The outlook for global energy prices will be one of the main themes of the World Economic Forum annual meeting, which gets under way in Davos, Switzerland, today. Roberto Bocca is the WEF’s senior director in charge of its energy industries think tank. A former oil executive, he has collaborated in the past with Daniel Yergin, the Pulitzer prize-winning author.
Mr Bocca told Frank Kane how he sees the current global energy outlook.
What caused the collapse?
I'd rather reverse the question and ask why has the price not increased despite all the geopolitical tension there is in the world? I'd say there are three reasons. [First,] China and demand. It has been less than expected, amid higher global supply. Second, we've seen reasonably good management of geopolitical tension, so despite crises in different regions there has been no big reduction in oil production. And third, the Opec has not reduced production, that is, it has let market forces play out.
Is it a new era of cheap energy?
There are a couple of perspectives. Historically the energy industry is cyclical. For example, there were peaks in the 1970s and 1980s, but then it declined and eventually came back again. At current prices, a lot of new investment will be stopped, but then in a few years time there will be another shortage. But there are a couple of factors out there that were not there 20 years ago: there is more movement around climate change and there are more supply options, both as new forms of fossil fuel and alternatives to fossil fuel. It’s difficult to think the cost of energy will stay low because of the need for lots of new infrastructure to be built. But the upside is that we will become more efficient in the way we use it.
What will be the price of a barrel of oil by the end of the year?
If I knew that, I’d be on a beach somewhere really, not in Geneva. But the question to ask is whether we’re at the bottom of the cycle yet. I don’t think we’re there yet. But once it hits bottom, that’s when it will start to fluctuate. I don’t think we’re past the phase of testing the bottom of the cycle yet.
What are the economic consequences of low energy? Who benefits?
The first result is a transfer of resources from producer to consumer countries, that is, a rebalancing of global resources. So countries that rely on oil revenue will have to reassess their priorities. The fundamental question is how long it will last. If it's going to be a long time, then there will be countries and companies that will be struggling. Some companies will go bankrupt, and some countries will have to trim their budgets. Bear in mind, too, that traders and speculators benefit from volatility. They will be looking to test the bottom of the market.
What does the lower oil price mean for the Arabian Gulf?
The Gulf countries in the Middle East are the ones that suffer least. Their production costs are the lowest, and even at current prices that is a lot of production that can be profitably got there. The financial resources are also there, so the consequences can be managed, at least in the short term. Long term is a different matter. I don’t think it’s in anybody’s interest for it to continue at a low level for a long time, but market forces may keep it there. Then that would raise other issues, like the social unrest and other challenges that are not desirable in the region. But again let’s get it into perspective. The price today is not so low compared, for example, to the end of the 1980s. And remember it has been historically high for many years, if you disregard the blip in the post-crisis period.
What are the consequences for Russia and the United States of a long period of low oil prices?
Russia, of course, is one of the big producers and is quite expensive [in terms of production costs], so there are obvious dangers there. But so far there have been no signs of shortages of supply to Europe. US producers have been incredible really. The shale producers have come up with a new energy form and the techniques, like fracking, showed the power of technology to change the economic equations. But maybe a period of lower prices will be good for them, too. At $100 they were perhaps getting complacent … Shale will be one of the parts of the industry that will be tested as prices stay low, as will deepwater exploration and production.
Is the US becoming a new global energy superpower?
It’s too early to say that. The new projects that will really lead the American industry might not be invested now. A lot are already in place. But we’re back to the question of how long the period of low prices will last. The recent past has shown also that the US has the power to develop new technology when needed, so maybe that will happen again.
On balance, are low prices good or bad for the world?
The IMF says that depending on where prices finally end up, it will make a difference of between 0.3 per cent and 0.6 per cent to world GDP. So that’s a good thing. But geopolitically, it’s more questionable. More stability in world energy supply would be a good thing.
fkane@thenational.ae
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