GCC States Should Introduce Energy-Efficiency Policies

In an exclusive interview with the Website of the Emirates Center for Strategic Studies and Research (ECSSR), Prof. Ken Koyama, Chief Economist and Managing Director of The Institute

Prof. Ken Koyama

of Energy Economics (IEEJ), Japan, stressed that the need for energy efficiency technology and a change in lifestyle for more responsible energy consumption is almost as important as discovering new energy sources. The interview, which was conducted on the sidelines of ECSSR’s Annual Energy Conference 18 titled: ‘Technology and the Future of Energy,’ also covered issues related to growing oil production in the US, rising demand in Asia, the continuing importance of oil for at least the next two to three decades as well as the interplay of price fluctuation and innovation in the petroleum sector. Following is the transcript of the interview:

Q: Technological innovations are taking place both in conventional and renewable energy technologies. In addition, Russia, US and other non-OPEC states are also producing more oil than before. In light of these trends, where do you see the future of oil prices in the medium to long term?

Ans: It is true that the United States is going to be more self reliant in terms of oil and gas. We have already seen that the shale gas evolution has made the US an energy exporter. Again, the net oil import to the US is declining significantly. Some experts have started saying that even in case of oil the US may soon become almost self reliant, even an exporter. But this change is taking place only in the United States. As a major consumer of oil and gas, Asia is typically becoming more import-dependent. The increase in the number of cars and the growth in shipping in China and India will increase the demand for oil and gas from Asia and that should also be seen as part of the emerging equation. So even if the US becomes more self-reliant, Asia will be the main driver of demand. Therefore, mutual dependence between the GCC and Asian economies will become more critical in the future. In other words, enhanced relations between the Middle East and Asia will be key to the stability of the oil market.

Q: However, one cannot ignore the technological innovation in renewables and the demand for clean energy. In this new age, for how long will oil remain economically and ecologically viable?

Ans: The environmental considerations and other challenges related to oil will become a cause of concern for OECD countries. But, we cannot forget the advantages of oil. It is most abundant and economically the most advantageous energy resource. It also has a very developed global market. It is also a highly convenient energy source. For example, after the earthquake and tsunami hit northern part of Japan, it was oil-related products that saved the lives of disaster-hit people. As the grid system didn’t work and electricity supply was cut off, with even gas pipeline not fully functional at that time, oil products were easily supplied to disaster-hit people. This proved quite beneficial. So the convenience of oil is undoubtedly still strong and its role remains very important. Of course, the present growth trend in oil may slow down, but oil will still be necessary and as we all know that the share of oil will still be dominant in the world for the next two or three decades. Again, economics is a very important element in the real market. Therefore, the share of oil will be a very important element in the market.

Q: The rise of shale oil and gas has opened the door for small and medium scale companies to have a bigger share in the sector. Will it challenge the role of big oil companies and producing countries in the world market?

Ans: One has to remember that the success of shale oil and gas in the US relies heavily on the country’s infrastructure facilities, particularly its pipeline network. The United States has a very developed pipeline network nationwide. So even when small-scale and medium-scale companies go ahead with producing shale gas, it is quite easy for them to market the gas by using the existing network. So you have to ask whether the same success in shale gas can happen in other parts of the world, where such a network of pipelines and other infrastructure facilities are not available. Again the land ownership and resource ownership provisions in the United States provide a strong economic incentive to promote shale gas development for land owners. But countries where resource ownership belongs to the nation there is little incentive for the landowner to invest in such projects. So, for these reasons we cannot expect a quick expansion of this technology in other parts of the world. It may happen, but it will take some time.

Q: The deflationary trend on the global economic scene that are being witnessed now even in emerging economies, in addition to other geopolitical variables, have made it difficult to make price projections. This affects long term development plans in the oil sector which in turn causes demand-supply volatility. What are your views on this issue?

Ans: When long-term energy projection is made by any institution, either by IEA (International Energy Agency) or OPEC or US Energy Information Administration, I think the assumption of energy price is guided by conventional wisdom. Therefore, your point may be valid to an extent. The idea is that energy prices keep gradually rising because of the supply-demand dynamic and the rising costs of production, among other factors. However, in the real market, it often happens that demand falls and the price is lower than expected which creates pressure for producing countries. However, it is a kind of norm to follow conventional wisdom. To address these difficulties, we usually use a sensitivity analysis. There is difference case price assumption, in which low price assumptions and high price assumptions are made. With this approach we develop a sensitivity scenario or projection. Otherwise it is too difficult to predict for we do not have any crystal ball.

Q: Which energy resource appears to you as the most promising to bring about the next revolutionary change in the energy sector?

Ans: Well, I am not an expert in this technical field to make any comment. However, I understand that there is no silver bullet right now. In fact, that has been an important lesson for us in Japan, after the Fukushima disaster. For Japanese economic and energy survival we need every technology. Again, with every technology there is some difficulty which has to be overcome. With nuclear, the concern relates to safety, renewables entail high initial costs and the issue of intermittency and fossil fuel has implications for the environment etc. Thus, we have to diversify and secure the best energy mix. More important than even this is to focus on energy efficiency.

Energy efficiency technology is the key to solving most issues and Japan is regarded as one of its pioneers. In the last two years, we have made significant progress in Japan in becoming more efficient, through the use of energy efficient technologies, by changing our lifestyle, industry work ethic etc. So, energy efficiency technology through appliances in vehicles, lighting, power generation, and building construction will play an important role in addressing energy related issues. I think in the GCC there is a lot of room to improve on energy efficiency. In my view, the energy needs of the GCC are also growing and for this reason its governments need to gradually introduce energy efficiency policies, so that technological development and diffusion of technology can be appropriately introduced in the lifestyle of the GCC people and its industry.

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