Business leaders from around the world are concerned about one key issue, the price of crude oil as it plays a significant role in the global economy. Fatih Birol, Chief Economist and Director- Global Energy Economics, Directorate at International Energy Agency said the high oil prices are acting as brakes for global economic recovery. He is optimistic about the US and feels India and China have great possibilities of growing significantly in 2013.
However, the high oil prices may act as a dampner, especially for energy importing countries like India, he opined. But, he is hopeful of seeing oil production growth and therefore, expects prices to remain around USD 100 per bbl. “I would in any case expect that the prices in the year 2013 would remain at least around USD 100 per bbl, which is definitely not a very good news for the energy importing countries such as India and it will be a good surprise if the prices go below USD 100 per bbl,” he explained.
Here is the edited transcript of the interview on CNBC-TV18.
Q: One of the questions that we often try to answer is where are crude oil prices headed. That is the question that business leaders from across the world are also focused on because if there is a sign of even the slightest recovery in the global economy, there is also the possibility that high crude oil prices might put the brake on that. Fatih Birol had some fascinating insights into how he expects the crude oil market to behave this year, where prices are headed but, more importantly the role of the US in energy supply in the course of the next five years.
A: When you look at 2013, I see Europe as the weakest part of the global economy. I have a bit of a question mark but, I also have some optimism for US recovery and I expect China and India to grow significantly. It will be 5 to 6 percent in India and perhaps 7 to 8 percent in China. However, there is one major question mark, namely the role of energy in the global economic recovery.
Today, we have about USD 110 per bbl price of Brent and I believe that high oil prices are playing the role of a handbrake for the global economic recovery. I would in any case expect that the prices in the year 2013 would remain at least around USD 100 per bbl, which is definitely not a very good news for the energy importing countries such as India and it will be a good surprise if the prices go below USD 100 per bbl.
Q: Given that the Organization of the Petroleum Exporting Countries (OPEC) controls pricing to a large extent, there has been considerable opposition amongst many OPEC member nations against Saudi Arabia pumping extra or surplus oil over the course of the last several months. That is what has helped key prices reach where they are. What do you expect the stance of the OPEC to be this year and hence, how will it impact the ability of Saudi Arabia to continue pumping surplus oil and at least keep prices here, if not move them lower?
A: Saudi Arabia is the central banker of the oil industry and they are playing an extremely constructive role in order to comfort the markets in the last few years. I expect them to continue this role. I also expect to see a production growth coming from Iraq significantly, which will also further comfort the market.
We are also seeing growth coming in oil production in the United States as a result of the unconventional oil revolution in United States. These are the factors which comfort the markets but, the demand is also very strong, coming from China, from India and the Middle East.
As a result, I would think that the oil market will be staying at USD 100 per bbl and if there are some further geopolitical tensions in Middle East, this will definitely be unwelcome news as far as international oil prices are concerned.
Q: What is your outlook on geopolitical tensions? We have seen them persist through the course of last year and several of those issues for instance, whether it is in Egypt or the standoff between Israel and Palestine or now the ongoing issue with France and Mali, they continue to in a sense put upward pressure on prices. How are you factoring this into that USD 100 per bbl range that you spoke about?
A: I am not an expert on geopolitical developments but, I would say that further developments in the region where bulk of the international oil reserves are, there will be upward pressure on the prices. If it goes higher than these levels, the prices, this is definitely not very good news for the oil importers.
Q: But if the tension persists, do you expect prices to move higher from the current band they are in and add to that the fact that I spoke to renowned Chinese economists Dr. Fan Gang and he said he expects China to grow between 8 to 8.5 percent. If you were to put geopolitical tensions along with buoyant growth in China, are you saying that the more realistic expectation is that prices will exceed USD 100 per bbl or maybe even USD 110 per bbl on Brent?
A: I hope not. There are factors which should push the prices up, such as the higher than expected growth in some key countries, geopolitical tensions but there are some factors which could bring the prices down. These would be factors like the European economy being so weak and its spillover effects.
Q: But if we start seeing a stabilisation in Europe, maybe not recovery but a stabilisation then you think the chances are higher that we will see more than USD 110 per bbl on Brent?
