Fatih Birol, Executive Director, International Energy Agency, who was in India recently, spoke to Anilesh S. Mahajan about the global energy market and the future of energy in big consumer markets such as India. Edited excerpts:
Q. We are living in very interesting times globally, especially from the oil market perspective. There is turbulence in the Middle East, tussle between buyers and suppliers, and OPEC is cutting supply. We are keen to understand which way should India look. We also need to factor in the trade war going on between the US and China.
A: There is a big change in global oil markets. This is driven by the US. A few years ago, the US was the largest oil importer, and after the shale revolution there, the production increased so much that it started exporting. It will soon catch up with Saudi Arabia and Russia in oil exports. In terms of production, it is already there. It is good news for Americans, along with countries like India. The countries which are dependent on oil prices have benefited. But Venezuela, a major oil producer, has had to cut down production by half in the last two years. Iran's production has gone down. In Libya, there is a civil war going on. Had these things occurred a few years back, oil prices would have jumped. The American oil is bringing stability, not only in prices, but also in supplies. Oil from the US is keeping the price around $60/barrel, acting as a cushion for now. Then there is a structural change. Earlier, oil prices were determined in Vienna (OPEC headquarters) by all the established producers. Not now. It's good news for importers because when the price of oil goes up, in India the deficit goes up.
After the Iran sanctions, the situation in the Strait of Hormuz is tense. The tensions over tankers and threats of retaliation by the US have increased prices of insurance of vehicles travelling from this strait. How do you think India - whose oil supplies come from this region - should react?
This is a big worry for me too. The tension between Iran and the international community, including the US, is critical. We are trying to calculate the implication. Today, one-third global oil supplies and LNG tankers pass through this strait. If it is closed, economies such as China, India, Japan and Korea will face a major hit. This is the reason we are monitoring the situation closely and are ready to act as soon as we sense danger. We have huge supplies in terms of oil stocks and can bring the oil to surface. Earlier, we did it when the Katrina typhoon hit the US. The global CEOs have mentioned that their major worry is the darkening shadow of geopolitics on energy.
Post Iran sanctions, Saudi Arabia and the US made an offer to fill in the oil supplies but have not been able to match the price Iran was offering. The Iranian oil came with discounts in terms of offloading, insurance costs, transportation costs and delayed payment terms. On the other hand, Saudi Arabia charges Asia premium for supplies to India and China. How do you see such scenarios, when one partner of the IEA puts sanctions on an oil supplier and another partner faces a crunch? What role do you think the IEA can play?
These are issues beyond energy. These are regarding agreements Iran has with several countries in terms of nuclear ambitions, and the US administration has bilateral relationship with India, China, Turkey, Japan, and Korea. One should wait and see how these discussions happen. We hope oil and energy issues remain energy issues and politics is not made a part of it.
What about the Asia premium charged by Saudi Arabia? India and China have formed the buyers' club to counter this.
This is a good move, joining hands with other big consumers of oil. The IEA is fully supportive of this vision. It is not just about Saudi Arabia. In fact, all exporters need clients to sell their oil. You need to make your clients happy. We hope this issue is resolved sooner.
In the last few years, the OPEC has lost its teeth. The US, too, has become an exporter of oil. Do you think a reorientation of the IEA is required?
You are correct. It is already happening. Most of our members, the US, Canada, Norway, Mexico, Brazil, Australia, are bringing a lot of oil to the markets, even more than the OPEC countries. At the same time, the OPEC countries are becoming major consumers. The issue of producer-consumer distinction is a grey area. The IEA members are both producers and consumers. And today we are the only oil organisation which also looks at coal, gas, nuclear, renewable and other alternative energy resources.
What are your projections for oil demand for the year?
This year, we may witness a slowdown, mainly due to the global economic slowdown, especially in China. Our assumption is that China will have its worst growth in the last three decades this year. And so will some of the other advanced economies. Oil demand will grow by roughly a million barrels a day; the earlier projection was 1.4 million barrels a day.
Should we get ready for more moderation in prices or expect OPEC to deepen the cuts?
These two things come together; the demand not being so strong and more oil coming from Brazil, the US and Iraq. Prices in the normal world would remain at reasonable levels. Obviously, if a geopolitical unexpected event happens, it may put an upward pressure on prices. But under normal circumstances, oil prices would remain around $60 a barrel. A big price increase is not expected in the quarters to come.
Is this another reason for OPEC to cut supplies? Or can we expect the US shale to offset their game for the next two years?
That's up to them to decide. The rules of the game have changed. If they try to cut production to put pressure on prices, increased oil supplies from the US will create a counter force. With new digital technologies, oil companies are able to ascertain new oil deposits, leading to more production. In the last decades, the discovered reserves have increased by at least eight times.
In the next decade, we are expecting another revolution with electric vehicles (EVs). How will this affect the oil markets?
EVs are coming in very strong but from a very small base. In last two years, we have seen record sales of EVs; still less than 2 per cent of the old cars running are electric. Today, we have about six million EVs, half of them in China, the other half in the other countries put together. It will grow. But this will not be the end of oil. This is because old cars in the world consume only 20 per cent of the oil in the world. Eighty per cent oil is consumed by trucks, aviation and, most importantly, the petrochemical industry. Therefore, even if electric cars grow strongly, it will at most lead to slowdown in growth of oil demand.
In India, the biggest import is oil and they are trying to cut oil imports by 10 per cent in the next three-four years. Do you think this is feasible?
What India can do on the demand side is to slow down the skyrocketing oil demand by using more bio fuels, bio energy and using cars and trucks more efficiently. Second, India has small but very important oil fields. If domestic production is increased through large investments, the import demand will fall. But frankly, the bitter truth needs to be said, that India will be an oil importing nation for many years to come and it's not the end of the world. Japan imports much more energy than India, almost 99 per cent, and is still a very successful economy.