On oil’s collapse and the Middle East’s plunge into irrelevance – maybe

If the Middle East did not sit on half of the world’s remaining oil reserves, most of us would take no more interest in its local politics and wars than we do in Central Africa’s travails. So if the demand for oil collapses, we will stop caring much about the Middle East – and demand is quite likely to collapse.

This is not the orthodox wisdom. As the BRICs (Brazil, Russia, India and China) move toward mass car ownership, their demand for oil is ramping up, while in the older industrial countries it remains fairly constant. The usual forecast, therefore, is for ever-fiercer competition for a static or even slowly declining supply of oil. But what if the demand for oil started falling?

The missing factor in the conventional calculations is the likely response of major oil consumers to the threat of climate change. The shift in public opinion over the past two years has been dramatic, and the major states now accept that strong measures are needed to avoid runaway global warming. At the G8 summit in Italy in July, the 18 biggest emitters of greenhouse gases agreed that the rise in average global temperature must never be allowed to exceed two degrees Celsius.

They wish the end, but they have not yet willed the means. Some sort of post-Kyoto deal on cutting greenhouse gas emissions will emerge from the current negotiating process by December, but it certainly is not going to deliver 50 percent cuts in global emissions by 2050, let alone by 2030 (which is probably the right target). Nevertheless, cuts will be mandated, and they will be much deeper than before.

Logically, the brunt of such cuts should be borne by coal – the most polluting fossil fuel by far. In practice, this will not happen, because the replacement cycle for large power plants – coal, gas or nuclear – is around 40 years long. National automobile fleets, by contrast, turn over in as little as 10 years – and long before one commits oneself to major technological shifts like fuel cells, one can already get big incremental emissions cuts simply by improving fuel efficiency.

One of the first big impacts of a new international deal on climate change (see the Landry-Spector Nez à Nez), therefore, will be a strong focus on improving fuel efficiency in all the big car-owning countries. It will be especially attractive politically, because most of these countries import much of the oil they burn, and cutting oil imports reduces both foreign exchange costs and political vulnerability.

Consider, for example, what is already happening in the US, even without the spur of a post-Kyoto deal. The average fuel efficiency of US motor vehicles has virtually stagnated since 1990: it is currently 21.4 miles per gallon. Three years ago, however, California passed legislation demanding a 30 percent cut in the emissions of new vehicles by 2016, which translates in terms of fuel efficiency to about 36 mpg.

This legislation was then blocked by the Bush administration, which refused to let California exceed the much laxer ‘national standards’ set by the Clean Air Act. President Obama has already requested that the US Environmental Protection Agency review (i.e., revoke) that decision. In 16 other states – accounting for about half of all US cars and SUVs – laws similar to California’s have passed or are pending.

Obama has not changed the existing federal target, which mandates an average fuel efficiency of 35 mpg only by 2020. However, by letting so many large states set an earlier deadline, he effectively imposes it on the entire US automobile industry – without having to fight a bill through Congress.

If the US also offers tax credits for drivers who scrap ‘gas-guzzling’ older cars, this strategy could cut US oil consumption by as much as 25 percent in 10 years. The US currently imports about half the oil it burns, and the 25 percent savings would come right off the top of these imports, which would mean almost a halving of total US oil imports.

There is plenty of room for further improvement: China’s current requirement is 43 mpg, and the EU’s target is 47 mpg by 2012. So even with a continuing expansion of car ownership in the BRICs, fuel efficiency improvements alone could produce a fall in oil demand of as much as two percent a year by the mid-teens of this century.

The impact on oil prices would be dramatic, and major oil exporters would be hit by the double whammy of falling price and declining demand. The Holy Grail of ‘energy independence’ would be within reach for many countries, and the importance of the Middle East in world affairs would plummet. It may not happen – but it certainly could.

Gwynne Dyer is a Canadian-born, London-based, independent journalist. His self-syndicated, twice-weekly column appears in some 175 papers in 45 countries.