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'Those seeking a more tranquil 2012 oil market may be disappointed' – IEA Deputy Executive Director

The relative stability in oil prices may be fragile, the IEA’s Deputy Executive Director has warned, with much depending on whether economic malaise or supply-side problems predominate in 2012.

Ambassador Richard Jones was addressing the US Senate Committee of Energy and Natural Resources in Washington DC. He briefed the Committee on oil market developments in 2011 and the IEA’s outlook for the oil market in the year ahead, stressing that those hoping for a calm oil market in 2012 may be disappointed.

Impact of high prices on economy

Since last spring, the high level of USD100-120 per barrel of oil has become relatively established, with prices oscillating within that range. Before this period, prices had risen from a low point of below USD40 per barrel in February 2009 to a high of around USD120.

“Oil prices at elevated levels pose significant problems for import-dependent countries,” Ambassador Jones said in his testimony on 31 January.

“In this regard, [the IEA] estimates that the proportion of total world GDP dedicated to oil expenditures was back up above 5% for 2011, as it was during the economic slump of 2008 and during several previous periods of severe economic downturn. High oil prices may or may not have caused these episodes of economic difficulty, but they certainly did not help.”

Demand growth in 2012

Looking ahead to 2012, Ambassador Jones explained that the IEA’s ‘base case’ view envisages global oil demand growth of just over 1 million barrels per day (mb/d).

The IEA believes that non-OPEC oil supply and OPEC gas liquids (which are not subject to OPEC’s production management system) will rebound by as much as 1.6 mb/d combined, leaving OPEC producers an opportunity to trim their collective crude supply by around half a million barrels per day to 30 mb/d, while still maintaining inventory levels to roughly where they are now.

At the same time, the Deputy Executive Director stressed that there is uncertainty surrounding the ability of non-OPEC supply to rebound “from the awful year it suffered in 2011.”

Ambassador Jones noted, however, that the IEA and many of its analytical peers believe non-OPEC supply can rebound, continuing the trend of reinvigorated growth that was seen in 2009 and 2010.

What about Iran?

The recently announced US sanctions on entities having financial dealing with Iran, and the upcoming EU embargo on oil imports from Iran, will clearly affect the mix of crude oil supply available on a regional basis, Ambassador Jones acknowledged.

Iran exports around 2.5 mb/d of crude oil, with 65% of this going to Asia, and some 30% into Europe, he explained. A significant portion of the 1.3 mb/d of Iranian crude oil imported by IEA member countries is likely to be affected by these measures, but the full impact of the sanctions and embargo have yet to be fully assessed.

“Ultimately, [the IEA] thinks refiners denied the ability to import Iranian oil will most likely find the extra barrels they need, albeit they may need to pay higher prices than might otherwise have been the case,” he said.

In addition, Ambassador Jones observed that there is a widespread expectation that Iran will try to retain or increase sales to non-OECD buyers, potentially making extra spot sales into Asia at discounted prices.

The Deputy Executive Director added that of greatest concern for the oil market is the threat by Iran to impede traffic through the Strait of Hormuz (17 mb/d, equivalent to some 20% of global oil supplies) if an embargo is applied, as well as its threat to retaliate against neighbouring producers if they try to boost exports.

“[However,] to a degree, such threats have already been priced into the market, while the likelihood of a prolonged stoppage for Hormuz transits is seen as being fairly low,” he added.

IEA stands ready

Ambassador Jones concluded that at present there is no physical oil supply disruption underway, but added that the IEA remains vigilant and ready to act if a major disruption occurs.

“Emergency oil stocks, as their name suggests, are for use only when the market’s ability to efficiently reallocate supplies in a crisis is compromised,” he said.

“Ongoing investment in new productive capacity, especially in diverse areas likely to be less susceptible to geopolitical risks, and a progressive improvement in energy and oil use efficiency provide longer term routes to greater supply security. But, if the mere availability of IEA strategic stocks helps calm otherwise jittery market nerves in 2012, so much the better.”

Photo: ©GraphicObsession

Meeting organised by International Energy Agency, International Energy Forum and Organisation of Petroleum Exporting Countries

The second Symposium on Energy Outlooks took place in Riyadh, Saudi Arabia, on 23-24 January, 2012.

