IEEJ：September 2020©IEEJ 2020
Special Bulletin
A Japanese Perspective on the International Energy Landscape (496)September 3, 2020

A thought on Structural Changes in the International Energy Market
and the Role of Innovations
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
International energy markets are always exposed to changes. Energy demand changes frommoment to moment depending on economic conditions, industrial activities and human livelihoods.
To meet changing demand, energy is provided through the supply chain from the upstream sector forresources development to the downstream sector for delivery to final consumers. However, supply isalso forced to change depending on national policy and strategic decisions on production, businessdecisions based on profitability and economic efficiency, weather and other natural conditions, andunexpected events or accidents. In this way, energy supply and demand always change, with energy
prices fluctuating. This represents the normal state of international energy markets.
International energy markets also see frequent structural changes. As energy demand
growth has continued to differ by region or country due to economic growth and development gaps,
structural energy demand changes have occurred. Although developed countries accounted for morethan 70% of global energy consumption a half century ago, the share has slipped below 50%, withthe gravity center of global energy demand shifting to developing countries including Asiancountries. On the supply side, energy supply had centered on coal since the industrial revolution
until the 20th century became the century of oil in which automobiles diffused rapidly. Since the twooil crises, however, mainly developed countries have promoted the development of alternatives to oil,leading nuclear, natural gas and renewable energy to take key positions.
Characteristically, the abovementioned structural changes in international energy markets
take relatively longer time. Such changes may be described as evolution. Various factors exist behind
the time-consuming structural changes, including the effects of infrastructure and capital investment
and stock that are unique to energy markets. Changes are seen from the viewpoint of flow and stock.
While daily changes as flow are big, facilities developed as stock through infrastructure and capital
investment for the whole of international energy markets are too large in scale to easily change.
Large oil, gas and coal fields, liquefied natural gas facilities, power plants and powertransmission/distribution networks are used over more than 20 years. In a sense, the internationalenergy market supply chain cannot be flexible or agile.
Nevertheless, the accumulation of large daily changes or flow would exert greater
influence as time goes by. Such accumulation in the past has brought about energy transitions. As
noted above, typical energy transitions include those from the coal century to the oil century andfrom oil to oil substitutes and diversification via the oil crises in the 1970s.
Recently, international energy markets have seen another great structural change. That is
the shale revolution. U.S. shale resources had been known as unavailable for commercial production
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IEEJ：September 2020©IEEJ 2020
before the revolution. Through a combination of advanced technologies such as horizontal drillingand hydraulic fracturing, the application of information technology and the IT-based optimization,huge shale resources have become available for commercial production, bringing about a revolutionthat has dramatically changed U.S. energy supply and demand, the international energy situation,international relations and geopolitics. The shale revolution is still a key factor exerting great
influence on the current international energy situation that is changing dramatically due to theCOVID-19 pandemic.
As indicated by the shale revolution, cutting-edge or innovative technologies play a keyrole in bringing about a major structural change in the international energy situation. The
development and diffusion of cutting-edge or innovative technologies or the rapid diffusion oflong-existing but not-widely used technologies could lead energy markets to change more rapidly
than in the past or go in a different direction. Such change is difficult to predict and may be
identified only when it emerges. The shale revolution was a typical event that was difficult to predict.
In such event, the market experiences a discontinuous change caused by new technologies.
In anticipation of the future international energy situation after the current rapid changes,
people in the world today are increasingly interested in structural changes that could be caused by
cutting-edge or innovative technologies. Due to great uncertainties brought about by the COVID-19
disaster, the direction in which the world or the global energy market would go has become a matterof great interest. How decarbonization, a challenge that had attracted global attention before thepandemic, would influence the development and diffusion of cutting-edge or innovative technologies
is now attracting global attention in the new context of the relationship between the post-coronavirus
economic recovery and decarbonization. Developments in the past several years indicate that greathopes regarding decarbonization are undoubtedly placed on renewable energy, whose costs havedeclined rapidly. As renewable energy has diffused, various cutting-edge technologies to address theintermittency of renewable energy supply have attracted great attention. They include storage
batteries, CO2-free hydrogen produced with surplus electricity from renewable energy, andcutting-edge digital or IT technologies. Representative long-term energy outlooks in the world
anticipate the substantial expansion of renewable energy almost commonly, indicating thatrenewable energy expansion would exert great influence on the global energy situation.
In considering the future energy transition, meanwhile, we are still uncertain about what
would be a main actor. Innovative technologies on which great hopes are placed include not only
renewable energy but also carbon capture and storage, carbon capture and utilization/storage,
CO2-free hydrogen production using fossil fuels, and next-generation nuclear power generators, etc.
As what technology option would be a winner is uncertain, we must choose between pursuing asmany options as possible and betting on one option in view of various conditions. Anyway, however,a player acquiring central innovative technologies to promote structural energy market changes andenergy transition could gain a competitive advantage regarding the balance of power in futureinternational politics, economy, geopolitics and energy markets. Competition for innovativetechnologies will become a challenge for success or survival for major countries including theUnited States, China and European countries as well as Japan and for the international businessworld.
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