1. Art and Diseño

Opp
portunity tto act:
Making sm
mart decissions in a ttime of lo
ow oil prices
Maria van der
d Hoeven
IEA Executivve Director
Oxfford Energy C
Colloquium
27 Jan
nuary 2015
Ladies an
nd Gentlemeen,
Thank yo
ou for inviting me to speaak to you tod
day. I was pro
ovided with a set of questions a few w
weeks ago
that I might tackle heere today. Th
hey are impo
ortant questio
ons, no doub
bt, asking whether the oill prices
hs could havee been predicted, what the prospectss are for an o
oil price
movemeents of the paast six month
recoveryy, and to whaat degree oil exploration is stranded.
But with your leave I would prefeer to take a slightly differeent approach
h. Because while
w
we can certainly
out what will happen oveer the comingg year, so mu
uch dependss on not only decisions
make preedictions abo
by key oil-producing regions, but also armed conflict and geopolitical ttensions. Insstead of riskss, I would
peak about o
opportunity.
rather sp
I would rrather speak today aboutt we can do n
now. What actions can w
we take, given
n the precipittous drop
in oil pricces that has occurred oveer the past months?
m
Whaat can be don
ne today thatt would havee been
near imp
possible one year ago? W
What can be d
done that can
n have a real and positivee impact on cclimate
negotiations at COP2
21 later this yyear? Indeed
d, how can we make smarrt decisions in this time o
of low oil
prices?
© OECD/IEA, 2015
You havee all seen thee headlines. “Falling
“
oil prices threateen electric cars and biofueels”, “Uncerttain
economiic fortunes in
n a world of ccheap oil”, “C
Cheaper oil, fatter walletts and a natio
onal opportu
unity”, and
very succcinctly “Cheaaper oil: man
ny winners, a few bad losers.” It seem
ms everyone h
has an opinio
on, and
rightly so
o. What happ
pens to the oil
o market afffects countleess aspects of human actiivity, in the rrealm of
energy aand otherwise. It’s fundam
mental to ou
ur economiess, and will continue to plaay a critical ro
ole for
years to come. The IEEA’s World Energy
E
Outloo
ok central sceenario sees o
oil still provid
ding one-quaarter of the
nergy mix byy 2040.
global en
So it is understandab
ble that governments, businesses, and
d experts likee all of you in
n this room ssee this as
nt, and one w
worthy of disscussion. And
d for that discussion, let’ss begin with a bit of
an important momen
perspecttive.
d like to take us back a few
w years.
If you’ll aallow me, I’d
In the wiinter of 1901
1, a Croatian--born oil exp
plorer named
d Anthony Lucas hit a gusher on Spind
dletop Hill,
in Texas.. Almost 100,000 barrels per day begaan erupting o
out of the gro
ound, settingg off the Texas oil
boom. Laand that had
d sold for USD
D 10 an acre was suddenly selling for as much as U
USD 900 000
0 an acre.
© OECD/IEA, 2015
But befo
ore the summ
mer was overr, with more than 200 weells now pumping oil, the price of oil h
had
dropped
d to as little aas 3 cents perr barrel. Thiss was almost the price of water. Manyy investors lo
ost
fortuness because theey couldn’t seee where thee market wass going. Wheen the price o
of oil is the same as
water, do you invest in drilling riggs or oil lamp
ps?
Many off you probablly know this story. The hiistory of the oil industry iis rife with bo
oom-and-bust cycles,
below USD 50 per barrel, it seems thaat many of
winners and losers. YYet as the priice of oil todaay drops to b
ur history. Hisstorically thee price of oil falls,
f
and theen it rises. Yo
ou may recall that oil
us have fforgotten ou
was as high as USD 1
145 in summeer of 2008. Itt was then arround USD 40
0 by Decemb
ber. By summ
mer 2011 it
hey once were, this
was backk above USD 120. While tthe peaks and valleys may be more seevere than th
cycle is the
t nature off the market.. The winners are the onees who take aadvantage off both the highs and
the lowss.
