreement. But the question of how to get there is the tricky one. In the past two weeks, both China and the EU have unveiled their own sweeping plans meant to limit greenhouse gas emissions, both incredibly ambitious in their own right but both also facing headwinds.
Let’s start with China. In Shanghai, the Shanghai Environment and Energy Exchange launched the country’s national emissions trading system on July 16. Currently focused on its own companies, the Chinese emissions trading system is already the world’s largest carbon market from the first day of operations. Covering an initial 2225 power plants that are estimated to emit more than 4 billion tonnes per annum of carbon dioxide, that amount already exceeds the European Union’s scheme, which covers about 2 billion tpa of emissions according to the International Emissions Trading Association. And there is still plenty of room to grow.
China decided to kick off its carbon trading platform with a focus only on power companies, given that they are among the most polluting of industries contributing to roughly 40% of China’s annual carbon emissions and roughly 14% of global carbon emissions from fossil fuel combustion according to the IEA. This initial phase allows the domestic participating companies to cover their own emissions by purchasing surplus allowance from those that have been able to cut their emissions through the exchange. Within the first week, Chinese energy giant Sinopec already closed a huge bulk deal by buying a 100,000 tonnes of carbon emission quota through its subsidiary Unipec. In the first day alone, a total of 4.1 million tonnes were traded, with the price rising from the opening CNY48 (US$7.41) to CNY51.23 (US$7.89), reflecting strong demand as the Chinese state aims to reach peak carbon emissions by 2030 and carbon neutrality by 2060. While the current price is still well under the €50 ($58.87) per tonnes under the EU emissions trading scheme, it is a bold step forward that can only grow.
In time, China intends to add other sectors such as iron and steel, cement, aluminium, paper, domestic aviation, building materials, and petrochemicals to future phases of the trading scheme. In addition, the first phase of the Chinese ETS is only limited to spot transactions by domestic players, but over-the-counter transactions and foreign/individual investors are expected to be added eventually one the exchange matures. Stricter carbon caps by industry may also be added, although the timing and scope have yet to be determined; China’s scheme is based on carbon intensity, rather than the EU’s absolute cap on emissions, which means that total emissions can still rise as power generation grows. For now, the price paid per on will be passed on to consumers, which promotes efficiency and incentivises emissions-cutting by giving a cost advantage to companies that are able to slash their carbon faster than required.
It’s a good start, even though it is unlikely to result in an acceleration of emissions reduction soon, given that there is not enough surplus renewables capacity to match the emissions of carbon-intensive industries. Which means that China will need to continue on its mammoth rollout of solar, wind and nuclear energy over the next decade to truly make a difference.
If China is just starting out with a framework that will service it for the next half century, then the EU is racing ahead to beat its own previous targets. The EU Commission has unveiled a new – dubbed the European Green Deal – that intends to achieve and exceed its commitments under the Paris Agreement, which bound the bloc to cutting greenhouse gas emissions by 55% in 2030 from 1990 levels and achieve net-zero emissions by 2050. The adoption of this target has already had ramifications across the continent, with almost all major energy companies adopting carbon neutral targets along the same timeline. And in some cases, even further, with the recent court judgement in the Netherlands that Royal Dutch Shell must accelerate its emissions-slashing plans globally from its already ambitious plan.
