Despite Shale, Middle East Remains Key to Oil Demand

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The US shale revolution has helped reshape the global energy market, but Middle Eastern oil will remain vital for meeting future Asian energy demand, said IEA's Fatih Birol.

The U.S. shale revolution has helped reshape the global energy market, but Middle Eastern oil will remain vital for meeting future Asian energy demand, Fatih Birol, chief economist for the International Energy Agency (IEA), told attendees Feb. 21 at an event at Rice University in Houston.

The significant growth that has occurred in recent years in U.S. unconventional oil production surpassed initial estimates by the IEA, which initially forecast that the United States would overtake Saudi Arabia as the world’s largest oil producer in 2017. This shift is now expected to occur next year, according IEA’s 2013 World Energy Outlook.

Despite this growth, Middle East oil will still be needed to meet global oil demand in Asia, said Birol, adding that the IEA’s findings have been misinterpreted.

“This message could have unintended consequences for global oil markets if it continues,” Birol commented.

These consequences include waning investment in Middle East oil development, which will be needed to meet future demand.

The surge in unconventional oil could enable the United States to wean itself off Middle East oil imports or imports altogether while meeting U.S. oil demand.

However, “there is a whole world outside the United States in terms of consumption needs,” Birol commented. “We need to understand that the world beyond the United States will need reasonably priced oil. If we keep sending the wrong signal, we may not have as much oil as we’ll need.”

U.S. shale oil production is expected to keep rising until the 2020s, but will then plateau. A slowdown in production is expected to occur in the following decade. In order to meet global oil demand growth, oil from the Middle East as well as new sources such as Brazil, Canada and Russia, will be needed to satisfy Asia oil demand, Birol said.

Shale, Nuclear Policies Rewriting Energy Play

The shale revolution, changes in nuclear energy policies in a number of countries following Japan’s Fukushima disaster, and specific pricing policies that give advantages or disadvantages to renewables and fossil fuels, are reshaping long-held tenets of the energy sector.

The roles and identities of actors in the global energy sector theater are also changing, with countries such as the United States and Brazil emerging as potential energy exporters. At the same time, some countries that have historically acted as energy exporters are seeing domestic energy demand rising at home, to the point that they are impacting the global energy market as well consumers as well as exporters. Over the past four to five years, consumption of not only oil but other fuels in the Middle East ranked only second behind China, Birol noted.

Trade patterns also are changing for countries such as Canada. In the past, Canadian oil and gas was imported to the United States, but the U.S. shale gas and oil boom has cut into Canadian imports. The Canadian government, in its search for a new market for its resources, has made a huge turn towards Asian countries. Over the past 24 months, Canadian government officials have made a number of visits to Asia.

Russia is also eying Asia as it seeks a new destination for its oil and gas as its previously loyal client Europe looks for new energy resources.

“Countries that can read the changes in trade patterns will be able to position themselves at an advantage,” said Birol.

China, India and the Middle East will also create much of the new demand for oil compared with Organisation of Economic and Cooperative Development (OECD) countries. Oil demand growth will primarily occur in transportation, including personal cars and freight, and the petrochemical industries of these nations, Birol said. IEA forecasts Asian trucks will comprise one-third of global oil demand, due to the anticipated growth in diesel and gasoline demand in Asian countries.

“This is an important signal for the oil companies and refineries,” Birol noted.

Asia and non-OECD countries will play the main actors driving future energy demand growth, while OECD member countries such as the United States, Canada, Europe and Japan will have a negligible role in future demand growth.

IEA successfully forecast the role that China would play in new energy demand growth. However, India may overtake China in this role in the 2020s. Birol attributes this future shift to China’s major focuses on energy efficiency and rebalancing its economy from heavy to light industry, as well the significant slowdown in China’s population growth.

Middle Eastern countries’ consumption of oil will growth in less than 20 years’ time from 6.6 million barrels of oil per day (MMbopd) to 10 MMbopd, or the same level as current Chinese oil consumption. Electric power demand in the region also will grow, with the amount of electric power capacity and transmission and distribution lines on par with capacity in Japan and Korea, Birol noted.

US Shale Redefines Economic Competitiveness

The U.S. shale revolution has defined the economic competitiveness of the United States, Europe and other countries in terms of energy-intensive industries. Prior to the shale revolution, global gas prices were more or less on par with each. Today, European gas prices are three times higher than the United States, and Asian gas prices are five times higher than that of the United States.

“We believe the price differential may narrow a bit, but it will remain with us for some years to go,” Birol said.

IEA also forecasts a wide differential to remain between gas and electricity prices for some time.

Lower gas prices mean that energy-intensive industries that are sensitive to higher prices such as petrochemical and iron in the United States have a competitive advantage over countries with higher gas prices. The U.S. and emerging countries will emerge as winners in the new market, while Europe and Japan will be among the losers.

This cost difference between the United States and its economic competitors will remain for some time, and Birol believes this difference could give a strong boost to the United States economy in 2015 through a renaissance of manufacturing and balance of trade.

The United States and other countries should use this time wisely to see how much they can make out of this opportunity.

“Competitiveness is a life and death” problem in Europe, said Birol, noting that not one speech in recent time by a European leader has not touched on competitiveness.

While Europe’s competitiveness has been hurt by the price differential between U.S. and European gas prices, Birol said liquefaction, transportation and regasification costs to bring U.S. gas to other markets makes it impossible that the world will see one gas price anytime soon.

“We may see some increase in U.S. gas prices and some decline in Europe, but the difference will remain for years to come,” Birol noted.

Oil prices will likely continue to trade at the $100 benchmark, barring a major economic downturn in certain parts of world.

Changes that Birol would like to see include a reduction in CO2 emissions, the continued rise of which has put the world on an unsustainable path. With more than two-thirds of emissions that lead to climate change coming from the energy sector, Birol noted that this a trend that needs to change. In many countries – particularly emerging economies in the Middle East and Asia – the consumption of fossil fuels is heavily subsidized.

Birol also would like to see the 1.3 billion people that currently have no access to electricity – mainly in sub-Saharan Africa – to be connected to the world’s electric grid. No electricity means no refrigerators or other electrical appliances commonly found in the homes of developed countries. Given current policies, however, over 1 billion people will still not have access to electric power over the next two decades. 

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