BL exclusive. Calmness in oil market indication of a disconnect with geopolitics: IEA chief

Dismissing talks about crude oil losing its ground as a fuel, International Energy Agency’s Executive Director, Fatih Birol, says that there is already a disparity between the oil prices and the geopolitical situations, therefore, he would be surprised if the prices see any severe spike.

Speaking to BusinessLine from Paris after the launch of IEA’s The World Energy Outlook 2019 he said, “Next few years based on the understanding of the current situation and the growth slow down trend, it is unlikely that oil prices will see an extreme spike.”

“The calmness which we see in the oil market despite the recent challenges in the key producing nations -- like sanctions on Iran and Venezuela, attack on an oil facility in Saudi Arabia, and unrest in Iraq –, it is an indication of a disconnect between the price and geopolitics,” he added.

On the supply side, Birol pointed out that a reason for this calmness could also be the availability of the American shale oil. Commenting on Iran’s latest announcement of oil discovery, Birol said “All new investments will boil down to the price. A significant amount of oil at low cost without political challenges is available in the market.”

Heavy reliability from Middle East

The outlook states that “Whichever pathway the energy system follows, the world still relies heavily on oil supply from the Middle East. The region remains by far the largest net provider of oil to world markets, as well as an important exporter of LNG (liquefied natural gas). This means that one of the world’s busiest trade routes, the Strait of Hormuz, retains its position as a crucial artery for global energy trade, especially for Asian countries such as China, India, Japan and Korea that rely heavily on imported fuel”.

India story

Talking about India story, the stated policies scenario given in the outlook says, India’s net oil import requirements will more than double between 2018 and 2040 and its level of import dependency will reach roughly 90 per cent making it one of the world’s highest importer. It also says that India’s reliance on imported fuels becomes a major factor in global trade and energy security.

On India’s energy basket, Birol said, the key drivers for India’s fuel demand are trucks, passenger vehicles, and petrochemical industry. “For the Indian economy bioenergy works out well. Minister of Petroleum & Natural Gas Dharmendra Pradhan and his team are working on it. Also, efforts should be made to increase the efficiency of trucks.”

The Outlook says that “Demand for natural gas has been growing fast as a fuel for industry and (in China) for residential consumers, spurring a worldwide wave of investment in new LNG supply and pipeline connections. In our projections, 70 per cent of the increase in Asia’s gas use comes from imports – largely from LNG – but the competitiveness of this gas in price-sensitive markets remains a key uncertainty.”

In India, the prospects for natural gas are limited by supply constraints and affordability issues, as well as by the lack of infrastructure, it says. According to Birol, “India will be one of the major drivers for the gas demand in next 20 years.” He expects this to put downward pressure on LNG prices.

Most of the projected growth in electricity demand is met by a combination of renewables (especially solar) and coal, with gas confined mainly to a balancing role.

To meet their energy requirement consumers like India are playing around with their energy basket. The Outlook states that “Critical fuel choices hang in the balance. A three-way race is underway among coal, natural gas and renewables to provide power and heat to Asia’s fast-growing economies. “

On coal

As regards coal the Outlook states that “Coal is the incumbent in most developing Asian countries: new investment decisions in coal-using infrastructure have slowed sharply, but the large stock of existing coal-using power plants and factories capacity under construction worldwide, provides coal with considerable staying power in the Stated Policies Scenario.”

Birol is clear when he says coal cannot be ignored in India context. But, he believes that India will do proper working towards low carbon resources.

India is the most significant overall source of energy demand growth in this year’s Outlook, a cost-effective combination of cheaper battery storage and solar PV could reshape the evolution of India’s power mix in the coming decades. India’s renewable power investment has doubled over the past five years, reaching nearly $20 billion in 2018, and now exceeds that for coal power.

Ambitious targets, supportive policies with competitive bidding and falling costs have lowered risks for investors and led to reductions in power purchasing tariffs for utility-scale solar PV and wind. Better financing terms also played a key role, he said.