Paris Is Choking. Traffic Congestion and Gridlock Blamed.

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The Eiffel Tower, Paris, December 9, 2016. The city is looking to attract new business. Gonzalo Fuentes/reuters

This article first appeared on the Atlantic Council site.

December 5 was probably not a happy day for tourists in Paris. The good news was the traffic was much better than usual, and the Metro and other forms of public transit were free. The bad news was that the city was having yet another pollution crisis.

Choking smog and murky air are often associated with emerging market cities in China and more recently India, with the primary culprits being coal-fired power and heavy industry.

Yet French electricity is 76 percent powered by zero-emissions nuclear generation and its manufacturing sector has plunged from 13 percent of gross domestic productin 1975 to just 6 percent in 2015.

So, what is the problem in Paris? In a word: traffic. Pollution controls have been in place for a long time, notably Euro V standards for low-sulfur diesel, the primary fuel used by heavy trucks and delivery vans. Yet problems with "black carbon" particulate matter and nitrogen oxide emissions from diesel vehicles remain significant.

Urban congestion and gridlock add further problems, as infrastructure built in large part in a pre-industrial age is overwhelmed.

Related: Paris cuts traffic by half in bid to tackle air pollution

In short, Paris is just one of many global cities that have hit a tipping point in terms of inability to balance air-quality concerns with a laissez-faire approach to transportation.

This reality cheers climate activists, even though local pollution concerns are the main agent of change. In fact, the transportation sector in the European Union has seen greenhouse gas emissions grow by 0.7 percent in 2014, in contrast to a 7.4 percent plunge in GHG emissions from the electric power sector.

In the context of all this, Paris joined three other global cities (equally congested Athens, Madrid and Mexico City) on December 2 to announce that they would ban diesel by 2025.

For the European cities, in particular, this is just the latest indicator of a shift away from diesel, a shift abetted by the recent revelations regarding fraudulent emissions standards from Volkswagen and other major auto manufacturers. These proposals targeting diesel follow a wave of recent announcements by European governments that they will move to ban sales of new combustion engine vehicles beginning in 2025.

These public policy trends create a layer of uncertainty for the oil industry both upstream and downstream. Upstream, long-cycle projects such as deepwater are already struggling with weak market conditions.

The uncertainty is compounded by environmental regulations of the type discussed above that raise questions about peak demand. The theory is that substitution away from petroleum in the transportation sector and greater efficiency in the usage of what remains will slow demand growth to a crawl, and then a slow decline.

Even if this "peak" occurs 25 years from now, that is a meaningful time horizon. A global oil super-major contemplating a deepwater project today will face a 10-year exploration and development cycle, meaning first oil would come around 2026.

Without commercial oil, there is no free cash flow, so actual revenue would be 10 years away as well. And the "payback" period of the project's capital and operational expenses could take 15 or 20 years, in some cases more. As such, the energy market outlook in 2050 is extremely relevant for long-cycle projects.

Mexico's deepwater bid round earlier in December, the fifth and most successful since the country's historic energy reform in 2014, will no doubt be impacted by these concerns, as the developments move from acquiring acreage to exploration and development, over the decade ahead.

Indications of slowing demand and substitution to new non-petroleum-based technologies in the transport sector, amplified by the environmental politics and policy responses seen in the case of Paris, cause real hesitation in investment. As such, shorter-cycle projects like U.S. shale or "brownfield" extensions of existing oil developments look much more attractive due to shorter payout periods.

These questions create uncertainties for countries as well—particularly those dependent on capital-intensive, long-cycle, high-cost oil projects like Canada, Iran, Nigeria, Russia and Venezuela.

Downstream, the Paris air-quality crisis flags another set of challenges. At the micro level, European refiners have spent billions of dollars retooling to reduce gasoline output and increase diesel. Refiners from the U.S. Gulf Coast to India have taken advantage of the diesel shortfall in Europe to capture profitable export markets. These dynamics are certain to change in the face of diesel bans and a massive consumer shift away from diesel.

Yet for refiners these changes are just the tip of the iceberg. Balancing shifts in demand for diesel versus gasoline is one thing, but a larger squeeze on transportation demand is a far more significant challenge.

Ultimately, the logical solution for Paris and other pollution-challenged cities (London, for example) is not just a reduction in traffic, but a shift to electric passenger vehicles, natural gas-powered buses and delivery vans, and even biodiesel or liquefied natural gas–fueled heavy trucks.

These shifts, while the subject of wild variations and debate over the length of the transition, point clearly to a single trend: demand destruction.

It is true that Europe is hardly the growth market for global oil demand and hasn't been for decades. Yet the success of efforts to address ground-level pollutants and decarbonize its transport sector will be closely watched elsewhere, including in high-growth markets in Asia.

The global oil market has seen Asian growth as the last demand frontier, but the rate of demand growth in Asia has been decelerating for the last few years. Cities from New Delhi to Kuala Lumpur to Beijing face the same pollution and congestion challenges as Paris, or far worse.

Demand uncertainty leading to a curtailment of upstream investment could create a massive oil price spike in just a few years, as short-term oil demand will grow and decline rates in existing fields create more demand for "new" barrels. Yet more and more upstream operators are scaling back long-cycle oil investment, as evidence of a longer-term demand slowdown is becoming harder to refute.

Certainly, the events in Paris have clouded the outlook further, and are the latest indicator that—drip by drip—the market is moving to a different fuel mix. It is also a useful reminder that the global transition to a low-carbon transportation sector is a complex system, with many sources of momentum and resistance beyond decisions that are made—or not made—in the White House.

Robert J. Johnston, CEO of the Eurasia Group, is a nonresident senior fellow in the Atlantic Council's Global Energy Center.

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Paris Is Choking. Traffic Congestion and Gridlock Blamed. | Opinion