IEEJ：February 2020○ｃIEEJ 2020
Special Bulletin
A Japanese Perspective on the International Energy Landscape (466)

February 6, 2020

Prospects for Future Oil/Energy Situation
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn February 5, an international panel discussion on the future oil/energy situation took
place at Tokyo’s Nikkei Hall, cosponsored by JXTG Nippon Oil & Energy Corporation, JX Nippon
Research Institute, Ltd. and the Institute of Energy Economics, Japan. The panelists at the meetingwere FACTS Global Energy Group Chairman Fereidun Fesharaki, U.S. Center for Strategic andInternational Studies Senior Vice President Sarah Ladislaw and I. Nikkei Shimbun editorial writer
Hirofumi Matsuo served as moderator. The 29th annual international panel discussion on thematter was very vigorous, covering prospects for the oil market and prices in the immediate
future, short- and medium-term outlooks on the natural gas market including the Asian LNG
market, and long-term challenges regarding oil and LNG. In the following, I would like tosummarize the points that were particularly impressive to me at the panel discussion.
On the first topic of prospects for the international oil market and prices in the immediate
future, talks focused on geopolitical risks in the Middle East and global economic risks posed by thespreading new coronavirus pneumonia epidemic originating in China’s Wuhan, which have shaken
the international oil market since the beginning of the year. Regarding the Middle Eastern
geopolitical risks, arguments were made from various angles about background factors behindshort-lived oil price spikes triggered by large-scale oil supply disruptions following terrorist attacks
on key oil facilities in Saudi Arabia last September and by growing military tensions following theUnited States’ killing of Iranian Revolutionary Guard Corps Commander Qassim Suleimani in earlyJanuary.
It was pointed out that the oil market recovered its stability thanks to Saudi Arabia’s
faster-than-expected restoration of 5.7 million barrels per day in oil supply disrupted by the terrorist
attacks and to the avoidance of a full U.S.-Iran war in the absence of any U.S. counterattack
responding to an Iranian retaliation against the U.S. killing of the Iranian Revolutionary Guard Corpscommander. At the same time, abundant oil supply or market concern about oversupply was cited asanother key factor behind the market’s rapid stabilization following both oil price spikes. Regarding
the factor of abundant oil supply, panel discussion participants pointed to U.S. oil production
expansion that has driven sharp growth in oil production outside the Organization of the Petroleum
Exporting Countries. These factors were intertwined to prevent growing geopolitical risks fromexcessively destabilizing the oil market. As a structural U.S.-Iran confrontation is left untouched,
however, the Middle Eastern situation remains tense. We will have to closely watch how future
geopolitical developments would affect oil prices depending on supply and demand fundamentals at
the time of the next possible serious geopolitical problems and supply interruptions.
Shaking the oil market at present are global economic slowdown risks caused by thespreading new coronavirus pneumonia epidemic. By February 4, the new coronavirus infected morethan 20,000 people, with no sign seen of any pause in the spread. Particularly, China includingWuhan has plunged into a serious situation that is expected to greatly affect the Chinese economy.
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As China’s economic growth in 2020 is well expected to slip below 6% from 6.1% in 2019, the newpneumonia epidemic is increasingly feared to reduce the growth to an even lower level. Given thatany substantial fall in economic growth in China is destined to affect domestic stability, Beijing isincreasingly expected to come up with a large-scale economic stimulus package. Until recently,
China’s energy demand expansion had been supporting oil and LNG markets. In response to theeconomic downside risks triggered by the new pneumonia epidemic, therefore, crude oil prices havedeclined rapidly. The front-month futures contract for the West Texas Intermediate crude oil declined
below $50 per barrel on February 4. If oil prices decrease further, the OPEC-plus group may beprompted to further enhance joint production cuts. Chinese and global economic slowdown risks
have become a focus of attention exerting great influence on the international oil market.
On the second topic of short- and medium-term outlooks on the natural gas market
including the Asian LNG market, panel discussion participants discussed how long oversupply
would last in the LNG market. A view given in the discussion was that oversupply would
remain until the early 2020s due to ongoing LNG supply projects’ entry into the production
phase and last year’s massive LNG project final investment decisions, despite growing demand.
Important in this respect is the speed of Asia’s LNG demand expansion that depends oneconomic growth, environmental regulations, LNG’s price competitiveness and competition
from other energy sources such as coal, nuclear, renewable energy, petroleum products andliquefied petroleum gas. Although Asian LNG demand is well expected to increase, theabovementioned downside risks for the Chinese economy may have to be viewed as having agreat impact on the LNG market. The United States’ growing presence as the driver of global
expansion in LNG supply as well as oil supply also became subject to discussion. In this respect,interesting arguments were made about various factors influencing the shale revolution. As U.S.
presidential election campaigns were gaining momentum, talks also covered whether U.S.
President Donald Trump would be reelected and how U.S. energy and environment policies
would change if a Democrat wins back the White House.
On the third topic of long-term challenges for oil and LNG, interesting arguments weremade from various angles. Importantly, it was pointed out that as far as U.S. oil production continues
to expand, downside pressure would structurally remain on oil prices, making it very difficult for theOPEC-plus group to control the international oil market. As indicated by history, the greater oil
production cuts required to support prices are, the more difficult it is to control the market. Saudi
Arabia unilaterally cut oil production by nearly 7 million bpd as a swing producer to control the oilmarket in the first half of the 1980s but gave up on market control in 1985 in a manner to prompt oil
prices to fall sharply. Arguments at the panel discussion reminded me of such past developments. In
this sense, talks in the panel discussion indicated that the key point would be how long the UnitedStates would continue expanding oil production.
Regarding long-term challenges, another focus of discussion was the fact that various
uncertainties are emerging about the future of fossil fuels such as oil, gas, LNG and coal at a time
when the world is in a new energy transition. As very ambitious climate change goals like a
European goal of achieving “net zero” greenhouse gas emissions by 2050 are announced one after
another, fossil fuels now accounting for more than 80% of global primary energy supply face foulwind and are feared to become “stranded assets” in the future. At the panel discussion, however, it
was noted that a gap has emerged and is widening between aspiration about climate change goals
and energy reality. An argument given in the panel discussion said that the gap is remarkable in Asia
about to become the center of the global energy market, indicating how challenging it would be tobalance economic growth with decarbonization in Asia. It was pointed out that progress in2

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decarbonization would cause great challenges not only in Asia but also in resource-rich countries
where fossil fuel exports now support economic growth. In this sense, it was discussed that Asia andresource-rich countries should use fossil fuels cleanly and sustainably from the viewpoint of thereality. One participant noted that innovations such as production of CO2-free hydrogen from fossil
fuels, carbon capture and storage, and carbon capture, utilization and storage would be important forsustainable use of fossil fuels and that how to realize low-cost energy transition through these
innovations would be the key to the sustainable use. Even if efforts are made to reduce costs,
however, costs would likely expand. Therefore, it would be important to get prepared to shoulder
higher costs for the ongoing energy transition.
The future of international energy markets is filled with various uncertainties. Prospects
for the future oil and energy situation will thus remain important in the future.

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