The guru is in a new role. And he has delivered!
When Fatih Birol took over the main stage at the Church House Conference Centre last Tuesday to present the IEA flag ship publication, the eagerly awaited World Energy Outlook 2015 (WEO-2015), before a global audience, he was there not only as the principal author of the publication, as in many years in recent history. He was there as the boss too, taking over, owning and presenting to the audience the findings and the political aspects of the just unveiled outlook.
And Birol was not found wanting in this new, rather exciting role too. For he definitely understands the global energy theatre, enjoying his new role - under immense spotlight. For Birol, the IEA Executive Director was there firing the early salvos, underlining before the energy world, if the current glut continues, the global reliance on Middle East oil exports could eventually escalate to a level last seen in the 1970s only. Energy-rich Middle East was then meeting the two-thirds of the global needs. And that was a major issue for the energy thirsty world then - pushing the very idea of energy security to the center stage.
The International Energy Agency, the OECD energy watchdog, was established in the turbulent early seventies - by the likes of Henry Kissinger - to look into the issue of energy security, find a way out of it, and, counter OPEC and its dominance. Consequent to all this, in recent years, OPEC’s market share had dwindled to almost one-third of the global requirement.
Another transition is now in the making, Birol is now warning. If the current market scenario persists, energy security of consuming nations would be at stake, he was blunt in his remarks at the presentation ceremony. An extended period of lower oil prices would benefit consumers but would (also) trigger energy-security concerns by heightening reliance on a small number of low-cost producers, or risk a sharp rebound in price if investment falls short, the WEO-2015 emphasized. “Now is not the time to relax. Quite the opposite: a period of low oil prices is the moment to reinforce our capacity to deal with future energy security threats.” Birol hence added: “It would be a grave mistake to index our attention to energy security to changes in the oil price.”
Since prices at today’s levels push out higher-cost sources of supply, the reliance on Middle East oil exports eventually escalates to a level last seen in the 1970s. Such a concentration of global supply would be accompanied by elevated concerns about energy security. This time it would however be Asia to face the consequences and not the OECD, the report points out.
Emerging Asia, as per the outlook, is the leading demand center for every major element of the world’s energy mix in 2040 - oil, gas, coal, renewables and nuclear. By 2040, China’s net oil imports are projected to be nearly five times those of the United States.
This changing energy scenario has also put the global energy model in strategic transition. Renewables contributed almost half of the world’s new power generation capacity in 2014 and have already become the second-largest source of electricity (after coal). And the WEO-2015 recognizes this in bold print. Renewables are set to become the leading source of new energy supply from now to 2040, the outlook emphasized. Their deployment grows worldwide, with a strong concentration in the power sector where renewables overtake coal as the largest source of electricity generation by the early-2030s. The report highlights that renewables-based generation reaches 50% in the EU by 2040, around 30% in China and Japan, and above 25% in the United States and India. In the meantime, the mandatory energy efficiency regulation has also expanded to more than one-quarter of global energy consumption.
All this, in combination with the structural economic changes undertaken by China and other emerging economies are pointing to significant slowing down of the global energy demand growth too.
The IEA is now forecasting tepid demand growth for the next 20 years or so, as alternative sources, especially renewables, expand their share in the energy mix. Oil demand will not hit 103.5m bpd until 2040 - from the current 94.5m bpd. It is projected to rise by less than 1 percent a year between now and 2020. After 2020, oil demand growth is expected to go even lower - grinding to almost to a halt, increasing just 5 percent over the next 20 years, the IEA said.
“Collectively, the United States, EU and Japan see their oil demand drop by around 10m bpd by 2040,” the report says. This is a considerably slower pace than necessary to quickly mop up the oil glut that has impacted the markets rather adversely.
The slowdown in oil demand growth follows a near 15-year surge in consumption, driven by the rapid industrialization of China and other emerging Asian economies. “We are approaching the end of the single largest demand growth story in energy history,” Birol told the Financial Times. “Demand is not as strong as we have seen in the past as a result of efficiency (and climate) policies (globally),” he added, saying the growth in renewables will further restrict demand for oil.
This brings the issue of crude market prices under hammer. Under the “central scenario” of the WEO-2015, ‘a tightening oil balance ultimately leads to an elevation in price to around $80 per barrel - but - only by 2020.’ However, the WEO-2015 also examines the conditions under which prices could stay lower for even longer. It specifically warns that prices could stay stuck in the $50-$60/bbl range if Middle Eastern producers, notably Iraq and Iran, can create a political climate stable enough to realize the potential of their low-cost reserves - always a big ‘if’, but one that has “a clear pathway” now that sanctions on Iran are set to be lifted. The report also pointed out that “a lasting switch in OPEC production strategy in favor of securing a higher share of the oil market mix” could keep the price of Brent crude at around $50 a barrel through the end of the decade.
Prices thus continue to be under pressure. The just unveiled WEO-2015 doesn’t provide much optimism in this regard. And markets are taking note of the emerging scenario!
