‘Energy Poverty’s Best Prevented by Income Transfers, Not Subsidies’

The annual edition of BP’s Statistical Review of World Energy is eagerly awaited by the industry, academia and policymakers keen on long-term trends in energy markets. Christof Ruhl, chief economist of BP, the man in-charge of not only compiling the humungous data but also making the numbers tell the story, was in India to unveil the 2013 edition of BP’s Statistical Review of World Energy. He shared his views on the emerging trends in global energy markets with ET’sRamkrishna Kashelkar. Edited excerpts 

How do you see global oil prices panning out over the next few years? What will be the key drivers? 
As a matter of course, we don’t publish price forecasts. We do however, spend a lot of time researching and publishing data on the fundamentals driving oil prices, both in the annual BP Statistical Review of World Energy and in BP’s annual Energy Outlook. There are at least two clearly discernible trends — on the supply side, the surprising growth of tight oil and the relentless shift towards emerging market economies on the demand side. We do think that OECD demand is likely to have peaked in 2005 and is in structural decline since. This indicates a relatively strong supply growth outside OPEC and moderate demand growth for the rest of this decade. Consequently, we believe that global oil markets will come under pressure, with OPEC being forced to cut its own production to stabilise the system. 

How do you view the advent of shale oil and gas and growth therein? Which are the countries likely to lead the unconventional hydrocarbons revolution? The resource is widespread globally, but its production is still in its infancy outside North America. I think it is very important to understand why this ‘revolution’ took place in the US and Canada, and not elsewhere. The reasons are not merely the availability of resources below ground. The reasons have much to do with what our industry likes to call ‘above ground’ factors — free access, competition and stable and conducive investment rules. Who is next in bringing these resources to market will thus not be a function of resource availability alone but of political decisions, mostly in two spheres — allowing for free access and competition among private investors to attract the necessary capital and technology and the constraints a society puts in place to prevent damage to our natural environment. In our outlook, we have China in the matter of shale gas and Russia in the matter of tight oil as the two next big producers for the period to 2030. But there are many smaller places in between which have large potential to realise. 

What will be the impact of a boom in shale oil or gas on OPEC in the medium term? How do you think OPEC will react? The growth of unconventional liquids is already changing global oil balances. We estimate increments of unconventional non-OPEC supply will account for all of the net growth in global oil production over this decade, and of 70% of the growth from 2020-30. There are large uncertainties, but our estimates at the lower end of a wide range of such estimates. In a normal market, this will bring down prices. But in oil markets, the impact seamlessly translates into the question how OPEC will respond. We assume that OPEC members are willing and able to curtail crude oil production in response to the new supplies over the current decade to balance oil markets. Even under our conservative scenario, this will translate into OPEC spare capacity climbing to the highest levels since the late 1980s and OPEC’s market share falling for years. The ability of OPEC to enforce these cuts is one key uncertainty here. The other is the future production level of tight oil. 

How do you view the influence of speculators and investors on crude oil price movements? Will that continue to go up in future? From time to time, and mostly when prices rise — rarely when they fall — people speculate about speculators or financial investors. Usually, without even as much as a clear definition of what the term “speculator” is supposed to mean and despite the fact that the fundamental forces of demand and supply appear to explain price movements well. Many studies — from academia, think-tanks, the industry, financial sector regulators and government agencies alike — have investigated the evidence and tried to establish a causal relationship between financial investment and oil prices. To the best of my knowledge, none has found a smoking gun. 

How do you view India’s current status with regard to high import dependency? What specific measures should India should adopt to ensure long-term energy security? Generally speaking, the key for energy security lies in liberalisation and global integration. A fast-growing emerging market economy such as India, with the ambition of combining rising population with rising income levels for a while longer, is obviously well advised to tap into all available resources, domestic and abroad. In both cases, this means to recognise that energy markets may well be big and complicated and slow moving, with their huge project sizes and long-gestation periods. But at the end of the day, they are only markets and so they follow the same principles as any other market. In the case of domestic production, this means to recognise the importance of market prices and competition in attracting the investment India needs. Producers will not produce if they can’t make a profit; and to prevent monopolies from exploiting the country’s needs is best done through competition. Similarly, consumers will always consume more if energy prices are cheap and subsidised than at international market prices; while energy poverty is best prevented by income transfers, not blanket subsidies. But I think the government knows all this and is on its way to graduallychange the landscape accordingly. 

What is the future of unconventional energy sources such as solar, wind or tidal? Will they continue to remain marginal in the foreseeable future?The basic problem for renewables is that as a sector they are still dependent on financial and policy support. Some renewable sources can compete, for example onshore wind in the best locations or solar power in Southern Italy, where there is plenty of sunshine and conventional electricity is expensive. But generally, it is a subsidised sector. If any subsidised fuel expands faster than its costs come down, subsidy payments have to increase to sustain the expansion. Such a process has its limits.