On the way to net zero, oil prices will fluctuate, which could have catastrophic consequences for low-income producing countries

A big question for the future of the global economy is how the transition to net zero will affect oil. Any energy economist will tell you that predicting oil prices is a pointless exercise given all the uncertainties involved – but it would be even more foolish not to think about them, given that they are so fundamental to everything we do.

First, a caveat. These have not been the easiest months in the fight to achieve the net zero target. Numerous multinational companies and governments have backed away from their commitments, under pressure from shareholders and voters not to spend money on solving problems that lie far in the future.

From my perspective, this can be incredibly frustrating, because anyone who has studied the numbers knows that net zero is the only sensible way forward. Yes, the International Energy Agency calculates that we will need to invest an extra $4.5 trillion (£3.5 trillion) a year in clean energy to meet the Paris climate target of limiting global warming to 1.5°C. But by my calculations, not spending that money will cost society around $8.7 trillion a year in climate-related damage.

If that is the reality, then we have to assume that common sense will prevail regardless. If that is the case, it means, among other things, that we are heading towards a future in which the majority of transport will be electric. This too is indisputably the best way forward.

The average well-to-wheel efficiency of electric vehicles (EVs) is about 80%, which refers to the proportion of energy released by the battery that actually powers the wheels. This means that vehicles with internal combustion engines are only 20% efficient. In fact, EVs are cleaner even when powered by electricity generated from fossil fuels.

If electric vehicles dominate transport, this will mean enormous changes in the global vehicle fleet in the coming years. Despite their enormous growth, currently only 14% of all new cars sold are electric, and shipping and especially aviation are lagging far behind.

Brent crude oil price, 2000-24

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This impending change will have serious consequences for oil prices, as about two-thirds of the oil consumed worldwide is used for transport (most of it for road vehicles).

The mass adoption of electric vehicles is likely to weaken oil demand and thereby make oil cheaper, but the price path is unlikely to be stable or linear. If investors expect prices to fall and governments increasingly block new oil projects, it will become more difficult to finance them. This could well lead to supply shortages that could temporarily drive prices higher.

At the same time, we must assume that carbon emissions will be appropriately taxed in the future (currently less than 30% of global emissions are subject to some form of carbon price, while fossil fuels receive over $7 trillion in government subsidies annually). This too is likely to lead to more expensive oil – in fact, expectations about carbon taxes will be the key variable determining price developments.

If oil prices become more volatile, that could accelerate the shift away from oil. It could also help drive the adoption of electric vehicles. In California, which has the largest share of electric vehicles in the U.S., demand for these vehicles has already become more dependent on pump prices.

This does not bode well for oil producers, especially if they are subject to a carbon tax. Interestingly, Saudi Arabia and the United Arab Emirates (UAE) are among the least affected producers, producing together around 15 percent of the world's oil.

Their oil production is among the lowest carbon in the world. This is because their oil is located in landlocked basins from which it can be extracted relatively easily. This means it is subject to lower tariffs through schemes such as the European Carbon Border Adjustment Mechanism (currently producers are exempt from the CBAM, but this is likely to change in the future).

Yet Saudi Arabia and the United Arab Emirates are trying to reduce their overall carbon emissions by diversifying their economies away from fossil fuels into areas such as tourism and hospitality, finance, real estate, manufacturing and renewable energy. To finance this, they are trying to keep oil prices as high as possible for as long as possible.

For other members of the OPEC (Organization of the Petroleum Exporting Countries) oil cartel, such as Nigeria, Venezuela, Angola, Congo and Algeria, diversification is not so easy. They are too dependent on revenues from the oil and gas business to be able to channel surpluses into sovereign wealth funds that invest in cleantech, for example. This means they are much more vulnerable to changes in oil prices and carbon taxes.

OPEC could play a critical role in helping these countries diversify their energy supplies into cleaner energy sources and other sectors. Rather than just focusing on themselves, Saudi Arabia and the United Arab Emirates should help drive this forward.

That doesn't mean we'll be without oil in the coming years. It's a resource that's valuable far beyond its energy content, and is essential for everything from plastics to petrochemicals. But we need to stop burning it. The resulting high price volatility will pose additional challenges to the energy transition, but it will also create opportunities for savvy investors and innovators in alternative fuels like biofuels and green hydrogen.