Davos 2020: Fatih Birol On The One Big Risk To An Otherwise Stable Oil Market
Fatih Birol, executive director of the International Energy Agency (IAE), gestures as he speaks during a Bloomberg Television interview on the opening day of the World Economic Forum (WEF) in Davos, Switzerland, on Tuesday, Jan. 21, 2020. (Photographer: Simon Dawson/Bloomberg)

Davos 2020: Fatih Birol On The One Big Risk To An Otherwise Stable Oil Market

Iraq is the single largest threat to an otherwise stable oil market, according to Fatih Birol, executive director at the International Energy Agency.

Birol warned that if any incident happens in Iraq—the Middle East’s second-largest oil supplier—which affects the stability of the country or disrupts oil supplies, it could have serious implications on oil markets and oil security.

Davos 2020: Fatih Birol On The One Big Risk To An Otherwise Stable Oil Market

Oil prices have averaged at $64.49 per barrel over the last one year amid disruptions in Venezuela and Iran in early 2019, a drone attack on Saudi Arabian Oil Co.'s facility in September and the U.S.-Iran standoff this January after the former killed Iranian General Qassem Soleimani. “If only one of those incidences had happened in the past, we would’ve seen oil prices rise substantially,” Birol said.

While the price of a barrel of oil did spike over $70 during the year, it has failed to maintain those prices. This stability is because of excess supply of oil in the market from non-OPEC countries such as the U.S., Brazil, Norway and Guyana, Birol said, adding that even if the OPEC production cuts are fully implemented, there would be surplus oil in the market.

The political tension around Iraq, however, is “rather discomfiting”, he said.

Also read: Libya’s Oil Output Plunges as Cease-Fire Talks Come Up Short

Iraq’s oil exports doubled during the last decade to reach 4 million barrels a day, with half of these volumes flowing to China and India, the two major centres of global demand growth, the Paris-based IEA said in its latest monthly report. Iraq relies heavily on shipping crude through the Strait of Hormuz, which Iran has repeatedly threatened to close.

In addition, tensions remain between the U.S. and Iraq after the latter’s government voted to remove American troops from their soil.

The Future Of Oil And Climate Change

Generation of renewable energy is set to surpass coal usage by 2026, according to a recent report by the IEA. Speaking about its implications on India, a heavy coal consumer, Birol said the subcontinent has been doing a “marvellous job in terms of renewables—both wind and solar”.

India is surpassing renewable energy targets which are considered as impossible to reach by many others, he said.

Also Read: India To Miss 2022 Renewable Energy Target By 42%, Says CRISIL

On a global scale, Birol said all oil and energy companies are bound to be affected by the climate change issue which will only become more central in the coming years. “I hope they find a way to have a profitable business, but on the other hand contribute to the fight against climate change.”

Watch | IEA’s Fatih Birol On The Future Of Oil In A World Fighting Climate Change

Edited transcript of the interview with IEA’s Fatih Birol

Let me start by asking you about the outlook for the year before I get to the decade. We’ve had an interesting last few months—we’ve seen a spike in crude oil prices and then a settlingdown. The U.S.-Iran trade tensions, the U.S.-China Phase I deal. How are you gauging both demand and supply and therefore pricing through the course of this year?

When I look at the last year Davos, and thisyear Davos, there was one year where we have seen oil prices around $65. Itdidn’t change much despite Venezuela, Iran being lost as an exporter, there wasan attack on Saudi Arabia and we have seen the recent killing of the Iranian General in Iraq and now we see that there is unrest in Libya.

Despite all ofthese things, oil prices remain around $65. If only one of those incidents would have happened in the past, we would have seen oil prices going up substantially. Why it is so stable? Because there is a lot of oil in the markets. There’s abundance of oil coming from the U.S., Brazil, Norway, Guyana,Canada, lots of oil. So, it is the reason we are seeing a more comfortable market now. These incidents are somehow tolerated within the current oil-market context.

Having said that, I have one major worry related to oil markets, which is Iraq. Iraq is today the second largest oil producer in OPEC. We know that the recent political developments around and in Iraq are rather discomfiting.If any incident happens in Iraq and if the stability of the country is put intoquestion, and if the oil markets see a disruption of Iraqi oil, this could have serious implications for oil markets and oil security.