That said
d, the naturee of today’s m
market sell-offf, brought o
on by deep im
mbalances aftter years of rrecordhigh pricces, price elasticity of ligh
ht tight oil, an
nd OPEC goin
ng for market share insteead of price, means
m
that marrkets will nevver again be tthe same.
Next mo
onth the IEA w
will launch th
he 2015 editiion of our Medium-Term Oil Market R
Report. It pro
omises to
be a fasccinating read
d. While you will
w have to w
wait a few weeks
w
for the full publication, suffice to say for
now the IEA forecastts lower pricee assumption
ns moving forward. Much
h hangs on th
he outcome of
o talks
n, violence in
n oil-producin
ng countries,, and future relations
r
bettween Russiaa and the Weest.
with Iran
But fund
damentally, for today, thee question is not whetherr the price off oil will rise again. It will rise,
though h
how far is debatable. Rather the quesstion for todaay is, now thaat the price iis so low, what does it
mean? O
Or rather, wh
hat could it m
mean? What cchoices doess it enable uss to make, to take advanttage of this
opportunity?
Today's bear market in oil reflectts the changees in supply and
a demand that were seet loose by th
he bull
of the last several years. The
T more thaan 50% increease in U.S. o
oil production
n in recent yeears
market o
© OECD/IEA, 2015
resulted at least in paart from high
h prices. Similarly, prices played a keyy role in efforrts to make ccars and
onsume less fuel, which has
h translated into lower growth in oiil demand wo
orldwide.
trucks co
Some ob
bservers are llikening this era to the beear market in
n oil that beggan in the mid-1980s. Bacck then,
policy makers in certtain countries could have taken advan
ntage of the plunge in oil prices to tighten
f
cy standards, which would
d have proteected motorissts from the inevitable ru
un-up in
vehicle fuel-efficienc
prices. But
B instead th
hey generallyy took a laisseez-faire apprroach, and co
onsumers flo
ocked to largeer,
thirstier vehicles. Wh
hen oil pricess began risingg, owners of those vehicles paid dearrly at the pum
mp.
What a d
difference a protracted
p
sp
pell of high p
prices makes.
Formerlyy a laggard, the
t United Sttates raised ffuel efficienccy standards ffor new lightt-duty vehiclees by
more thaan 14% betw
ween 2008 an
nd 2013. Tho
ough some in the U.S. mayy be taking aadvantage off low oil
prices an
nd buying SU
UVs, standard
ds will be tigh
htened further in the years to come. TThis will redu
uce US
dependeence on oil byy 2 million baarrels a day b
by 2025, acco
ording to thee US governm
ment.
This will improve US energy security and curb
b emissions o
of the greenh
house gases tthat are caussing the
o warm. And if past experience offerss any lessons, now is not tthe time to eease up – esp
pecially
planet to
given thee pressing neeed to transfform our plan
net's energy system.
With its heavy reliance on fossil ffuels, the currrent system is on course to deliver att least a 4-deegree
ncrease in global temperatures if no cchanges are made. It is no secret thatt we need radical
Celsius in
action, b
but efforts thus far have b
been sluggish
h at best. In tthe IEA’s ann
nual assessment of efforts to
transform
m the energyy system, ren
newables rep
present the only
o bright sp
pot in an otherwise-bleakk picture of
clean-en
nergy progresss.
And therre are importtant changess in the energgy mix for yeears to come: demand forr coal and oill continues
to fall, w
while natural gas and reneewables use expands veryy rapidly. And while global energy demand has
grown byy one-third ssince 2000, th
he IEA expeccts continued
d stable energy demand in OECD coun
ntries to
2040.
