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Climate benefits from oil demand dips underestimated

Modest dips in oil demand worldwide — following, for example, the rapid spread of electric vehicles — could lead to a greater reduction of CO2 emission than forcasted. In fact, oil fields produce oil that can vary a lot in terms of yield and carbon emissions. 

According to a study published in Nature and written by researchers of Ca’ Foscari University of Venice, Stanford, Pittsburgh, Ford, Aramco, and German Aerospace Center, oil companies could reduce the production of oil that has above-average carbon intensity (a measure of the amount of carbon emitted per barrel of oil produced). 

In the paper, the researchers link econometric models of the production profitability of 1,933 global oilfields (representing about 90 percent of the world's supply in 2015) with their production carbon intensity. They then examine the oilfields' responses to a decline in demand —  what volume of oil they would extract and how much money they would be willing to spend on exploration. By doing so, the researchers were able to identify which companies would reduce their extraction volume and to what extent they would so following a shock in global oil demand.

“Our results show that global oil demand shocks result in nonlinear carbon emission reduction,” says Valerio Dotti, a researcher at Ca’ Foscari’s Department of Economics. “The carbon intensity of non-extracted barrels would be 25-54% higher than average, depending on the model and on demand decline. This means that even a small reduction in global oil demand (such as -2.5%, -5% and -10% in our analysis) would have a considerable impact on the reduction of CO2 emissions due to the oil sector.” 

The reason for this is production profitability. It is reasonable to expect that producers will tend to let go of less profitable barrels, i.e. the ones with high carbon intensity. Oil with low or medium carbon intensity is the most profitable. 

According to the researchers, in order to reduce carbon emissions by reducing the demand for oil, policymakers must take into account the global market structure. In fact, even the most “marginal” producers might not be greatly affected by demand decreases.

“These results have implications for policymaking when it comes to reducing global warming,” says Dotti. “For example, it implies that the implementation of technologies that aim to reduce the use of fossil fuels has a more powerful impact on the reduction of CO2 emissions than was previously thought, based on the average emission rates per barrel extracted.”