You made the point that Non-OPEC supplies are infact, they’re increasing. Like you said, from Norway, Brazil, Canada, Australia and Guyana. Will this help compensate for any shortfall, or production cutbacks in OPEC, because we’ve seen that the OPEC has preferred to keep prices at acertain level in and around between $50-60? Especially now that we have Saudi Aramco listed, I’m sure the pricing of oil becomes even that much more critical to a large player like Saudi Arabia.

So, how do you see the non-OPEC supply situation playing out, and you expect it to stay or help keep pricesaround 60 for the course of the year?

First of all, a structural change is happening in the oil markets. The share of OPEC plus Russia and others is sliding down significantly. It was about 55 percent of the global oil production but now it is going down to 45 percent. Therefore, the ability of those countries determining the market conditions, the prices are also being more limited going on. This is number one.

Number two, looking at the numbers, even if the OPEC cuts agreed upon in Vienna are fully implemented, we expect there will be still 1 million barrels per day of oil surplus in the markets which could play a crucial roleif an incident happens. But of course, this will depend on the nature of the incident. For example, Libya sees hundreds of thousands of people being lost from one day to another, but it could have been tolerated within the current market context. But if a bigger incident happens such as the one I am rather afraid of, such as the Iraq dispute, it can lead to other implications.

I understand the share of U.S. oils are also falling.

No, the share of the U.S. oil is still growing. But the growth is slowing down. It is still growing but it is slowing down.

Is demand a fear for you or a concern area for you this year, given that we’ve had yet another IMF minor downgrade in terms ofgrowth outlook for the global economy. Do you think that it is the slightly tepid demand conditions that will help balance out any kind of supply shock andkeep prices that in and around $60?

Yes, that’s true. We expected it this year that global oil demand will increase will be around 1 million barrels per day. Compared to the previous years and the historical averages, it is rather on the lowside, mainly as a result of slower economic growth coming from the emerging countries.

China, the driver of the global oil demand growth, is experiencing the lowest economic growth in the last three decades. Therefore, oil demand growth will be about a 1 million barrels per day, still decent but lower than historical averages.

You said something in a recent interview that I want to touch upon before I get to a quick question on India, and that is, you said the oil industry faces twin threats of financial profitability and social acceptability. I know these comments were made in the backdrop of all conversations around climate change. Can you give us a sense of what you expect this year and this decade will bring in terms of changes to the oil industry?

The oil and gas industry needs to balance the short-term profits and the long-term social acceptance issue. Climate change is an issue here. It will be with us for many, many years to come. It is a very important and a serious issue. We can only hear more and more about climate change and it is at the heart of the debate in Davos. Energy is at the heart of the climate change debate anyway. No oil and gas company will be left unaffected from the climate change debate. In my view, they can well be a part of the solution.

How?

Because, they can do two things. First, from their produce—oil and gas. They emit a significant amount of emissions that they can reduce. Second, these companies have a huge experience in the large-scale engineering projects, they have huge capital deep pockets so they can invest ina clean energy technology and they can enable those technologies which are difficult to push through the markets. That’s how they can be a part of the solution. So we will see.

I am going to discuss with the business leaders in the next three to four days, and I hope that they will prefer to be a part ofthe solution and I hope they find a way to want and have a profitable business,but on the other hand contributing to the fight against climate change.

I have one final question and that is in a recent report, you said that renewable energy generation will surpass coal by 2026. This is an IEA report. Can you tell us a little bit more about the implications of that, especially for a country like India, which is so highly dependent on coal and is looking to increase production of coal, to be able to feed in its energy needs.

That of course relates to different trends indifferent countries.

For India, I see two important trends. One is that India is doing a marvellous job in terms of the renewables, both wind and solar. A few years ago, India set a target for renewable energies, which is being considered impossible to reach by many and India is reaching that and going beyond that. They are going slowly but surely. I should say that they have taken very good steps in that direction.

But, at the same time, in terms of coal, I see two trends. There is a big drop in Europe and in the United States. But coal is still used in a China, India, Indonesia, etc., in these countries. When it comes to renewables, renewables are growing across the world—especially solar and wind because they are becoming cheaper. That is the main reason. So,therefore globally, we will see renewables overtake coal in the next few years to come.

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