© OECD/IEA, 2015
But that is not to sayy that we sho
ould not pay attention to oil. It will co
ontinue to haave a role to play in the
m for yearss to come. But for today,, as we havee seen, oil maarkets are w
well-supplied.. Prices are
energy mix
low, and
d demand is slowing. Indeed we havee reduced ou
ur estimate o
of oil deman
nd growth in 2015 by a
further 2
230 000 barrrels per day.. Growth is sslowing in China, but alsso in Russia where the economy
e
is
under prressure from sanctions an
nd lower oil revenues.
r
But again, short-term
m conditions should not d
divert our atttention from
m problems tthat may lie ahead. We
must takke a longer-teerm view. In terms of oil supply, onlyy a few region
ns show significant growtth over the
next deccades: the United States, Canada, Brrazil and thee Middle Eastt. The non-O
OPEC countriies make a
significan
nt contributiion to satisfyy growing oil demand in
n the period to 2020. Bu
ut after this, there is a
large and
d growing gaap in the maarket. This gaap needs to be filled by the only rem
maining largee source of
low-costt oil. That is the Middle East. There are plenty of resourcess to meet th
his challengee but given
security concerns and today’s oil market, there is real con
ncern about a shortfall in investment.
Some maay think therre is plenty o
of time to sorrt this out: exxtra supply frrom the Middle East is neeeded only
in the eaarly 2020s. But this would
d be a mistakke. To produ
uce extra barrels in the eaarly 2020s, th
here needs
to be invvestment tod
day. It is reasssuring to see countries in the region – including the UAE, Kuw
wait, Saudi
Arabia, aand Algeria – making firm
m statementss about continuing to inveest despite current low prices.
hoping to seee progress on
n climate witth COP21 and
d Paris on
A bigger worry perhaaps, especially for those h
he drop in oil prices will m
mean a drop in support aand investmeent for renew
wable
the horizzon, is that th
energy. Skittish
S
or sh
hort-sighted investors
i
maay indeed cho
oose to aban
ndon renewables. Govern
nments
may scalle back suppo
ort programm
mes. But thiss could be a mistake.
m
To begin
n with, oil and
d renewables rarely compete. Renew
wables are priimarily used to generate electricity
for utilitiies, businesses and homeeowners. Oil is generally destined for transport. Demand
D
for renewables
will not ssuddenly fall if demand fo
or oil increasses.
On top o
of this, adopttion of renew
wables is in m
many ways inevitable. It’s a long-term necessity. In
n fact if
some invvestors are flleeing renew
wables because they thinkk cheap oil w
will ruin their investment, all this
© OECD/IEA, 2015
does is ccreate an opp
portunity for investors wh
ho are lookin
ng long term. With the rissk of strandeed assets in
the futurre, who would not want to
t already bee harvesting energy from
m sunshine orr wind?
Some maay argue that this situatio
on is compliccated to some degree by the price of natural gas, if it is
indexed to oil. As thee price of oil falls, so doess gas, which o
oes compete with renewaables in
of course do
n. But in man
ny jurisdictions renewablees are alread
dy competitivve with cheap gas. For
electricitty generation
examplee, the recent long-term co
ontract awarded for solarr PV in Dubaii is just below
w USD 60 perr
megawatt-hour. Thiss puts PV on par with gas generation with
w gas pricced at USD 4.50 per thoussand BTU.
8 per megaw
watt-hour, PV
V would be ccompetitive with
w gas at U
USD 7. We see PV at USD 80 per
At USD 80
megawatt-hour as reeplicable in countries with
h both good sun and a go
ood investmeent climate, such
s
as
ountries and in Latin Ameerica, but alsso China.
MENA co
So the m
most important factor for renewables is not price. It’s the stabiility and pred
dictability of policy and
market fframeworks. This is what will ensure tthat renewab
ble energy caan generate tthe significan
nt capital
needed for
f long-term
m gain. And what
w
a gain itt would be. We
W speak of winners and losers during oil-price
fluctuations, but consider an inveestment porttfolio of reneewable poweer that is stab
ble, predictab
ble and
pollution, contributes to global climatte efforts, an
nd
unlimited. Renewable power thatt decreases p
wable power tthat improvees energy seccurity,
providess a hedge agaainst volatile fossil fuel prrices. Renew
energy aaccess and th
he resilience of our econo
omies. Wheree are the loseers there?
So the risk is that low
wer oil pricess will introduce policy unccertainty. This is once agaain why policcy makers
dent, and at tthe same tim
me industry sh
hould take ad
dvantage of an
must be smart, patieent, and prud
n the moment for eitheer policy makkers or industtry to lose sigght of the bigg picture.
opportunity. This is not
Of course there will b
be differencees by sector.
