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SHUTTING ONE BARREL DOES NOT EQUATE TO PRODUCING ONE BARREL

Intuitively, restricting the oil supply in one region can lead to an increase in global oil prices, benefiting Oil and Gas (O&G) companies and stimulating new extraction projects elsewhere. A case in point is Putin’s invasion of Ukraine and the subsequent boycotts. Brent crude futures soared to $100 a barrel, and the five largest O&G majors reported a combined profit of USD 55 billion in the second quarter of 2022 alone. To meet demand, oil suppliers depleted inventories, while consumer nations implored O&G companies to increase drilling.

It's important to note that the same market leakage logic also applies to demand. Decreasing oil demand in one area can lower global oil prices, making it more affordable to purchase and consume elsewhere. While this concept holds true economically, significant instances of a country reducing its oil consumption by 20% in one year are rare. However, if such a reduction were to occur, its global impact would be partially offset.

Contrary to common belief, both demand and supply-side policies are susceptible to market leakage. The elasticity of oil results in a percentage, known as the leakage rate, being unavoidably produced or consumed in both cases. Research indicates that the most effective approach to reducing global oil consumption is to simultaneously address oil demand and supply.

The illustration below is based on a simplified theoretical economic model, demonstrating the effects of each policy type on the regional distribution of fossil fuel production and consumption:

Source: Partners, Not Rivals: The Power of Parallel Supply-Side and Demand-Side Climate Policy,

Resources for the Future, Brian C. Prest.

Two things to take away in this graph:

  1. The leakage rate for supply-side policies cannot reach 100%; there is always a net reduction in global oil consumption

 

    2. Implementing policies that address both demand and supply simultaneously cancels out market                          leakages and represents the optimal strategy to curb global oil consumption

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HOW TO ANTICIPATE AND
QUANTIFY LEAKAGE ?

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CONSTRAINING THE MOST EMISSIVE SOURCES HAS A SUBSTANCIAL IMPACT ON THE CLIMATE

People often overlook the fact that crude oil is not a homogeneous product. Depending on its geographic origins and the extraction/transportation processes, crude oil productions can be accurately classified in terms of life-cycle climate impacts. In simpler terms, not all barrels of crude oil have the same carbon intensity.

The Oil Climate Index plus Gas (OCI+) is a data product developed by researchers at RMI, providing annual estimates of total life cycle greenhouse gas (GHG) emissions for 586 oil and gas fields. The carbon intensity for each oil field is measured in kilograms of carbon dioxide equivalent emissions per barrel of oil equivalent (kgCO2e/boe).

Therefore, there are climate benefits to shutting down the most polluting fields if the substitute fields are less emissive.

Let’s consider a theoretical example: Shutting in 2 barrels of Canadian oil sands (650 kgCO2e/boe) would entail the production of 1 barrel of Norway Ekofish (450 kgCO2e/boe).

The climate benefit of this theoretical supply constraint of two Canadian oil sands barrels would be:

2x650 - 1x450 = 850 kgCO2e

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HOW DOES LEAVIT ANTICIPATE AND MITIGATE LEAKAGE?

Two types of leakage are to be anticipated: 

  • Activity-shifting leakage: This occurs when agents engaged in oil extraction relocate their activities to a nearby location. 

  • Market leakage: Reduced supply from one source is partially offset by increased production from other sources.

If you're seeking additional information on:

  • Strategies to mitigate local leakage

  • Quantifying market leakage following a specific oil field constraint 

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