While the freefall of oil prices seems to have stopped for now, the inevitable rise of energy demand from developing economies may turn the current overflow into a critical shortage. How long before oil becomes a treasured resource in major demand again? And with new technology coming into play, how will the energy market affect our lives in the coming decades – will it fuel growth or new conflicts? Former Executive Director of the International Energy Agency Nobuo Tanaka is on SophieCo.
ISIS continues to sell oil because it’s in somebody’s interest – ex-IEA chief
Sophie Shevardnadze: Nobuo Tanaka, the former Executive Director of the International Energy Agency, great to have you on our show. Welcome. So, in response to the low oil prices, what we’re seeing right now is companies are canceling new projects, investment is stalling, infrastructure is not being updated. The International Energy Agency says oil projects are at the lowest level in over 70 years. Right? So what I’m wondering - now we’re seeing an oversupply of oil, but without development, should we be bracing for a global shortage instead?
Nobuo Tanaka: Well, if the investment is declining these consecutive years, possible for the third year in this year, if that’s the case, the capacity will not increase as much to the level of the demand in the future. When economic growth is happening in emerging economies, we’re going to have a shortage. So the IEA is very concerned that low oil price is signaling the wrong idea for the investors in the energy sector. And almost all energy sector may have a small level of capacity increase for the future.
SS: Just lately OPEC dominance on the oil market was offset by the US shale oil production - and despite lower oil prices, the US shale oil production is still going strong.
NT: That’s true.
SS:Has OPEC - and Saudi Arabia - have sort of lost control of the oil market?
NT: Well this is interesting situation. Suddenly Saudi Arabia challenged the shale from the Unites States - how resilient it is. So Saudi kept the share of the market or in some level of the production and the price collapsed. So the shale started declining in 2015-2016. But thanks to the demand coming up and also OPEC countries together with non-OPEC like Russia tried to reduce the production from early this year. So the price is coming up. Now that shale production is recovering. So it is kind of testing the resilience and how far the price can go down to stop the shale production or not. This is a very new situation, nobody knows how strong, how resilient the shale is. So, you know, in a sense, the shale production is challenging OPEC policy. So OPEC is changing their policies, shale is changing. This is a kind of interesting area.
SS: So it’s interesting to see what the new reality is going to be, because we see the U.S. shale and OPEC officials meeting recently at the recent OPEC meeting. How do you think they are going to coexist? U.S. shale and OPEC? Or is there another battle in the cards?
NT: Well, the shale is increasing probably for some decades but not more than that, because shale development is a new technology and new potentials, but gas may continue longer, but shale oil may not stay forever. While the OPEC countries especially in the Middle East have huge resources. And definitely this is a short-term or a mid-term situation, not going forever, so Russia has huge potential and also Russia and Middle East have shale potential also. But you don’t need to, I mean, OPEC countries, Russia are not necessary to invest into the shale even though there’s the resources.
SS:Because they have so much resources...
NT: Exactly - conventional crude. So this is a kind of coexistence of different technologies in a different location in a similar market, so we will see.
SS:But for those countries, like the United States, who are still big on shale production, questions remain about the safety of shale oil and gas extraction.
NT: Environmental impact…
SS:Fracking has been proven to cause minor earthquakes, water pollution - so the environmental damage is absolutely undeniable. The question is are we going to ignore this damage and go for the profit?
NT: Yea, that’s a very good point. Certainly we cannot ignore the negative impacts by the development for the environment or safety issue. So the shale companies must invest for a much stronger or safer way of development and also prepare to stop the environmental pollution. So the cost of shale will increase by doing so. So by doing so the shale is getting less competitive technology.
SS: You know, I was thinking about this lately with oil resources slowly shrinking, you’d expect countries who are rich in those resources would be very well off. But then, you know you look at Venezuela, you look at South Sudan, you look at Gaza Strip, you look at Nigeria - and these countries are completely torn apart and they’re very poor. So it makes you wonder - is having oil or gas reserves a blessing or it’s actually not that good for a developing country?
NT: Well, some people say - “the resource curse”, because of the rich energy resources like oil, gas. If the country is not using the revenue for better purposes like reinvesting into the oil field or technologies or education of the people or the new industries, the country may suffer - if the location of the revenue is not in a good way. Just spending or wastefully consuming more, by controlling the price of oil lower in the domestic market rather than the wholesale market in the global, then you are just wasting the very important resources you are given by the God. So it’s a matter of the policy - how you spend wisely the revenue for the improvement of the future generation of the country. So this is a tough competition. Some of the producer countries like Norway or United Arab Emirates, even though they are small but they reserve some part of the revenue for investing for the future. This is a very clever way of using the huge revenues.