For transsport, the atttractiveness of investing in conventio
onal biofuels is determineed by blendin
ng
requirem
ments, on thee demand sid
de, and availaable feedstock, on the su
upply side. Lo
ow oil prices could
therefore underminee the econom
mics of these biofuels.
© OECD/IEA, 2015
However these prices may also leead to reduceed agriculturral production costs – wh
hen oil is cheaap, fuel
a drop. Co
ombined with
h good harveests for biofuel feedstockss this year, notably
and fertiilizer prices also
corn and
d vegetable o
oils, this could lead to red
duced producction costs.
Advanceed biofuels faace a greater challenge, ggiven their naascent level o
of developmeent and a lacck of
strong policy supportt. There coulld very well be
b a delay in investmentss or the aban
ndoning of prrojects if
p
persist.
low oil prices
In the heeating sectorr, renewable options such
h as biomass in many cases remain co
ost-competitive against
oil for sp
pace heating needs in buiildings. The p
perception th
hat these investments maay not be wo
orth it may,
howeverr, delay invesstment decisions by housseholds and iindustry.
In the eleectricity secttor, distributeed generatio
on solutions ssuch as solarr PV – where costs have faallen
dramaticcally in recen
nt years – rem
main generallly competitivve versus dieesel fired gen
neration, who
ose costs –
particulaarly in remote locations – remain high
h even with tthe recent oil price fall. Th
he presence of enduser sub
bsidies, howeever, distorts this picture.. This is a sign
nificant pointt that I will reeturn to shortly.
And for utility-scale
u
eelectricity generation, seccure long-terrm remuneraation is moree important ffor
investmeent than the fluctuation o
of oil prices. In the past this has mainly been achieeved through
h policydriven in
ncentives succh as feed-in--tariffs, particularly in Europe. But inccreasingly this is ensured by market
arrangem
ments, such aas long-term
m power purchase agreem
ments awardeed competitively, for example in
Latin Am
merica and the Middle Easst.
Of course, as I have m
mentioned, ffalling oil pricces can impro
ove the econ
nomic attracttiveness of oil-fired
nd gas generration in areaas where gas prices are in
ndexed to oil. To the exteent that renewables
plants an
competee with these forms of gen
neration, there may be so
ome effect on
n the attractiveness of reenewables.
Still, in th
he U.S., loweer oil prices may
m slow exp
ploitation of ttight oil and therefore sh
hale gas. Thiss could
ultimateely serve to boost the attrractiveness o
of renewables.
© OECD/IEA, 2015
So there are risks, bu
ut as with anyy risk, there is also opporrtunity. Low o
oil prices preesent a seriess of
h goals that w
would otherw
wise be moree politically or
o
opportunities for pollicy makers to accomplish
economiically difficult.
One of these is the elimination off subsidies to
o fossil fuel cconsumption.
There arre many typees of fossil fueel subsidies, but analysis by the IEA fo
ocuses solelyy on subsidies that
result in the prices paaid by end ussers being reeduced to below international benchm
marks. For exxample, in
he pump are some 8 timees lower than
n they are heere in London
n. These
Saudi Arabia, gasoline prices at th
n subsidies.
are typiccally known aas fossil fuel consumption
In 2013, governmentts around thee world spen
nt USD 550 biillion on thesse subsidies. This is more than five
pport that went to renew
wables. It is also twice as much as actu
ual investmeent into
times the level of sup
bles in 2014.
renewab
Ten coun
ntries accoun
nt for almostt three-quartters of this USD 550 billion, and five of
o them are in
n the
Middle East
E and Nortth Africa. Mo
ore than one-third of elecctricity in thee Middle Eastt is generated using
subsidiseed oil. In the absence of tthese subsidiies, almost all renewable energy tech
hnologies, plu
us nuclear,
would bee competitive with oil-fired power plaants.
In this paast year we h
have seen siggnificant initiiatives to tacckle subsidiess in Jordan, M
Morocco and Egypt.
Jordan reemoved fosssil fuel subsid
dies early lastt year and raaised electricity prices thee following su
ummer.
