Transcript: Interview with IEA chief economist Fatih Birol

ED CROOKS: There was a phrase in your report that leapt out at me: “Rising global energy demand poses a real and growing threat to the world’s energy security.” Is that your most important message today?

FATIH BIROL: There are two major messages I was getting from the book. The first one is exactly what you say. The energy security risks are so strong, and probably increasing, for an upward event in the markets, and the second is on the climate change, on the CO2 emissions, the levels are reaching a certain level that we are [getting to] an irreversible trend for our planet.

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my message is that, if we don’t do anything very quickly, and in a bold manner, the wheels may fall off. Our energy system’s wheels may fall off. This is the message that we want to give.

EC: That’s a very powerful phrase: “The wheels may fall off.” What do you mean by that?

FB: On the energy security, oil prices part, the numbers, one doesn’t need to be a big energy expert or anything: it’s just mathematics. I can tell you that we, in the next seven to eight years, need to bring about 37.5 million barrels per day of oil into the markets, for two reasons. One, the increase in the demand, about one third of it, and two thirds, there is a decline in the existing fields [and there is a need] to compensate for the decline. What we have done is that we have looked at all the projects in the Opec countries and the non-Opec countries, all the producing countries of the world, at the 230 oil projects, on a field by field basis, how much oil they will bring to the markets for the next five to seven years. And these are projects which are financially sanctioned projects. If they all see the light of the day in a timely manner, they will come up about 25 million barrels per day. So, 37.5 mlillion on the one hand, what is needed, and what we expect is 25 million barrels per day, and this is in the case of no slippages, no delays in the projects, and everything goes on time, which is very rare. So, there is a gap of 13.5 [sic] million barrels per day.

EC: The gap of that size emerges by when?

FB: Within the next seven years. So, if this gap cannot be closed – and there are two ways to close it, which I will tell you in a minute – if that gap cannot be closed, we may end up with a supply shock approaching an escalation of prices. This is what I meant, the wheels may fall off.

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FB: The problem is now that what we are experiencing with demand is the following. There are three major demand centres now, China, India and the Middle East. When you look at the numbers in the last seven quarters, about 70 per cent of the growth in global oil demand came from China and India, and this is followed by the Middle East, and in all of these three countries, for different reasons, oil prices do not have an immediate effect on demand. China and India, for two reasons. One, the economy is growing so strongly, that the price effect is completely unimportant, compared to the economic effect. (...) The second reason is that, especially in China and India, there are significant subsidies on the oil product prices.

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So, demand will grow, and I think, if the governments of OECD, China and India, leave everything to the markets, in terms of slowing down the demand, they will make a historical mistake. In addition to the price related adjustments on demand, we need regulatory measures, such as efficiency improvements in the markets.

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EC: Comparing the figures from last time, in terms of oil supply, just having a look at some of the numbers, there seem to be some quite big differences. You seem to be more negative about non-Opec production out to 2030, and quite a lot more positive about Opec production, is that right?

FB: The main issue here is that we think that, in the Opec countries, there are enough reserves. We are not sure if there is a political will to make something out of those reserves, but there are enough reserves as officially reported. However, as you rightly say, we are getting more pessimistic about non-Opec production.

EC: You’ve gone down about four million barrels a day by 2030?

FB: Close to four, yes. The main reason here is, this is very important to perhaps note, unlike the Opec countries, we think there are some geological problems in the non-Opec areas. This is not an investment issue, not a political issue, but it is more geology, because of a huge decline in the non-Opec countries.

(....) in unconventional oil, the Canadian tar sands, which is the most important one, will reach about three million [b/d] most probably in 2015, which is still only 3 per cent of the global oil production, which is still very small. So despite what some people think, I don’t think that unconventional oil will either replace the Middle East, or be a major way of addressing energy security. It makes some positive contribution, but it is very limited.

(...) Iran is experiencing a very strong decline. You were talking about the North Sea, Mexico and others, but Iran is a very exceptional case in Opec, it is experiencing decline rates in some of their fields of up to 15 per cent per year, and Iran needs money and new technology to address this decline issue. Iran needs a lot of investment, but whether or not Iran will be able to raise this investment, in the political context they are in, is another issue.