Low prices should give no cause for complacency on energy security, IEA says

Fatih Birol.

Fatih Birol.

An extended period of lower oil prices would benefit consumers but would 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, says the International Energy Agency (IEA) in the 2015 edition of its flagship World Energy Outlook publication.

The report finds that the plunge in oil prices has set in motion the forces that lead the market to rebalance, via higher demand and lower growth in supply, although the adjustment mechanism in oil markets is rarely a smooth one.

In the central scenario of WEO-2015, a tightening oil balance leads to a price around $80 per barrel by 2020. But WEO-2015 also examines the conditions under which prices could stay lower for much longer.

Since prices at today’s levels push out higher-cost sources of supply, such a scenario depends heavily on the world’s lower-cost producers: 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, with Asian consumers – the final destination of a huge share of regionally-traded oil – particularly vulnerable.

Developing Asia, a region in which India takes over from China as the largest source of consumption growth, is the leading demand centre 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 nearly five times those of the United States, while India’s easily exceed those of the European Union.

“It would be a grave mistake to index our attention to energy security to changes in the oil price,” said IEA Executive Director Fatih Birol. “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.”

The report also underlines that the single largest energy demand growth story of recent decades is near its end: China’s coal use reaches a plateau at close to today’s levels, as its economy rebalances and overall energy demand growth slows, before declining. India – the subject of an in-depth focus in WEO-2015 – moves to centre stage in global energy, with high levels of economic growth, a large (and growing) population and low (but increasing) levels of energy use per capita all pushing energy demand to two-and-a-half-times current levels.

Overall, world energy demand grows by nearly one-third between 2013 and 2040 in the central scenario of WEO-2015, with the net growth driven entirely by developing countries. The links between global economic growth, energy demand and energy-related emissions weaken: some markets (such as China) undergo structural change in their economies and others reach a saturation point in demand for energy services. All adopt more energy efficient technologies, although a prolonged period of lower oil prices could undercut this crucial pillar of the energy transition; diminished incentives and longer payback periods mean that 15 per cent of the energy savings are lost in a low oil price scenario. Lower prices alone would not have a large impact on the deployment of renewables, but only if policymakers remain steadfast in providing the necessary market rules, policies and subsidies.

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