March 23, 2023

Analysis

Stranded Countries and Stranded Assets

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This is the eleventh edition of The Polycrisis newsletter, written by Kate Mackenzie and Tim Sahay. Subscribe here to get it in your inbox.

The US routinely flouts its international climate financing commitments, rarely delivering on its promises. Last year, for example, Congress proposed just over $1 billion—or less than a tenth of its pledge in the annual budget. So it came as a surprise to some observers when, in November, the White House announced a $100 billion partnership with the United Arab Emirates to finance clean energy in developing countries.

It’s the latest in a series of high-profile green moves by the Gulf States. Two months earlier, German chancellor Olaf Scholz had traveled to Qatar to secure shipments of LNG. Later, the gas exporting country’s investment fund helped finance a German utility’s acquisition of solar and wind power plants in the US. At home, the Gulf states pursue an American-style “all-of-the-above” energy strategy, simultaneously expanding both hydrocarbon production and renewables.

But the UAE and other members of the Gulf Cooperation Council (GCC) are no longer just global gas stations. Flush with revenue, they are also becoming bankers to the world. And with many of their clients increasingly bent on the energy transition, their role as financiers is increasingly at odds with their role as drillers.

Sovereign wealth funds in the region are managing a pile of revenue equivalent to the UK’s GDP. According to the IMF, high energy prices mean governments are expected to reap $1.3 trillion over forecasts from before the Ukraine war. High prices also mean a massive transfer of wealth from oil importing countries to oil exporting countries, and from consumers to producers.

One of these beneficiaries, the UAE, is hosting this year’s UN climate conference. The twenty-eighth Conference of the Parties will be presided over by Sultan Al-Jaber, also chief executive of the country’s oil company, Adnoc. UAE’s role as climate conference host might be galling but it is the GCC country which has apparently moved most beyond fossil-fuel dependency. Today, its  government revenue from hydrocarbons is equivalent to about a third of GDP—Saudi Arabia’s average is closer to half.

The UAE’s relatively less extreme oil-GDP ratio might reflect not so much conviction in the ecological imperative for a green transition, as success in a strategy that most of its peers are also pursuing. Within the petrostates themselves, the vast dollar-denominated revenues provide amply for the small population of citizens, but they also crowd out other domestic industries.

Saudi Arabia has been worrying about existential threats to oil sales for decades. The global recession caused by the Volcker Shock during the 1980s led to a reduction of oil demand by several million barrels a day, along with concerted efforts by OECD countries to reduce dependence on expensive oil. Since then, Saudi oil ministers have worried about “demand destruction” and used the country’s pivotal role in OPEC to ensure prices do not rise enough to drive customers to curb their use in ways that could become permanent. The threat has become existential as recent IEA forecasts bring the end of the oil era into sight. In 2016, the country’s leader, Mohammed bin Salman, declared a Vision 2030 strategy to go “beyond oil dependence” and expand sectors like financial services, tourism, and ports.

With footloose petrodollars, every story is an oil story. Take the Credit Suisse meltdown. Surely, one would be forgiven for thinking, it started with interest rate hikes in the West. But no: the proximate cause was the Saudi National Bank refusal to double down on its investment in the troubled Swiss bank. After the Russian invasion last year, with oil prices riding high, the Saudi government took a 10 percent stake in Credit Suisse, aiming to diversify its economy from oil into financial services. Last week, Saudi National bank’s refusal to come to Credit Suisse’s assistance spooked investors that something more rotten was going on, and the ensuing crisis over the weekend is still roiling financial markets.

Everyone wants to sell the last barrel of oil, but no one wants to pay much for the privilege of doing so. Western commercial capital is restricting investment in new oil fields, with investors preferring that the majors distribute earnings as dividends rather than reinvesting in long-term projects. Even the US shale oil producers have cut the amount of cash they invest in supplies by two-thirds. Saudi Aramco plans to increase production but despite its incredible cashflow, its capital expenditure on upstream oil and gas production is barely keeping pace with inflation.