Morocco
o has been reeducing subssidies progresssively on bo
oth diesel and
d gasoline sin
nce the begin
nning of
2014. Eggypt has raiseed the price o
of residential gas supplies, gasoline and diesel. Th
his could redu
uce Egypt’s
subsidy bill
b by about one-third – that’s USD 5 billion.
And let u
us be clear: fossil fuel sub
bsidies are an
n extremely inefficient
i
means of achieeving their sttated
objectivee, which is tyypically to heelp the poor. IEA analysis indicates thaat only 8% off the money spent
reaches the poorest 20% of the p
population. O
Other direct fforms of welffare support would cost much
m
less.
Of course one of the most damagging effects o
of subsidisingg fossil fuels is that low-carbon technologies,
and in paarticular emeerging renew
wable energyy technologiees in the pow
wer sector, are less able to
o compete.
© OECD/IEA, 2015
This hind
ders investment in renew
wables, leadin
ng to strongeer reliance on
n fossil fuels and higher
greenhouse-gas emisssions than w
would otherw
wise be the ccase. In addition, slower d
deployment o
of
bles, in turn, reduces learrning rates an
nd slows the pace of costt reduction as the techno
ologies
renewab
mature.
In other words, the m
more a goverrnment subsiidises fossil fuels,
f
the mo
ore it has to subsidise
s
renewables if
it wants to keep a levvel playing fieeld. Fossil fuel subsidies rrig the gamee against reneewables and act as a
ubsidies to reenewables
drag on tthe transition to a more ssustainable eenergy system. On the otther hand, su
can, if well-designed,, aid the dep
ployment of ssustainable teechnologies in support of energy secu
urity and
mental goals.
environm
Fortunattely, we are sseeing positivve moves in many countrries that are dependent o
on energy im
mports to
reform fossil fuel sub
bsidies. Reforrming such subsidy schem
mes is difficu
ult, as the sho
ort-term costts imposed
be burdensome and indu
uce political opposition.
o
B
But getting th
he prices
on certain groups of society can b
ould deliver m
major energyy savings, low
wer carbon dioxide emissions,
right by phasing out subsidies wo
d reduce burd
dens on goveernment bud
dgets.
improve economic effficiency and
he time to taake action. Th
he lower thee oil price, thee less the impact will be felt
f by consu
umers
Now is th
when the subsidy is eeliminated.
But redu
ucing subsidiees won’t be eenough.
If the wo
orld seeks to truly encourrage more effficient use of energy, boo
ost the economic case fo
or carbon
capture and storage,, and promotte low-carbon energy sou
urces includin
ng renewablees and nuclear power,
a effective, realistic price on carbon..
then theere must be an
Low oil prices
p
provide an opportu
unity here. Policy makerss in major energy consum
ming countriees can take
advantagge of the oil market’s collapse to intro
oduce carbon pricing, taxxes, or low-caarbon mandaates, or to
strengthen existing sschemes. You
u can see herre that the w
world is makin
ng progress. Carbon taxes and
ns trading sch
hemes are im
mplemented or being plan
nned in dozeens of jurisdicctions around the
emission
© OECD/IEA, 2015
globe, from emergingg economiess in Asia and South Ameriica, to develo
oped countries in Europee and
merica.
North Am
But as im
mportant as p
planning is, itt is no substitute for actio
on. The world wants COP
P21 to be a su
uccess, yet
some weere discouragged by a lackk of progress in Lima last December. Iff major world
d economiess stood up
and bravvely announcced significan
nt steps forw
ward in carbon pricing, it ccould be a gaame changerr. We
should reecall that it w
was when oil prices were falling in thee early 1990ss that Finland
d, Sweden, and
Denmarkk implementted some of tthe earliest ccarbon taxes..
h schemes are
Critics arrgue that carrbon taxes arre job killers, but this is aggain short-sigghted. If such
designed
d properly, and put in plaace in an environment of lower energy prices, economic discom
mfort can
be minim
mised. Indeed
d, many stud
dies suggest that
t
they can
n yield a net economic beenefit. And with
w smart,
targeted
d measures aimed at low--income earn
ners, once the price of oill does rise, th
he effects of a new tax
can be mitigated.
m
In aaddition, higgher taxes on
n transport fu
uels could heelp to financee clean energgy
research
h, developmeent, and deplloyment – th
his is good forr us all. The long-term beenefits of seccure and
reliable access
a
to susstainable eneergy and tran
nsportation are
a simply un
ndeniable.