SS: But a vital resource like oil is a perfect conflict-starter, especially if you take into consideration that the population is growing and the resource in itself is shrinking do you feel like we’re going to see more wars break over it? And where geographically? South China Sea? Maybe Latin America?
NT: Yeah, sometimes the energy or the resources were the reason for wars, for conflict before in history. It is inevitable that for the sake of economic growth resources are very important, but now technologies make it very different - the energy situation now. The renewable sources like solar,wind are everywhere, nuclear power is very popular among emerging economies, even energy conservation is a very good way to increase security or efficiency. So with these new technologies some countries, even the Saudi Aramco is concerned that the decline in demand of petroleum may come sooner than later. Because peak concept is applied to the supply side, but the demand peak may come earlier, because I still remember the very interesting quote of the Saudi oil ministry Zaki Yamani, who said ‘The stone age was not over because we ran out of stones, so the oil age may disappear even though there's plenty of oil’. Because of the new technologies, the new energy resources...So, how to invest into the different new technologies is very important thing for the governments, oil producers should do.
SS: So you feel like the demand for oil may disappear while it’s still there?
NT: I think so. When will it happen? This is a very interesting question - I was asked this question in a very interesting way by Saudi Aramco. I said maybe it’s before 2030. Because in 2030 China will peak out the carbon dioxide emission in the COP 21, that means they will reduce consumption of coal, but probably oil also. If the largest consumer of oil will stop increasing the use of oil, this could be the peak demand of oil. Of course there are many emerging economies like india, African countries, some other Asian economies will continue to use for sure.
SS: You’re right because China has rolled out a plan to have a fifth of its car sales electric by 2025. And then alongside China you have India who wants to go fully electric by 2035. So you wonder what’s going to happen to the energy market, right? Because they are the biggest consumers.
NT: So I don’t know when, but we have to prepare for the situation like that. Consumer countries, as well as producer countries we have to prepare for the risk that these kind of big changes may happen in the energy market in the future.
SS: But you know, if things go according to your scenario, you’re wondering why people are looking for places to dig and drill. For instance, with the industry barely recovering from the oil slump, we see America drilling in the Arctic, Norway - in the Barents sea. And in places like the Arctic resources aren’t very easy to extract and it’s very expensive...
NT: Costs are very high.
SS: What’s the point? Why turn to the Arctic for oil?
NT: This is an interesting question. Yes, Arctic oil in a very deep sea area could be much more costly than conventional oil. The technology may make a breakthrough, even for oil, or even for coal - like these fossil fuels can be cleaner in the future. So that kind of technology together with the new development of the difficult areas - it all depends on the prices. Because if carbon prices get high enough to make the oil economies greener, it may be profitable to invest the big amount of money, the high costs for the difficult places, because the carbon price is so high that it legitimises the investment.
SS: I wanna ask you about climate change - you’ve touched upon it. Do you feel like climate change can actually unfreeze more energy resources in the North and maybe offset some of the shortage in the South?
NT: There’s some good part of the climate change in the future, you’re right.
SS:But then would it offset some shortage in the South, or not?
NT: Well, the Southern part - some of the small nations may suffer because of the sea level may go up. What does it mean for the consumption of energy or growth is another tricky question. So, yea, it may help, you’re right, it may help for more demand coming in the Southern part if you develop the Northern hemisphere or Arctic by cheaper costs - that’s also true. Yes, it’s also true. But there’s a change of cost by the climate change mitigation, new technologies may pave the wave new potential in the Arctic, that is also true.
SS: I want to touch upon another very important topic - despite the fact that ISIS is being bombed by half of the world, it’s being attacked on the ground on all sides, it still manages to sell oil and make money off it. I don’t understand how, but can the International Energy Agency do something about it? Somebody has to be buying that oil it’s selling?
NT: That is an interesting question. You know, they sell the oil -
SS: And somebody buys it.
NT: This is the problem, right. So it is a matter of political coalition - how we can isolate ISIS. Somebody’s not really doing their share.
SS: So it’s in someone’s interest?
SS:Do you think people higher up in a…
NT: I don’t know, this is a very tricky question.
SS: Have you thought about it?
NT: Well, you know, how could this kind of thing happen is very political question, but probably the political alliance surrounding ISIS is not enough. Is it a government that is controlling all private sector or somebody else is doing this, who knows. Because we don’t have any proof so we cannot say. You’re right, if this is really happening this is really unfortunate.
SS:But then you know oil’s black market is not just ISIS and ISIS selling and making money off illicit oil sales -- it’s stolen by drug lords in Mexico, pirates in Nigeria, Libyan smugglers etc. So when you think about it illicit oil is sold everywhere from Latin America to Western Europe, costing the industry billions and billions of dollars. Can a black market of an industry as big as the oil industry ever be defeated?