A “green Opec”?

These new investment alliances between wealthy countries and Gulf fossil-fuel exporters are coinciding with a period of reckoning about the cost of climate change to countries that did little to contribute to it. A formal acknowledgement was made at last year’s UN climate conference of the need to pay “loss and damage” to countries that are ravaged by climate change. For poorer countries, sources of finance are limited. About three in five developing countries are in or approaching debt distress. Many have exhausted their 2021 SDR allocations for fiscal use and a new window to market finance that only opened in recent years slammed shut once Covid hit their economies.

Developed countries, meanwhile, still haven’t mobilized the $100 billion per year in “climate finance,” promised in 2009 for delivery by 2020. Covid provided some cover for missing the deadline, but whether or not the target will  be met by this year remains to be seen. The amount is derisory next to the estimates of trillions required for developing clean energy systems and adapting to climate change impacts.

Could a “green Opec” fill the gap? The Arab oil producing countries have a long history of supporting other neighboring countries with less good fortune in oil reserves. Arab countries disbursed almost a trillion dollars to developing countries in financial assistance between 1971 and 1989. It went to Arab countries in the Middle East and Africa, and the  majority was bilateral, concessional, and unconditional. Some of the most climate-vulnerable states such as Bangladesh and Pakistan are beneficiaries of their support. Around 2014 the Abu Dhabi Development Fund began providing modest concessional loans for solar projects to small island states such as Tuvalu and Samoa.

Unsurprisingly, however, most oil exporting countries provide very little climate-oriented aid for other countries. Gulf exporters are not counted as significant sources of climate funds in any of the analysis of such flows. Yet the UAE’s insistence that it can keep the extremely narrow window for limiting warming to 1.5C indicates that it remains interested as a responsible actor of the energy transition.

In 2007 Opec member Ecuador proposed leaving some of its reserves in the ground in exchange for international financial support. Five years later, then president Rafael Correa, picking up on an idea proposed earlier by economist Herman Daly, proposed that the oil cartel members should impose a tax on their oil exports which could be diverted to helping poorer countries adapt to climate change.

The Opec Fund’s latest three quarterly newsletters all focus on climate change and even mention renewable energy where previously most of the focus was simply on the catchall “access to energy.” The fund is a small disburser of aid in the scheme of things (about $1bn/year) but while its recent energy projects include gas-fired power plants in Mozambique and Uzbekistan, it now declares it wants to direct 40 percent of its funds to “climate finance,” including renewable energy.

The theory of fossil fuel “stranded assets” holds that hydrocarbon reserves won’t be actually sold, leading to financial losses. It usually uses a supply-cost analysis to see which company or country reserves are most likely to make it to market in a carbon-constrained world. If cost per barrel is the only metric that counts, then with cheap and easy-to-drill hydrocarbon reserves, the Gulf kingdoms should be in a good seat.

James Cust, David Manley, and Giorgia Cecchanito: “Unburnable Wealth of Nations.” Finance & Development, March 2017, Vol. 54, No. 1.

However oil has a different role in each country; Saudi Arabia has a break-even price which it needs to sustain its generous domestic spending, and its obstructive interventions in international climate fora over the years suggest consistent efforts against cutting emissions. (Just this weekend, it was reportedly pushing for more prominence for carbon dioxide removal in the IPCC Synthesis Report.)

In January, two months after the UAE–United States announcement, the US pledged an initial $20 billion towards clean energy investments, declaring it would “prioritize commercial projects in developing and low-income countries.” As the US deepens its reinforcements of its financial sector, and the Federal Reserve deploys emergency dollar liquidity measures with some of the richest countries, a handful of low-income states are still desperately negotiating debt relief; progress on expanding concessional lending from MDBs is happening slowly at best. Problems that could be easily—or at least plausibly—solved are left to go on.

The Polycrisis is a publication focusing on macro-economics, energy security & geopolitics.

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