As you h
have heard m
me say again aand again: th
he worst course of action would be co
omplacency. We saw
a a policy co
oncern.
this 30 yyears ago, but back then tthe prospect of climate change barelyy registered as
w know otheerwise. Policyy makers must look over tthe horizon, beyond the election cyclle. They
Today we
have a once-in-a-gen
neration chan
nce to get uss back on tracck.
Another critical aspect when thin
nking long terrm is innovattion.
Indeed, one
o of the prroblems wheen looking baack at past su
uccesses is a failure to rem
member the cost and
effort required. We sshould know by now thatt technologiccal change caan be an intriicate, compleex and
m process.
long-term
For exam
mple it took 6
60 years from
m the first co
ommercial production of oil
o before it captured
c
10%
% of the
primary energy markket, and then
n another two
o decades to
o reach 30%. During this ttime, fierce
© OECD/IEA, 2015
competittion was enccountered, piitting produccers and userrs of oil again
nst those witth a preferen
nce for
horse-drrawn travel, eelectric tram
ms, gas lightin
ng, bioethano
ol, coal conveersion and m
much more.
Hindsigh
ht may have a habit of maaking past traansitions app
pear neat and
d inevitable, but they weere not.
The same applies to tthe innovatio
ons that mad
de shale oil p
possible. The same will ap
pply to the in
nnovations
ahead.
on is not only about tech
hnical progress – innovation is needed
d from research and deveelopment,
Innovatio
to suppo
ortive marketts and regulaations.
And we cannot
c
simply pour moneey into reseaarch, expectin
ng the develo
opment of teechnology th
hat
magicallyy becomes m
mainstream. SSupport is neeeded from rresearch and
d development, to demon
nstration,
to changging market b
barriers. We need supporrtive marketss that can pu
ull innovativee technologiees, and the
benefits they bring, into the main
nstream.
Cheap oiil may make us complaceent, believingg that today’ss technologyy and today’ss fuel will con
ntinue to
be the engine of grow
wth for tomo
orrow. Of cou
urse this is faalse. Just as tthe horse-draawn carriagee was
d by the interrnal combusttion automob
bile, so will the diesel gen
nerator be reeplaced by th
he solar
replaced
cell. There were som
me who kept their
t
money in horses, asssuming that the demand
d for horsesh
hoes and
w
never go away. We can imagin
ne what happ
pened to these investors.
saddles would
And so, ladies
l
and geentlemen, likke the boom--and-bust cyccle of oil pricces, we returrn to where w
we started.
Investorss who flockeed to Beaumont, Texas in
n 1902 to takke advantagee of the gush
her at Spindletop were
either richly rewardeed or saw th
heir fortunes fall as quicckly as the p
price of a baarrel of oil. SShort-term
thinking carries that kind of risk.
It is longg-term thinkking that will provide th
he real rewaard. Significaant, paradigm
m-shifting progress on
energy aaccess and ssecurity, eco
onomic grow
wth, and envvironmental sustainability requires vision and
leadersh
hip. It requirees the couragge to look ovver the storm
my seas to thee sunrise on the horizon. It requires
taking ad
dvantage of an
a opportunity when it p
presents itself.
© OECD/IEA, 2015
And that opportunity has presented itself. While oil prices remain low, policy makers from around the
world should seize the chance to make meaningful changes to the way we produce, use and price
energy. What a great shame it would be for climate negotiations in Paris this year to come, and go,
without meaningful commitments having been made. What a great shame it would be if world leaders
look only to what is happening today, rather than what tomorrow will bring. Vision and leadership is
what is needed to take advantage of this opportunity, and make smart choices.
I thank you for your time, and look forward to your questions.
© OECD/IEA, 2015