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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Nuclear Power Was in Decline Even Before Fukushima

In an exclusive interview with the Website of the Emirates Center for Strategic Studies and Research, Anthony P. Froggart (Senior Research Fellow, Energy, Environment and Development Program, Chatham House, UK), pointed out that the rapid advancements in technology

Antony Froggart

and economics of renewables are forcing even the most nuclear-intensive countries to question the viability of their nuclear programs. Speaking on the sidelines of the ECSSR’s Annual Energy Conference 17 titled: “Global Energy Markets: Changes in the Strategic Landscape,” held on Nov.1-2, 2011, Froggart averred that the Fukushima tragedy has further accentuated the trend away from nuclear. Following is the text of the interview:
Q: Do you see there has been a change in public perception and the perception of governments around the world against nuclear power after the Fukushima tragedy earlier this year?A: What we have seen as a result of Fukushima is that a number of countries who already had concerns about nuclear power are accelerating their decision-making and the obvious example in this regard is Germany. In the late 1990s, Germany introduced legislation to phase out nuclear power. This was later overturned. But post-Fukushima, Germany has reverted back to the decision of phasing out nuclear power. Again, in other European countries we see an increase in skepticism toward nuclear power and legislation in this respect has followed or is in the process of being followed. For example, a referendum took place in Italy where people voted against the reintroduction of nuclear power. Similarly in Switzerland, the government is likely to reject the nuclear option and the new government in Belgium has also said it would phase out nuclear. However, some governments in Europe still say that they wish to continue with their nuclear programs. The varied reaction can be seen around the world. Thus post-Fukushima, we find construction of new reactors in India and Pakistan. However, a country like China—which currently has 40 percent of the world’s reactors under construction—has not started building any new reactors this year and it seems it has frozen its expansion program post-Fukushima.
Q: Does this mean China has put on hold its plans to build nuclear reactors? Do you think it is scaling back its projects in the wake of the Fukushima tragedy or are there other factors in play?A: China was early going very fast in building its nuclear reactors. Within its 12^th Five-Year Plan, it was extremely ambitious. I think it is very clear that it will now not be able to meet its objectives of the 12^thFive Year Plan, but as of yet they are not talking of abandoning nuclear, but are looking at what lessons might be drawn from the Fukushima tragedy and it is also believed that they might be using the event as a justification for a slowdown because they were going so fast beforehand that it was leading to engineering and oversight issues, and so they are taking a step back. So it is very clear that it will impact their nuclear development target.
I believe nuclear power was already having problems globally before Fukushima in terms of its development. The peak of nuclear output was in 2002, since then we have seen a decrease in the total number of reactors in operation as more have closed than have started up. The reasons behind this are multifold. Firstly, it is the availability of alternatives. In the last few years, for example, it was said that the United States would re-instigate the construction of new nuclear. This is now very unlikely, mainly because the price of gas has fallen to the extent that going nuclear makes no economic sense. In many parts of the world alternatives are available. You are seeing the development of renewables, in a way we haven’t seen before as well as the promise of the development of renewables.
Q: Are current financial issues also affecting some governments to move into renewables as opposed to nuclear energy?A: Right now there are concerns over public acceptance, when it comes to nuclear. But I think the price of nuclear is even more important in the current times—both in terms of price of construction and the fact that this price continues to increase. In addition, the price of capital is also becoming more expensive and so financial institutions that may have been willing to lend for the development of nuclear energy, may either be no longer willing to do so or at least the price of borrowing the money has increased substantially.
Q: What are the major advances taking place in the field of renewable energy that could reduce global reliance on nuclear energy in coming decades?A: The energy sector as a whole is in a flux like never before. This has happened with changes like the development of shale gas, the economic viability of carbon capture and storage, the development of renewable energies in their technologies and economics, the prospects of solar photovoltaic achieving grid parity. I think the prospects for solar photovoltaic technology are particularly bright. So you have all of these developments and if you invest in nuclear at the current time with all of the uncertainty both from a financial perspective and from a technological development perspective you lock yourself in a certain development path of energy. Therefore, it makes sense just to pause and assess how technologies of renewable energy would develop.

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