IEEJ：May 2015

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Special Bulletin
A Japanese Perspective on the International Energy Landscape (218)

May 8, 2015

26th OIES Brainstorming Meeting
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn May 7-8, the Oxford Institute for Energy Studies held the 26th OIES brainstorming meetingin Athens, where more than 30 energy experts and industry officials from Europe, the United States,
the Middle East, Russia and other regions had vigorous discussions on a wide range of topics fromthe world economy and geopolitical risks to the oil market, the gas/LNG market and environmental
problems. In the following, I would like to review key points that caught my attention at the meeting.
The biggest focus of attention at this year's OIES brainstorming meeting was how the impact of
the recent crude oil price plunge on the international energy situation should be analysed. Last year'sOIES meeting took place in June when crude oil prices were spiking due to the emerging ISIS
(Islamic State of Iraq and Syria) problem. For details, see my 175th special “A Japanese Perspectiveon the International Energy Landscape” bulletin. Despite various uncertainties, a dominant view atthe 2014 meeting was that crude oil prices would remain high. In fact, however, prices soon began todecline. Toward the end of last year, crude oil prices accelerated their free fall. In January, thebenchmark West Texas Intermediate futures price plunged to around $45 per barrel, losing more than
50% from the peak. Oil prices have recently rallied on growing signs of a decline in U.S. oil output.
The WTI price rose back above $60/barrel, making the oil price recovery or hike a matter of concern
in the market again. Basically, however, oil prices have been far lower than in the previous year. The
low oil prices were thus the focus or undercurrent of discussions at the brainstorming meeting.
As usual, the OIES meeting began with discussions on global economic problems andgeopolitical risks, where the low crude oil prices were a key issue as well. In the world economy, theUnited States is serving as a single engine to drive global growth, with emerging economies losing
steam. But a sense of caution has arisen about the future course of the U.S. economy, as indicated byrecent wild stock market fluctuations. Downside risks also exist for the "new normal" Chinese
economy, though with no major economic collapse anticipated. In Europe, whether the Greek debt
issue would lead to Greece's "Grexit" exit from the euro zone and how the exit would affect theEuropean economy and the world have become major matters of concern. While uncertainties arelingering about the world economy, many participants in the OIES meeting noted that crude oil pricefalls are playing a role in stimulating economies including major oil consuming countries and thatthey should find out the effects of the low oil prices. As for Russia that has been affected most by theoil price plunge among oil producing countries, OIES meeting participants pointed out that theeconomic downturn, though severe, is less serious than that in the 1990s and that any economic
collapse has been avoided as the ruble's depreciation has eased the impact of a decline in oil sector
investment for example.
As for geopolitical risks, OIES meeting participants took up various topics, including Libya,Syria, Iraq, Yemen, Iran and other Middle East problems, and the Russia-Ukraine problem, as seen
last year. These problems remain so complicated that it is difficult to find solutions. But some1

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participants noted that these geopolitical risks have made no major contributions to oil or gas supply
cuts so far with some notable exceptions. One called for paying attention to a point that Libyan andIranian supply has hit bottom and could increase depending on future developments (including theconclusion of Iran's nuclear negotiations with P5+1).
Based on these conditions, OIES meeting participants presented interesting arguments about
how the oil price plunge has altered the international oil market and how oil prices would move inthe future. The low prices caused various reactions from both the supply and demand sides. Many
participants pointed out that the low prices have brought about various changes to the
supply-demand balance by stimulating oil demand partly backed by an effect to pickup economy andleading high-cost oil production to be reduced or restricted. While one participant noted that the low
prices have affected shale oil production and deepwater oil development, another pointed out weshould understand that effects would be exerted on shale oil production over a short cycle and on
deepwater oil development over a medium to long cycle.
The above means that shale oil production will gradually slacken and decline as an oil priceplunge immediately causes a decrease in rig operations. If crude oil prices rise beyond $60/barrel,
however, shale oil production may increase fairly quickly with recovery seen in investment(including spending on shale oil wells that have been dug while not yet having been completed). For
deepwater oil development, investment costs per project are far greater with longer lead times. The
impact of a delay in investment in deepwater oil development under the current oil price plunge willaffect the market over a medium and longer term.
In the presence of the two cycles, the market could require crude oil prices to rise back to$70-80/barrel over a medium term to stimulate investment and a substantial production expansion tomeet future global demand growth and offset a natural output fall at existing oilfields, according to aview given at the meeting. But other participants noted that short-cycle changes in shale oil output
could work to hold down price hikes. Given high-level oil inventories and oversupply, and downside
risks for the immediate future, however, the oil market is still plagued with great uncertainties.
Discussions at the meeting led me to believe that it is premature to interpret the recent price recovery
as signaling any full-blown hike.
As for Saudi Arabia's oil production policy that attracted attention from market participants byplaying a great role in leading oil prices to plunge since the second half of last year, a participant
pointed out that the oil kingdom now gives top priority to maintaining its market share under along-term strategy and has set its new oil production norm at more than 10 million barrels per day.
But another view noted that Saudi Arabia's policy should be understood as free from any ideology
and changing in response to market conditions. Given Saudi Arabia's great influence, we may haveto keep close watch on the recent realignment of oil policy-related organizations, policy personneldecisions, high-level officials' statements on the oil market and their impacts.
Lastly, interesting arguments came about gas and LNG market problems under the newenvironment of falling oil prices. Particularly on the Asian LNG market, one participant in the OIES
meeting pointed out that LNG prices for long-term contracts are falling in line with spot price dropsand low crude oil prices as the supply-demand balance is expected to remain loose due to slack
demand growth and a substantial increase in supply from Australia and the United States over thenext four to five years. It was also noted that LNG price falls can stimulate LNG demand and cut
LNG supply expansion over a medium cycle, working to tighten the supply-demand balance over a2

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medium to long term. Furthermore, there are various uncertain factors including possible U.S. LNG
exports to Europe and Russia's strategy to take advantage of its surplus capacity for countering such
U.S. exports. Under the new market environment, we may have to continue watching theabovementioned developments.
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