How Gulf Oil Producers Are Speeding the Green Transition

Quick: Which organization in the world may have the greatest influence over the pace of the transition to green energy, and therefore the most important role in fighting climate change?

Could it be the US government, or the Chinese? The EU? The UN?

That organization is likely OPEC, the Gulf-led cartel of oil-producing nations, whose output decisions have a major impact on global oil pricing. In recent years, OPEC has consistently curbed production as oil prices have declined, keeping prices at around $80 a barrel, according to an analysis from Citi’s Wealth Outlook 2024.

“Oil prices are low enough where many people can still afford to fill up their car and power their home until more green capacity becomes available, but high enough to see further investments in the critical infrastructure needed to keep the transition at least more-or-less moving forward,” writes Malcolm Spittler, Investment Strategist and Senior US Economist at Citi Wealth, and his colleagues in the Outlook.

OPEC foresees the end of an era

If OPEC had wanted to stall the green transition, it could have flooded the market with oil and caused the price of oil and gas to collapse, which would have drastically reduced the incentive to invest in cleaner alternatives. “If the world existed in a $30-a-barrel universe, it would have been much harder for these investments to reach a break-even point—for electric vehicles in particular, but also for electricity providers globally,” says Spittler.

Instead, OPEC’s first-time participation in the COP28 climate talks in Dubai last November suggests that it is taking a different tack. Recognizing that the sun is slowly setting on the era of fossil fuels, it is helping to funnel profits from oil prices toward projects meant to diversify its members’ economies away from oil and gas—such as the billions that Saudi Arabia is spending on sports infrastructure and “gigaprojects” aimed at tourists, or the United Arab Emirates’ investment in new exhibition centers and research institutes.

As governments worldwide struggle with the economic and political costs of policies that reduce demand for traditional energy and encourage investment in clean energy, OPEC’s impact on the energy transition is difficult to overestimate. Meanwhile, the Vienna-headquartered group is essentially using a single lever to “artificially set [global] prices to incentivize the desired behaviors,” notes Spittler.

Investment implications of OPEC’s moves

OPEC’s strategy effectively cedes market share to Western energy producers, which have benefited from the higher oil prices set by OPEC without having to curb production. This points to potential investment opportunities, especially given that most oil and gas producers and pipeline and equipment makers currently trade at relatively low valuations, Spittler says.

Investing in these firms may also provide a partial hedge against shocks and inflation amid the current geopolitical turbulence that is partly due to Russia’s invasion of Ukraine.

OPEC’s approach should eventually help green energy producers. However, this capital-intensive industry has suffered from Fed credit tightening, with profitability remaining elusive. In the near term, investing in what Spittler calls “irreplaceable inputs” is one way to seek profit from the green transition.

“One commodity where we see high future demand, restrained supply and no substitution is copper,” Spittler says. Copper is needed in large quantities for electrification; as much as 176 pounds (79.83 kilograms) of copper go into an electric vehicle.

What are the implications of these insights for sustainability-focused investors? That depends on their philosophy, says Harlin Singh, Head of Sustainable Investing at Citi Wealth.

Investors willing to invest in fossil fuel producers could focus on firms that are diversifying into renewable energy and committing to aggressive reduction of their carbon footprint. Those willing to invest in mining could seek out companies with progressive labor practices and environmentally responsible extraction. Shareholders could then vote on resolutions and directly engage with these companies to encourage more sustainable strategies.

Many economists are anticipating interest rate cuts later this year, which could signal a buying opportunity for investors in green energy production, notes Singh. The success with which energy producers deploy artificial intelligence will also be of great interest to investors. Advanced data analytics are helping to identify likely new supplies, manage flows through the pipeline, track emissions, and better integrate with renewable energy supplies. With such real-time information, energy producers can seek to integrate variable flows of renewable energy into the grid.

The wealth of potential opportunities in sustainable investing go well beyond green energy, and include precision agriculture, retrofitting buildings for energy efficiency and conserving land for carbon offsets.

Rather than excluding some industries outright, Singh sees a growing trend toward investors seeking measurable “additional” impact. The sustainable investment platform provided by Citi Private Bank, Citi Wealth’s division that serves ultra-high-net-worth investors, offers a variety of funds in areas including private equity and venture capital, as well as opportunities in green and social bonds. Many of these funds address specific themes such as climate technology, and produce annual impact reports.

OPEC as a smart player

When considering OPEC’s options, Spittler employed game theory for the Outlook. Coauthor Singh offered insights on policy, and coauthor Maya Issa, a Dubai-based Senior Investment Strategist at Citi Private Bank, contributed her understanding of local dynamics in the Gulf.

Citi Private Bank sees the green transition as an unstoppable trend, and it can help clients find investment products and gain investment exposure that aligns with their values and objectives.

In Spittler’s view, OPEC’s decision to use oil and gas revenues for renewable energy and economic diversification show that it is “reacting logically” to the coming transition toward greener energy. “It’s crucial to see them as smart players,” he says. “They don’t want to fight the inevitable.”

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