IEEJ： June ©IEEJ 2024
Special Bulletin
A Japanese Perspective on the International Energy Landscape (694)June 21, 2024

Noteworthy Risks of Destabilizing Future International Energy Situation
Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, JapanOn June 17, I was invited to the 57th meeting of the Strategic Policy Committee of theAdvisory Committee for Natural Resources and Energy and gave a report entitled “InternationalEnergy Situation and Japan's Challenges.” (The report materials and videos related to the report andQ&A sessions are posted on the website of the Ministry of Economy, Trade and Industry. For thematerials of the meeting as a whole, please refer to the Strategic Policy Committee of the Advisory
Committee for Natural Resources and Energy (57th meeting), Agency for Natural Resources andEnergy (meti.go.jp) (in Japanese).)As the time for my reporting was limited to some 10 minutes, I focused on a few important
points. In this essay, I would like to discuss uncertainties about key prerequisites for anticipating thefuture international energy situation. Amid such uncertainties, Japan must pursue the simultaneousachievement of enhanced energy security and decarbonization. Moreover, Japan is required to makeappropriate policy responses with an awareness of the widening gap between ideals and realities,
considering the international situation in which the division of the world is deepening.
As a result of Russia's invasion of Ukraine in February 2022, the international energy
situation has been driven by significant instability and supply insecurity, resulting in substantial spikes
in all energy prices. Crude oil prices hit their highest levels since the 2008-2009 global financial crisis.
Natural gas in Europe and global coal prices soared to unprecedented levels. Under thesecircumstances, energy security came back as a top energy policy priority.
Over about two years since then, however, the energy market has changed again. Crude oilprices have regained some stability, hovering around $80 per barrel. From levels far above $100/bbl
in the first half of 2022, crude oil prices have declined considerably. European gas prices, which soared
to nearly $600/bbl crude oil equivalent, have fallen sharply to levels below crude oil prices in termsof calorific equivalent. While the natural gas price plunge has been attributed partly to warm winterweather, Europe has a kind of euphoric feeling that the gas crisis has been overcome.
The decline and stabilization of energy prices represent a welcome change and a boon forenergy-consuming countries and consumers in many ways. However, it is important to remember thatthe current price levels of around $80/bbl for crude oil viewed as an important commodity for the
global economy and international politics are not necessarily low. From a long-term perspective, thecurrent levels are historically high. This is an important point that should not be overlooked.
Moreover, I feel that various risk factors that could destabilize or substantially push up
energy prices seem to be becoming apparent or gradually emerging in the international energy market
or the situation where energy prices remain relatively high. In this sense, no optimism can be warranted
about the future of the international energy situation.
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At the top of the list of various risk factors are geopolitical risks that represent traditionalrisk factors. Geopolitical risks that could shake the international energy situation in the future include
those in the Middle East, such as the escalation of the Gaza crisis and the destabilization of the Middle
East situation over Iran. In addition, the fate of the Ukraine-Russia war, in which attacks on energy
infrastructure on both sides have continued and intensified, is an important geopolitical risk.
Furthermore, geopolitical risks regarding China-Taiwan relations and safe passage through the Taiwan
Strait are issues that could have serious implications, especially for East Asia including Japan.
In addition, we should remember energy supply disruptions due to natural disasters andaccidents as another traditional risk factor. Supply disruptions caused by natural disasters have shaken
the energy market many times in the past. Large-scale accidents that occur in energy supply chains
can also have devastating effects. Attention should also be paid to energy supply disruptions due tocyberattacks, although it is unclear whether cyberattacks should be included in accidents or discussed
in relation to geopolitical risks.
Among old and new risk factors are the energy market’s heavy dependence on some energy
suppliers and their relevant market dominance and power. The 1973 oil crisis was accompanied by an
OPEC (Organization of the Petroleum Exporting Countries) offensive and an Arab oil embargo. Then,
OPEC's market dominance reached its peak. While times have changed, the OPEC-plus group of oilproducing countries still adjusts oil supply and demand to support oil prices. In addition, the world’s
heavy dependence on limited critical mineral supply sources, such as China, could be an importantrisk factor for future energy security in a broad sense as demand for critical minerals inevitably
increases due to future energy transition.
One of the new important risk factors that need to be paid attention to in the future is therisk of policy changes. This is because policy changes that the market does not anticipate could occur
and have significant impacts on the energy supply and demand structure. As for any actual impacts inthe future, it is necessary to nail down specific policy changes. The U.S. Biden administration's recent“pause” on liquefied natural gas export licenses may be included in the category of policy changes
affecting energy supply. As a major risk of policy change, it is necessary to pay attention to thepossibility that U.S. policy will change dramatically depending on the outcome of the U.S. presidential
election in November, exerting significant impacts on the international energy situation.
Risk factors that may emerge on the path of promoting the energy transition with high ideals
include underinvestment in fossil fuels and the resulting significant tightening of the supply-demandbalance. The fossil fuel market has always been cyclical, repeating the tightening of the supplydemand balance and price hikes followed by the easing of the balance and price falls. The easing of
the balance and price declines under the COVID-19 pandemic were followed by investment andsurplus capacity declines that led to simultaneous hikes in energy prices. The Ukraine crisis has further
exacerbated the price hikes. If even necessary investment in the fossil fuel sector is cut amid
decarbonization efforts, a supply-demand crunch will occur to push up prices to the disadvantage ofthe global economy. As fossil fuels are expected to play a key role during the long energy transition,
it is crucial to ensure adequate investment in fossil fuels.
In today's world, technological innovation and the subsequent progress in the new
information revolution may significantly change the energy supply and demand structure, leading toa major challenge in securing a stable energy supply. Attracting global interest is the possibility thatthe rapid spread of generative artificial intelligence and the subsequent substantial growth in data2

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centers and semiconductor production may lead to a rapid increase in electricity demand that could
not have been imagined in the past. What should be done to stably cover the electricity demand growthwith zero-emission electricity has become a new important challenge for securing a stable global
energy supply. In this way, there are many uncertainties in the world that could significantly affect theinternational energy situation. It is inevitable for Japan and the rest of the world to respond
appropriately to such uncertainties.

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