Technology and its consequences
Technological innovation may make things different this time. Large
investments will likely be discouraged by the new technology at the heart
of carmaker plans to replace internal combustion engine vehicles with those
that run on electricity. The stock market capitalization of electric
carmaker Tesla points to the imminence of the transformation of the
automobile market. Tesla’s capitalization dwarfs that of traditional
carmakers—even though those manufacturers produce vastly more cars than
Tesla. That disparity has prompted traditional car manufacturers to commit
to replacing vehicles powered by internal combustion engines with those
powered by electricity, which in turn has triggered massive research and
development on electric vehicles by manufacturers seeking to grab shares of
the new market (see table).
A frenetic ramping up of production of electric vehicles is not without
risk, however. It could cause supply to exceed demand—which would lead to
negative cash flows, illiquidity, and bankruptcies of car manufacturers.
The automakers’ bet is driven both by the commitment of governments to
achieving zero net carbon emissions and by the belief that consumers will
want to adopt cleaner modes of consumption—transportation accounts for
about a quarter of global energy-related carbon dioxide emissions. But it
is unclear whether consumers will merely pay lip service to cleaner
consumption or actually change their behavior. Will higher carbon prices
become less important to consumers than concern about an inadequate
charging infrastructure for automobile batteries?
That said, mass manufacturing will eventually make the price of electric
cars attractive, and a spike in oil prices would hasten the conversion to
electric vehicles. This last oil price super cycle will be consistent with
climate goals and associated with commitments by large economies to net
zero carbon emissions in the medium term. However felicitous a development
that will be for the global climate, however, it poses a risk that the oil
reserves so many oil-dependent economies count on will be less
valuable—especially for reserves where extraction costs are high. The
reserves and the investment surrounding them become, in effect, stranded
assets. That could lead to severe economic woes, including bankruptcies and
crises, in turn leading to mass migrations, especially from populous
oil-dependent economies, many of them in Africa. Other larger oil-dependent economies in the Middle East, central Asia, and Latin America are
also an important source of remittances, employment, and external demand
for goods and services that benefit many neighboring countries. The end of
oil, then, could not only devastate oil-dependent economies but could also overwhelm their neighbors. It is not all bad news
for countries with mineral deposits important to the energy transition.
Cobalt, essential for car batteries, will be in much higher demand. Uranium
could be valuable as well as electricity generation moves away from fossil
fuels and nuclear power becomes more attractive.
The end of oil thus makes economic transformation imperative. Oil-rich
countries must diversify to become resilient to the changes in energy
markets. An appropriate governance framework to manage proceeds from oil in
good and bad times has always been important to fostering economic
diversification. But with stranded assets a new risk, radical shifts in
governance in oil-dependent economies are urgent. Dubai, for example,
facing the depletion of its oil reserves, transformed itself into a global
trade hub. Countries and businesses reliant on these markets must formulate
policies to address this transformation, including the development of
renewable energy. To jettison their hidebound economies, which have led to
low productivity and waste, oil-rich economies should commit to reforms
that lessen obstacles to innovation and entrepreneurship. Reforming
corporate governance and legal systems, promoting markets that have no
barriers to entry and exit, and ending favoritism for both state-owned
enterprises and politically connected private firms will help attract
investment and change attitudes toward innovation (Arezki 2020).
