The underlying trend of OPEC energy intensity and the environmental implications

• Author: Ada Wossink,Ibrahim A. Tajudeen
• Published date: 01 September 2020
• DOI: http://doi.org/10.1111/opec.12183
• Date: 01 September 2020

The underlying trend of OPEC energy

intensity and the environmental

implications

Ibrahim A. Tajudeen*,** and Ada Wossink**

Doctor, *Nigerian Electricity Regulatory Commission, Plot 1387, Cadastral Zone A00, Central Business

District, FCT, Abuja, Nigeria. Email: Ibrahim.tajudeen@nerc.gov.ng

Professor, **Environmental and Resource Economics, Department of Economics, University of

Manchester, Manchester, M13 9PL, UK.

Abstract

Given the upward trend of OPEC energy intensity, policymakers need a good understanding of the

underlying factors and the environmental impacts when considering future energy policies. An

index decomposition analysis is used to decompose OPEC energy intensity covering 1971–2017.

The link between the decomposed energy indices and CO

2

emissions is examined using structural

time series and least square dummy variable corrected models. Both models also estimate the

underlying carbon emission trend (UCET) which arguably reflects the impact of non-economic

factors. For OPEC as a group, increases in energy intensity are linked to both energy inefficiency

and structural shifts towards energy-intensive activities. About 62 per cent of the increases are

attributed to the former, and the remaining 38 per cent is due to the later. The country-level results

also show major contributions from both components to energy intensity. The econometric results

show that shifts towards energy-intensive activities and, notably, deteriorating energy efficiency

generally go in tandem with substantial increases in CO

2

emissions. The estimated UCET is

upward sloping indicating carbon-emitting behaviour, taste and lifestyle. Therefore, policies aimed

at conserving energy and limiting the concentration of energy-intensive activities in the oil-

exporting countries should be considered alongside other policies that attempt to influence

behaviours and lifestyles.

1. Introduction

OPEC energy intensity, defined as its total energy consumption over real GDP (a tonne

of oil equivalent per thousand 2010$US), increased almost threefold from 0.078 in 1971

to 0.203 in 2017 and diverged from the world energy intensity, which steadily declined

from 1971. Arguably, this does not represent sustainable energy consumption. Figure 1

compares the trend of OPEC and the world energy intensity from 1971 to 2017. Energy

JEL classification: C22, Q41, Q43.

©2020 The Authors. OPEC Energy Review published by John Wiley & Sons Ltd on behalf of Organization of the

Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK

and 350 Main Street, Malden, MA 02148, USA.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use,

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278

intensity declined at an average annual rate of 1.177 per cent for the world while it

increased at an average annual rate of 1.94 per cent for OPEC. Given the foregoing and

considering that about 7.03 per cent of world energy use in 2017 is linked to OPEC,

1

it is

clear that changing OPEC energy intensity trajectory would enhance global energy

sustainability and reduce future global CO

2

emissions.

The rapid increase in the OPEC energy intensity cannot be attributed solely to its

failing energy efficiency; there are good reasons to believe that the structural changes

2

that have occurred in some OPEC countries are contributing factors. Although none of

OPEC countries is yet to be regarded as developed countries, OPEC members, in

general, have used the revenue generated from the oil sector to transform other sectors,

modernise and industrialise their economies, thereby increasing energy consumption.

Besides, the artificially low energy prices through the wide variety of energy subsidies in

OPEC countries

3

may catalyse both failing energy efficiency (Olivia and Gibson, 2008;

Fattouh and El-Katiri, 2013) and lowering costs of energy-related inputs for production,

thus stimulating structural shifts towards energy-intensive activities.

Knowing this fact, the question that arises is what drives OPEC energy intensity and

the environmental implications? To answer this question, there is a need to understand

better the underlying trends of OPEC energy intensity and their links to the environment.

0.050

0.080

0.110

0.140

0.170

0.200

0.230

Total Energy Consumption/GDP (tonne of oil

equivalent per thousand 2010 price $US)

Energy Intensity - World

Energy Intensity - OPEC

Figure 1 The historical trend of energy intensity from 1971 to 2017. [Colour figure can be viewed

at wileyonlinelibrary.com]

©2020 The Authors. OPEC Energy Review published by John Wiley & Sons Ltd

on behalf of Organization of the Petroleum Exporting Countries

OPEC Energy Review September 2020

OPEC Energy intensity and the environment 279

To do this, we decompose changes in OPEC energy intensity into contributions due to

structural shifts in economic activities and changes in energy (in)efficiency; then, we

analyse the impacts of the decomposed components on the environment. With this,

policymakers can consider the most appropriate policies to influence OPEC energy

intensity trajectory for a more sustainable and environmentally friendly energy

consumption path.

Many previous attempts have decomposed energy intensity (e.g. Boyd et al., 1987;

Gardner, 1993; Boyd and Roop, 2004; Huntington, 2010; Zhao et al., 2010; Mulder,

2015). A separate strand of the literature also decomposed energy intensity as well as

examined the underlying determinants (e.g. Metcalf, 2008; Oseni, 2011; Jimenez and

Mercado, 2014; Moshiri and Duah, 2016). More recently, a study by Tajudeen et al.

(2018) separated energy efficiency from energy intensity and provided a modelling

framework for estimating the relationship between energy efficiency and CO

2

emission

at the macro-level.

Despite the rapid rise in energy intensity for OPEC countries, most of the studies that

assessed changes in energy conservation/efficiency have either focused on OECD or

other developed countries. Only a few studies have focused on OPEC countries but have

mostly investigated the link between energy consumption and economic growth (e.g.

Squalli, 2007; Hossein et al., 2012). Sari and Soytas (2009) examined the link between

CO

2

emission, energy use and economic growth for five selected OPEC countries. The

authors, however, emphasised that their study’s results might be unable to account

properly for the recent trends in CO

2

emissions for the five countries or OPEC in

general. A few other studies that examined similar links and focused on the Middle East

and North African (MENA) countries have about six OPEC members, which are mainly

the same as the five countries studied in Sari and Soytas (2009). A few studies have also

focused on individual OPEC countries in a time series model. Nonetheless, either in a

panel or in time series setting, yet there is no study for the entire OPEC members.

Therefore, policymakers in OPEC countries are left only with the option of relying

directly on estimates from developed countries. Arguably, this may lead to inappropriate

policy actions because most OPEC countries do not possess the same characteristics as

developed countries. As noted by Adetutu (2014) also, alongside the ongoing

international negotiations on climate change policy, adequate and reliable information

on energy efficiency trends in developing countries, of which OPEC constitutes an

important part, is required.

On its part, none of OPEC’s members belongs to Annex I countries with mandatory

emission reduction targets under the Kyoto Protocol. OPEC opposed the full

implementation of the protocol because it would reduce the demand for oil and slow

down growth in their revenues from oil exports. It has also argued for compensation for

any loss in oil revenue (Barnett et al., 2004). However, OPEC soon realised that the

OPEC Energy Review September 2020 ©2020 The Authors. OPEC Energy Review published by John Wiley & Sons Ltd

on behalf of Organization of the Petroleum Exporting Countries

280 Ibrahim A. Tajudeen and Ada Wossink