A: I hope not. This will not be good news because this itself could slowdown the stabilisation of the market as Europe imports a lot of oil and also a lot of natural gas, whose prices are index oil prices as well. Therefore, I wouldn’t expect a strong European economic recovery if the price remains very high.
Q: In your recent report, you spoke of medium to longer term trends in terms of energy supplies. One of the highlight of that report was that the US will become an energy surplus economy in a few years from now. Share with us your assessment of that. Is that going to be only on the natural gas front because there are certain restrictions on being able to move that natural gas to other parts of the world or do you expect that there will be enhanced oil production as well?
A: I expect that US around 2017 will be the largest oil producer of the world, overtaking Saudi Arabia and in a few years of time around 2015, the largest natural gas producer of the world overtaking Russia. It means within ten years of time, United States will be the number one oil producer in the world and number one natural gas producer of the world. That will have major economic and geopolitical implications.
Q: Before we come to the implications, on what basis are you expecting them to become the largest oil producer as well? As far as natural gas is concerned, we are fairly conversant with the kind of reserves the US has. Give us an insight into the kind of investments the US is making when it comes to oil that will propel it to become the largest producer?
A: US conventional oil production was declining year on year and now with the technology which is similar to technology used for natural gas, called the Fracking technology we see an increase in the US unconventional production. It brings a significant amount of returns when the oil prices are around USD 75 to 80 per barrel.
As a result of that we have already seen the declining US oil production chart is making a “V” chart and going up and this will continue if the prices are at these levels and even a bit lower. It is because of this we expect US to increase its production significantly.
Q: Let us now talk about the implications, as you pointed out, of what happens when the US becomes the largest oil and natural gas producer in the world. That takes away the strength of the OPEC and clearly puts the Middle East at a big disadvantage. What do you think the outcome of this will be?
A: The US will be a major oil producer, but Saudi Arabia and other Middle East countries will still be huge exporters. US will probably produce a lot of oil but, they will use a lot of this oil at home and will not be an oil exporter. However, Saudi Arabia will still continue to export.
Iraq will export, but the main implication will be on different countries’ competitiveness in the global economic area. So, US will have a lot of cheap cost energy which will revive the US economy whereas Europe and Japan have high cost energy which will be a main problem for the economic recovery. As a result of cheap gas, as a result of domestic oil, I would expect the US economy to see a strong revival in the years to come.
We may see lower current account deficit, stronger US dollar and we may well see a strong comeback of US economy in the next few years.
Q: It may not be a big exporter of oil but, will it or can it become a big exporter of natural gas?
A: Definitely. US has all the potential to export gas. I expect, before 2020 we will see the first volumes leaving the United States. But, it is up to the US government and the US people to decide whether or not they will use their natural gas for different purposes or they want to export, which is more compelling for them. However, the potential to export is definitely there.
Q: Would the economics of transported natural gas work for countries which are energy deficient like India? We are very far away on the other side of the world, but I am trying to understand what this means for countries like India which import more than 75 percent of its energy needs?
A: For many countries, for many importers, the very fact that in addition to the traditional gas exporters such as Russia, there will be new countries producing gas. It will be coming into the market from countries such as Australia, United States and also Canada.
It is very good for countries like India, it is like you are in a street and there is only one supermarket and it sells the milk at a certain price, at a certain quality and now suddenly there are four or five supermarkets and there will be a competition between those too. I will go to whoever makes the cheapest and the best quality one.
So, importers will have more cards in their hand which makes them much stronger vis-à-vis the exporters. This is a good news for India and the others.
Q: You mentioned the growing importance of the US in the energy supply market. What will this mean for the determination of prices? Till now, prices are tightly controlled by OPEC because it constitutes the largest exporting set of nations. Even if the US decides not to export its oil or not to export large quantities of gas, it will still have a key say in pricing? What will it mean for pricing?
A: The production growth in US comes from the fields which are rather complex. Complex fields means you need higher prices to turn investments in these profitable. So, in any case, you will need about USD 80 or so even in the United States to see this production.
Therefore for importers, prices will go down substantially. It will not be the case unfortunately for India and for other countries. We will still see higher prices as we discussed last year. I still maintain the view that the era of cheap oil is over. Energy importing countries such as India should try to find out ways of development in the context of rather high energy prices.