Click here to read the joint press release from the Symposium.

Global information resource is set up by IEA and World Resources Institute

The International Energy Agency has helped create a database that will act as a one-stop-shop for researchers, planners, and policymakers to source information and data on Bus Rapid Transport (BRT) systems, such as the costs of such systems in different countries, which until now has not been possible.

This database, which will be launched in February 2012, is the first globally encompassing effort to map out BRT Systems around the world and will include a web portal, which is publicly available for anyone wishing to access information about BRT data. 

BRT systems – which were originally popularised in Curitiba, Brazil, and Bogotá, Colombia – are networks of low-cost surface metro systems, featuring large, fast buses that are highly efficient, popular with passengers, and much more advanced than regular bus systems. They are now being considered and actively adopted by hundreds of cities around the world.

These systems incorporate a number of technical innovations which aim to slash carbon dioxide emissions by enticing people away from their cars to a cost-effective and attractive alternative, and by making the bus routes more efficient, thereby saving energy.

Their numerous features include introducing dedicated lanes for buses in urban areas and creating bus stations with pre-pay systems that allow high volume, rapid boarding and alighting of buses, similar to metro systems.

For this project the IEA teamed up with Embarq, a division of the World Resources Institute, a think tank based in Washington D.C.

“The culmination of our joint efforts will result in the most comprehensive and robust database for a transit system which promises carbon reduction and increased mobility at a cost-effective rate,” said Tali Trigg, Energy Analyst, within the Energy Technology Policy Division at the IEA.

In addition to this new database, a new Standard of assessing the quality of BRT systems is also being developed.

The official Standard, which the IEA welcomes, is being developed by the Institute for Transportation & Development Policy (ITDP), a leading non governmental organisation working in the area of sustainable transport in the developing world. It allows projects that have been branded as BRT to be scored as gold, silver, or bronze. ITDP and a technical committee of international BRT experts will take on the roll of assessing cities to decide on their respective scores. The IEA has assisted in reviewing the technical details of this Standard.

Fuel subsidies are not only enormously wasteful but they also greatly distort the efficient distribution of resources – Oil Market Report

Demand for oil products in Nigeria is likely to fall in the first quarter of 2012 following the removal of a gasoline subsidy, according to the International Energy Agency’s latest Oil Market Report (OMR).

The decision by the government to instigate a subsidy removal programme was made after it revealed that the subsidy cost the economy an unsustainable $8 billion in 2011. The subsidy cost more than double the estimate for 2010. With two-thirds of the population living on $1.25 a day, it was difficult for the government to continue to support a subsidy that cost nearly $50 per person last year.

The OMR noted that this was a bold decision, adding that “fuel subsidies are not only enormously wasteful but they also greatly distort the efficient distribution of resources, whilst often fuelling corruption.”

However, when the subsidy was removed at the start of this year, gasoline prices more than doubled, reaching $0.90/litre, which sparked political unrest. Workers went on a national strike, disrupting the Nigerian economy.

The government quelled the unrest by agreeing to partially scale back on its subsidy removal programme. A gasoline price of $0.60/litre has now been set. Although this is still 50% higher than pre-removal price levels, it is one-third down on the initial price hike.

“In hindsight, a more gradual process might have been advisable,” the OMR stated. “Nor do the measures seem to have been accompanied by much in the way of public consultation or targeted assistance for the poorest members of society.”
  
“Nigeria is on the watch list for 2012, with oil product demand likely to fall, at least in [the first quarter of 2012],” the OMR concluded. “Persistent industrial disputes, of the kind seen in January, could further reduce forecasts, not just for oil demand but also for economic growth in general.”

The IEA’s World Energy Outlook 2011 estimates subsidies to fossil fuels amounted to $409 billion in 2010, with oil products representing almost half of the total. Nigeria has been among the world’s biggest subsidisers of oil products in recent years.

What is the Oil Market Report?
The Oil Market Report (OMR), a monthly IEA publication which provides a view of the state of the international oil market and projections for oil supply and demand 12-18 months ahead.