The new EU proposal aims to cut reliance on fossil even further and promote renewables. Central to this is a requirement that the share of renewable energy sources as part of Europe’s mix must rise to 40% from 20%, while limiting pollution from fossils fuels from key sectors like power, transportation, shipping, agriculture and housing – resulting in a 61% fall from 2005 levels by 2030, compared to the current target of 43%. Controversially, the EU proposal also deals with the idea of ‘imported pollution’ – carbon leakage that is caused by shifting production to countries with loose or no emissions rules by imposing a carbon import tax that will begin in 2023 for full implementation in 2026. This would ensure domestic competitiveness within the EU while incentivising trading partners that do adopt carbon plans by allowing the carbon price (as determined through China’s emissions trading system, for example) to be deducted from the carbon cost bill when entering the EU. It is a plan that has already sent shudders through global supply chains, triggering accusations of bias by developing countries. But there is also dissent for the plan in Europe itself. Emmanuel Macron’s government in France, one of the main pillars of the EU, is reportedly already lobbying to watering down the proposal to create a new carbon market for domestic heating and road transport, and phasing out all combustion engine cars by 2035. Other countries, including the Netherlands and Hungary, are also worried about the social impact, since the plan would drive up costs for average citizens. The EU Commission claims the increase in costs will not be too much, on the assumption that revenues generated from the new carbon market will be channelled to subsidise fuel bills of low- and middle-income households.
Between China and the EU, bold moves have been made to progress on a carbon neutral future. But there is one major player that has plenty of ambition as well, but is unable to proceed with similar bold steps due to politics. Since taken over the White House in January, US President Joe Biden has made renewables a focus of his administration – announcing initiatives to scale back on fossil fuels and move to 100% carbon-free electricity by 2035. But his ability to push further – by, say, creating a national renewable standard or fund renewable infrastructure is hampered by Republican obstruction and state pushback. The likelihood that the Republicans may increase their power in the next mid-term elections also pours water on the idea that Biden’s big ideas can take shape eventually. But where the American government can’t step up, private investors can step in: witness the recent shareholder revolts at Chevron and ExxonMobil. The march towards carbon neutrality will be tortuous and long, but at least there is some progress happening now to ease the difficult path the world must take in the future.
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In 2020, renewable energy sources (including wind, hydroelectric, solar, biomass, and geothermal energy) generated a record 834 billion kilowatthours (kWh) of electricity, or about 21% of all the electricity generated in the United States. Only natural gas (1,617 billion kWh) produced more electricity than renewables in the United States in 2020. Renewables surpassed both nuclear (790 billion kWh) and coal (774 billion kWh) for the first time on record. This outcome in 2020 was due mostly to significantly less coal use in U.S. electricity generation and steadily increased use of wind and solar.
In 2020, U.S. electricity generation from coal in all sectors declined 20% from 2019, while renewables, including small-scale solar, increased 9%. Wind, currently the most prevalent source of renewable electricity in the United States, grew 14% in 2020 from 2019. Utility-scale solar generation (from projects greater than 1 megawatt) increased 26%, and small-scale solar, such as grid-connected rooftop solar panels, increased 19%.
Coal-fired electricity generation in the United States peaked at 2,016 billion kWh in 2007 and much of that capacity has been replaced by or converted to natural gas-fired generation since then. Coal was the largest source of electricity in the United States until 2016, and 2020 was the first year that more electricity was generated by renewables and by nuclear power than by coal (according to our data series that dates back to 1949). Nuclear electric power declined 2% from 2019 to 2020 because several nuclear power plants retired and other nuclear plants experienced slightly more maintenance-related outages.
We expect coal-fired electricity generation to increase in the United States during 2021 as natural gas prices continue to rise and as coal becomes more economically competitive. Based on forecasts in our Short-Term Energy Outlook (STEO), we expect coal-fired electricity generation in all sectors in 2021 to increase 18% from 2020 levels before falling 2% in 2022. We expect U.S. renewable generation across all sectors to increase 7% in 2021 and 10% in 2022. As a result, we forecast coal will be the second-most prevalent electricity source in 2021, and renewables will be the second-most prevalent source in 2022. We expect nuclear electric power to decline 2% in 2021 and 3% in 2022 as operators retire several generators.
Source: U.S. Energy Information Administration, Monthly Energy Review and Short-Term Energy Outlook (STEO)
Note: This graph shows electricity net generation in all sectors (electric power, industrial, commercial, and residential) and includes both utility-scale and small-scale (customer-sited, less than 1 megawatt) solar.
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