IEEJ：February ©IEEJ 2022
Special Bulletin
A Japanese Perspective on the International Energy Landscape (570)

February 4, 2022

Prospects for Future Oil/Energy Situation: Focusing on Geopolitical Risks
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn February 4, an international panel discussion on the future oil/energy situation took
place in the form of an online webinar, cosponsored by ENEOS Corporation, ENEOS ResearchInstitute, Ltd. and the Institute of Energy Economics, Japan. I and two others participated in thepanel discussion as panelists. The other two were Fereidun Fesharaki, chairman of FACTS Global
Energy Group, and Sarah Ladislaw, a managing director at the U.S. RMI (former Rocky MountainInstitute) and a non-resident senior associate at the U.S. Center for Strategic and InternationalStudies. Nikkei Shimbun editorial writer Hirofumi Matsuo served as moderator. The 31st annualinternational panel discussion on the matter, as well as the past ones, covered prospects andchallenges for the international oil situation and global natural gas and LNG markets over theshort, medium and long term, including the impact of the decarbonization trend.
The most impressive point to me regarding the latest panel discussion is that extremelyinteresting arguments came about the current spikes in crude oil, natural gas and LNG prices. It wasapparently significant that the discussion came at a time when the world was bracing for thedestabilization of international energy markets, with the tense Ukraine situation attracting global
interest as a geopolitical risk. As a matter of course, the key discussion issues included howinternational oil, natural gas and LNG markets would be affected by carbon neutrality and otherambitious decarbonization goals and initiatives in the world over the medium to long term and what
responses are required for energy policies and market participants. While participating in thediscussion, I was inspired very much regarding various points. In the following, however, I would
like to focus my comments on issues regarding market destabilization over the short term.
The first issue at the panel discussion was how rising crude oil prices should be viewed.
Basic factors behind crude oil price spikes, such as Brent’s rise above $90 per barrel, include aremarkable decline in oil inventories. Why has the international oil market transitioned from extreme
oversupply under the COVID-19 pandemic in the early spring of 2020 to the current low inventories
and tight supply-demand balance? The key reason is a coordinated oil production cut by theOPEC-plus group of oil-producing countries in a demand recovery process. The large-scaleOPEC-plus production cut has had great effects, leading the market to rebalance and transition to atight supply-demand balance through a decrease in inventories. Amid this transition, crude oil prices
have retained an uptrend.
When the Omicron COVID-19 variant infection was spreading throughout the world latelast November, crude oil prices fell back sharply on concern that crude oil demand would stagnate as
the global economy decelerates due to Omicron developing into a pandemic. Even amid thecontinued Omicron spread, however, global oil demand is still increasing as the continuation of
economic and social activities with COVID-19 has become a central challenge. Then, a new matterof concern is whether the OPEC-plus group could continue to increase production by 0.4 million
barrels per day a month as agreed earlier. As Nigeria and Angola are failing to increase production as1

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planned, crude oil prices are rising on concern that the OPEC-plus group could fall short ofincreasing production as planned.
The oil market is now even more nervous about the impact of the Ukraine situation thanabout the OPEC-plus production trend. As Russian troops have amassed on Ukraine’s border, theirpotential invasion into Ukraine has loomed as a great geopolitical risk. As Russia serves as a key oil
exporter to Europe as well as a major gas supplier to the region as explained below, market
participants are concerned that growing tensions between Russia and Western countries following
the potential invasion would disrupt Russian oil and gas supply. As crude oil prices are rising due
partly to the risk, participants in the panel discussion frequently indicated that crude oil prices would
rise further depending on future developments. Over the short term, the international oil market
would be exposed to the geopolitical risk and be very unstable.
In the global gas market as well, any risk event is feared to trigger spikes in European gas
prices and Asian spot LNG prices amid growing insecurity and uncertainties mainly about theUkraine situation. As is the case with the oil market, the gas market has seen price hikes caused by
the combination of supply and demand fundamentals and geopolitical risks. Although regional gasand LNG markets had been independent from each other, they have been rapidly globalized in recentyears. As a result, a tighter supply-demand balance in a regional market has begun to affect otherregional markets. The market structure has changed to lead regional markets to interact with eachother. Particularly, a tightening supply-demand balance and spot price hikes in the European gas
market have grown linked to those in the Asian market. In Asia, spot LNG prices have soared as
LNG demand including massive consumption in China has continued to increase, with U.S. LNG
supply growth failing to catch up with demand expansion. Spot LNG prices peaked at unusually highlevels close to $50 per million British thermal units before falling back to present levels below$30/MMBtu. The present levels are still high.
European gas prices have posted even greater hikes. As great uncertainties arose aboutpipeline gas supply from Russia, the largest gas supplier to Europe, amid low inventories, concern
about geopolitical risks pushed gas prices up to levels close to $60/MMBtu (equivalent to a crude oil
price of $360 per barrel) late last year. As Asian spot LNG prices have done, European gas prices
have declined below $30/MMBtu. Depending on Ukraine situation developments including aRussian invasion that may lead to the possibility of disruption of Russian gas supply to Europe,European gas prices could rise to new record highs.
If Russian gas supply that accounts for some 40% of European gas supply is disrupted to alarge extent, it may be effectively impossible to cover the loss. The United States and its allies are
considering using U.S. LNG, increasing supply from Qatar and utilizing LNG cargo divert frommajor Asian LNG-consuming countries. Given the massive Russian gas supply to Europe, however,it may be difficult to cover the loss. LNG supply mainly under long-term contracts may be difficult
to divert from Asia to Europe, even if some flexible measures are available. Even if U.S. LNG andother flexible LNG supply can be diverted to Europe, such diversion may be designed to respond toan emergency situation and trigger spikes in spot LNG prices. The market is now required to brace
for a contingency event.
Whether Russian gas supply would be disrupted on a large scale remains very uncertain.
Ukraine tensions have some chance to be eased through diplomatic means. Whether any risk event
would trigger large-scale disruptions to energy supply is now difficult to predict. Given that Europeand Russia depend on each other regarding energy trade, an export revenue loss would not2

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necessarily be acceptable for Russia. Amid the current energy price spikes, however, the potential oflarge-scale gas supply disruptions and further price hikes may be a grave energy security risk forEurope and a grave issue not only for the international gas and LNG market under globalization but
also for overall energy markets. While Russia is likely to leverage energy security concerns in
Europe and other major energy-consuming regions for strategic purposes, Western countries aretrying to embark on developing strategies to counter such Russian action. Energy geopolitics is now
about to exert great influence on the overall international situation. We must closely watch relevant
future developments.
Contact: report@tky.ieej.or.jp
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