What is a subsidy?
Any government action directed primarily at the energy sector that lowers the cost of energy production, raises the price received by energy producers, or lowers the price paid by energy consumers.

New IEA report offers detailed guidance for governments on how to partner with private sector to finance energy efficiency measures

Improvements in energy efficiency can achieve a whole array of economic, societal and environmental benefits, often at low cost. In many cases it seems unexplainable that consumers, business and government authorities do not exploit the full potential of energy efficiency, yet there are a range of market and human behavioural failures that stop us from doing so.

Improving energy efficiency often requires an initial upfront cost, for example, for a more advanced or new piece of technology, a change in process, or the refurbishment of a building, that is paid back later through reduced energy bills. Even though the rate of return in investment in energy efficiency can be high, lack of finance can still be a key barrier to investment in energy efficiency.

Because of the finance challenges often associated with energy efficiency projects, the IEA encourages governments to support private investment in energy efficiency measures. The IEA recommends that governments facilitate private investment in energy efficiency through collaboration with private financial institutions to develop public-private partnerships (PPPs) and other frameworks that facilitate energy efficiency financing. Now, in a new report on public-private approaches to energy efficiency finance, the IEA provides guidance on the essential steps and milestones in implementing PPPs in financing energy efficiency measures.

The latest IEA Policy Pathway report, “Joint public-private approaches for energy efficiency finance”, aims to support policy makers at all levels of government and other relevant stakeholders who seek practical ways to develop, support, monitor or modify energy efficiency policies in their home country and abroad.

PPPs are mechanisms that use public policies, regulations and/or funding to leverage private-sector financing for energy efficiency projects. The active participation of commercial banks and financial institutions is needed for the long-term growth and development of the market for delivering energy efficiency financing and implementation services. PPP mechanisms can be used to obtain such leveraging of commercial financing and to reduce the cost of energy efficiency finance to the public purse.

This Policy Pathway describes how to implement three particular kinds of PPPs - Dedicated Credit Lines where credit lines are established by a public entity (such as a government agency and/or donor organisation) to enable financing of energy efficiency projects by a private-sector organisation (bank or financial institution); Risk-Sharing Facilities involving a partial risk or partial credit guarantee programme established by a public entity (such as a government agency and/or donor organisation) to reduce the risk of energy efficiency project financing to the private sector (by sharing the risk through a guarantee mechanism), thereby enabling increased private sector lending to energy efficiency projects; and Energy Saving Performance Contracts (ESPCs) which are public-sector initiatives, in the form of legislation or regulation, to facilitate the implementation by energy service companies (ESCOs) of performance-based contracts using private-sector financing.

This publication proposes a policy pathway that supports the development and implementation of PPPs comprising ten critical steps in the following four stages.

• Plan: policy makers begin the PPP process by identifying the market segment where energy efficiency needs to be improved, choosing among the different public-sector intervention approaches available, and structuring an agreement between the public and private partners.
• Implement: the public partner defines the implementation steps and manage the implementation process, while the private-sector partner takes the lead in implementation of the PPP mechanism, making adjustments as necessary to meet objectives and respond to market changes.
• Monitor: the public partner manages the contract to ensure delivery of services (including authorising payments and maintaining records) and assesses performance relative to the standards defined in the PPP agreement.
• Evaluate: an independent third-party organisation evaluates the PPP design and implementation to assess its success in meeting objectives, factors affecting performance, and key lessons learned.

Countries around the world have accumulated considerable experience with PPPs for energy efficiency financing, which should be useful for other policymakers setting up such programmes. Case studies included in the Policy Pathway report (the Thailand Energy Efficiency Revolving Fund, the Commercialising Energy Efficiency Finance programme across six countries in central and eastern Europe, and the US Federal Energy Management Programme) should provide insights along the policy pathway for others. Nonetheless, to be effective in addressing the particular financing barriers to energy efficiency in a given country, PPPs must be adapted and customised to local legislative, regulatory, institutional, financial and energy services market conditions.

The IEA is grateful for the support of the European Bank for Reconstruction and Development (EBRD) Shareholder Special Fund for this work.