NT: Well, I don’t know. I don’t have the facts to make a comment. But you know the black market exists anywhere. If government has not enough control over the situation or if there is not enough coalition or regulation among the country. So we need a strong political will to stop that, otherwise, you know, it does exist.
SS: There was a research by Ernst & Young that says that more than half of the illicit oil dealings are actually related to corrupt officials. So I'm just wondering, is the oil industry corrupt beyond hope?
NT: I cannot generalise, there are always corrupt officials anywhere. So is the oil industry corrupt by this kind of custom? Or is it only oil industry? Or any other industries are not corrupt?
SS: It’s just very - It screams out because there's just so much money in it and there's so much conflict over it, so...
NT: Yeah well...
SS: Because the oil industry is not supposed to be something illegal. I mean you can combat drug trafficking to start with with something illegal. The oil industry is supposed to be: I sell and you pay me, we're both in profit. And then you have this other part of it: more than half of illicit oil sales are due to corrupt officials. So it just makes you wonder how corrupt is it really?
NT: How corrupt they are - we don't have any tests. You know... this governance of the government issue is very important and this is more the choice of the people, democracy, or a way the international community works. So if there are so many corrupt -- corruption happening, certainly this makes the kind of let's say detriment to anybody's let's say situation. I think this is a matter of definite political will: how can we manage this situation. And is it an industry issue, is that a government issue? It's both. We have to work out if we have to set a target and make international rules around them, and if we don't abide, the penalty should be there. But rules must be clear, what we have to do. Otherwise just complaining will not lead us anywhere.
SS:Mr. Tanaka, I know you are a strong advocate of Asian rising giants - like China and India - to be admitted to the International Energy Agency. So both of these countries consume an enormous amount of energy, why haven’t they been admitted already?
NT: When I was executive director, I invited China and India to join IEA. They are interested in it, so they come to learn what we are doing. So it's a matter of learning process. They learn about energy efficiency, clean coal technologies which China and India needs very much. They learn about strategic stockpiles of oil policy - how to do that, went to use it. So they learn a lot. So gradually they’re cooperating even without membership. So now they became so-called associate members. So it's a process of joining. When they come to learn enough I think they have to join, but the problem is the current statutory agreement requires the members to be the members of the OECD first to become a member of the IEA. But China or India are not interested in joining OECD, because OECD is a rich man's club.
SS: But if they're not admitted to the IEA then they'll just create their own structure. And who needs that fragmentation?
NT: We have to separate this OECD membership and IEA membership first. So this is what IEA members should do first and offer China or India to be full members to the IEA. Otherwise they may not come in.
SS:You also said that for a better energy management Russia should be readmitted to the G8. How would that help stabilise world energy flow? I mean isn't G20 already enough?
NT: G20 is focusing more on financial stability. It was created during the time of the Lehman shock or the very financial crisis, so it is representing macroeconomy or financial market situation, banking etc. They do sometimes energy, but energy is not really the focal point of the G20, so I think G7 or G8 with Russia may be a kind of forum to discuss the energy issues more. Of course why not Saudi Arabia why no one other major energy players to join, this is always the question raised. In energy issues the major players are the United States, Russia and China, India, of course as a consumer there. So we have to have some new configuration to discuss the energy issue. So G7+ or some kind of new format may be necessary
SS:Europe up to now still relies heavily on Russian gas, but plans to build a pipeline from Russia to Germany have met resistance among some of the EU members. EU officials are actually saying that this project - the Nord Stream 2 - is destabilising the EU economy and coming in the way of the union’s unity. The way I see it - Europe needs Russian gas because it relies on it, we would be more than happy to sell it to them, so why undermine a perfectly good beneficial - mutually beneficial energy deal with some political tensions?
NT: Yeah, geopolitics is inevitable, it’s happening in many places in many situations so we cannot solve that quickly, but still Europe is importing 30% of their oil and 30% of their gas from Russia, right? And Russia is a very stable supplier of gas and oil to Europe. Russia needs to diversify the target countries to Asia. So you are exporting to China or Asian countries, so it's a matter of diversification. So for Russia diversification of the demand countries is necessary. For Europe or for importing countries, like Japan, we need to diversify our sources. Europe wants to diversify more to other countries but Japan needs more diversification from Middle East, so we need more Russian gas, Russian oil. So it's a matter of degree - what situation the countries are put in.
SS: Mr. Tanaka, thank you so much for this interview. We wish you all the best.
NT: Thank you very much for having me.