HomeMediaLatest NewsGet out of the loop. What awaits Russia when demand for oil and gas collapses due to global warming

Get out of the loop. What awaits Russia when demand for oil and gas collapses due to global warming

18 August 2021

Salikhov Marcel R. President, Principal Director on Economic Studies, Head of the Economic Department

Marcel Salikhov, President of the Institute for Energy and Finance, commented to The Bell on the prospects of decarbonizing the Russian economy.

When will global oil and gas demand start to decline

In the context of the intensifying "energy transition" in the world, most likely, the trends for different energy resources will be very different. Coal and oil are likely to be the hardest hit among hydrocarbons, and natural gas to a lesser extent. Renewable energy sources will benefit the most if they are also referred to as conventional “energy resources”.

There are many different long-term forecasts for the development of the world energy, which indicate different development paths. However, it is impossible to build a more or less accurate forecast, since future dynamics will depend on the decisions on decarbonization that will be made in the coming years in different countries. In this sense, the structure of the world energy in 2040 or 2050 will be more determined by decisions in the field of regulation than solely by market mechanisms. This is the main difficulty in predicting the structure of the world energy in 30 years.

However, there is a consensus among experts that oil demand will peak in the next decade. This will not happen in the coming years,as global oil demand quickly recovers from the pandemic. But in the period 2025–2030, this will indeed happen.

What will happen to the Russian economy

These are long-term processes that will stretch over decades. Therefore, there will not be any instant refusal from fuel and energy resources. However, global demand for oil may start to decline, which will intensify competition among producers. The gradual increase in the need to pay for CO2 emissions can lead to the fact that the discounts for producers will increase. That is, the price of hydrocarbons can remain high enough for the end user and relatively low for the producer. The difference will be related to taxation, including the actual inclusion, to one degree or another, of the cost of emissions. For example, in the EU, taxes account for a very high share of the price of petroleum products. This practice could gradually be extended to an increasing number of carbon-intensive products.

Such a scenario will, of course, worsen the financial position of hydrocarbon producers. Demand constraints may also lead to the fact that exports in physical terms may stagnate or begin to decline, which is also disadvantageous for the economy. In recent years, the Russian economy has grown at a very slow pace, with long-term growth rates not exceeding 1.5–2.0% annually. If the negative scenario is realized, long-term growth rates may decline even more, and the economy will increasingly plunge into full-fledged stagnation.

What will happen to the ruble and the state budget

An obvious risk for the ruble in the event of a decrease in the volume and value of hydrocarbon exports is a decrease in its value. Although in recent years the link between oil prices and the ruble exchange rate has formally weakened due to the effect of the fiscal rule, it remains in the long term, since the cost of hydrocarbon exports is the main factor that determines the inflow of foreign exchange into the domestic market.

A negative scenario for the development of the "energy transition" does not mean that the budget will not have enough money to fulfill its obligations. The budget has a NWF airbag. The next few years may turn out to be quite successful in terms of conjuncture in the commodity sectors, which will lead to an increase in the NWF.

Moreover, as we have seen in recent years, the state can always raise the level of taxation in order to compensate for the reduction in oil and gas rent for itself. The problem is that this creates a negative feedback: the increase in taxes worsens the conditions for doing business, the economy stagnates, which forces further tax increases, etc. But all this means that there will be fewer opportunities for development and exit from such a loop.

What Russia to do

I don’t think there is a single adaptation mechanism; rather, we are talking about a variety of solutions that need to be implemented. From the point of view of diversifying the economy and avoiding excessive dependence on the raw materials sectors, in my opinion, the state should invest significantly more in human capital, primarily in education and healthcare. New and future sources of economic growth will require skilled and talented citizens. However, this is a long-term prospect - even if now we increase spending and improve the quality of education, the return on this will occur in decades. But if this is not done, then there will be no chance of getting out of long-term stagnation.

There are also specific areas in the field of energy that can reduce costs for the economy and help the Russian economy to adapt. There is a lot of excitement around the world about hydrogen energy; in the coming years, a large amount of funds and efforts will be spent on its development. Based on official plans, including the recently adopted Concept for the Development of Hydrogen Energy, Russia plans to become an important producer and exporter in this new market.

However, taking advantage of new promising directions is greatly hampered by the growing isolation of Russia. For example, it is obvious that the EU will be the main export market for Russian hydrogen. However, export opportunities depend on the European position - to what extent hydrogen will be recognized as meeting the “green requirements”. This is also a political issue. Therefore, in my opinion, it is foolish to count on large-scale export of Russian hydrogen while maintaining serious political differences.

Russia also needs to create its own national CO2 trading market, despite the opposition from many industrialists. Lack of payment for emissions will become increasingly anachronistic in the face of energy transition. It may also be worth pursuing the development of CO2 capture and storage (CCUS) technologies. The potential competencies of oil and gas companies can be very useful in these solutions, as often old fields can be used to store CO2. However, this is also due to the presence of an emission charge.

Who will resist the climate restructuring of the economy

It is generally accepted that oil and gas companies are opposed to the climate agenda. However, they face increasing pressure from investors and conduct international business, so they are well aware of "where the wind is blowing." I think that this will become more and more obvious, therefore Russian economic policy will increasingly become climate friendly. In the West, public opinion is a powerful argument for companies, but in Russia, according to polls, citizens are not very concerned about the climate agenda. This may change in the future.

Should Russia expect internal carbon regulation

In July 2021, the European Commission published a draft CBAM regulation, which implies levying payments for emissions and imports. However, the published version turned out to be much softer than many expected. In particular, it is not even planned so far that oil and gas will be included in the CBAM mechanism. Its own Russian national system, if created, will reduce costs for exporters, but will not eliminate them. Conventionally, if in Russia the payment for emissions is 5 euros per ton, and in the EU - 50 euros, then the exporter will be able to set off only the internal price, but pay the difference in the cost of emissions (45 euros). At the same time, a proprietary emissions trading system will mean that carbon-intensive industries and the electricity sector will have to pay for emissions, not just for those products that are exported to the EU. However, as the EU experience shows, adapting such a system requires a lot of time and effort, so it is better to start early.

You will receive notifications about the release of new materials on the site. We do not share email addresses with third parties and do not spam.
Thank you!
Your application is accepted.