IEEJ：February 2019○ｃIEEJ 2019
Special Bulletin
A Japanese Perspective on the International Energy Landscape (414)February 8, 2019

Prospects for Future Oil/Energy Situation
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn February 6, an international panel discussion took place at Tokyo’s Nikkei Hall on thefuture oil/energy situation, 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 the author. Nikkei Shimbun editorial
writer Hirofumi Matsuo served as moderator. The 28th annual international panel discussion on thematter became a thriving meeting attracting more than 600 participants on a registration basis. The
vigorous panel discussion covered supply/demand, financial and geopolitical factors behind wild
crude oil price fluctuations from 2018, technological, policy and geopolitical factors influencing
long-term oil supply and demand, short-term and medium to long-term prospects for theinternational oil market and natural gas problems mainly in the Asian LNG market. In the following,
I would like to summarize the points that were particularly impressive to me at the panel discussion.
First, a mainstream prospect for the international oil market and crude oil prices over ashort term was that if no major destabilizing factor arises, crude oil prices may rise with thesupply-demand balance tightening moderately toward the second half of 2019. As supply anddemand fundamentals, financial factors and geopolitical factors are very uncertain, it is very difficult
to anticipate the direction of the international oil market. However, the mainstream prospect meansthat the supply-demand balance may moderately be tightened, given that Iran’s oil exports may
decline after the expiration of the 180-day waiver on the Iran oil embargo amid steady oil demand
growth and the OPEC-plus oil production cut. As a matter of course, the market could be greatlyaffected, depending on the extent of U.S. shale oil production expansion or the emergence andescalation of global economic risks. No optimism can be warranted about future market conditions.
Second, an in-depth discussion came on the Iran issue among geopolitical risks seen as
potential market-destabilizing factors. The U.S. Trump administration, though maintaining a toughstance against Iran basically, has made major changes to its Iran sanctions policy in a manner toshake the market. It requested major oil-importing countries to cut imports from Iran to zero before
coming up with the 180-day waiver on the Iran oil embargo. The Trump administration’s policy after
the expiration of the waiver has been attracting attention, while the regional situation involving Iranhas remained tense under strong U.S. political and economic pressure on the Iranian regime. As thehigh-level tensions are feared to trigger some geopolitical risks, we must keep close watch on theIranian situation. In addition to the Iranian situation, the Middle East has many global
attention-attracting issues including a rivalry between Iran and Saudi Arabia as well as those
involving the regime and stability of Saudi Arabia. The United States’ involvement or engagement inthese problems is important.

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Regarding the United States’ involvement in geopolitical risks, an interesting discussion
came on Venezuela. The South American major oil producer has halved its oil production from morethan 2 million barrels per day to around 1.2 million bpd amid political, economic and social unrest.
As European and American countries have grown critical of dictatorial Venezuelan President Nicolas
Maduro, U.S. President Donald Trump has indicated potential military intervention in Venezuela,
leading the Venezuelan situation to grow more uncertain. In the panel discussion, participants
reaffirmed that the future course of Venezuela would be very important for anticipating the futureinternational oil market. Importantly, it was noted that as the protracted unrest has seriously affected
the Venezuelan oil industry with experienced oil industry people being lost, the Venezuelan oil issue
would take much time to be solved even after the possible resolution of the current political unrest.
Third, panel discussion participants were conscious that Asia has been the center of global
oil and gas demand growth, including China whose oil and gas demand has great influence on theglobal supply-demand balance. The speed or scale of China’s future economic and energy demand
growth attract global interest. As a significant factor affecting the growth, the U.S.-China trade war
has become an urgent challenge. Under the recognition that the U.S.-China confrontation represents
not only trade disputes but also structural clashes involving technological supremacy and otherstrategic problems, and global order, many people believe that it is difficult to expect bilateralstructural talks to produce any easy solution during the 90-day truce. However, President Trump
conscious of the approaching next presidential election and Chinese President Xi Jinping facing
economic growth deceleration may be eager to avoid economic deterioration and could strike some“deal” for a soft landing over a short term. Future developments involving U.S.-China relations willcontinue to exert great influence on global order and on the international energy market.
Fourth, it was important that a view that market conditions in Asia including Japan would
remain favorable in the immediate future for improving profit margins in the downstream oil sector
was given at the panel discussion. Japan’s downstream oil market has dramatically changed as theoperation of oil refining facilities has grown more efficient through industrial realignment. It is also
important that oil refiners’ profit margins can be expected to improve further as the International
Maritime Organization imposes regulations on the sulfur contents of shipping fuels in 2020. Given
that Japan’s oil demand is likely to decline in a long run even amid positive prospects for thedownstream oil sector, it was argued that appropriate industrial strategies for the future should be
developed and implemented while the market environment remains favorable for the next severalyears. This means that the Japanese downstream oil sector should take advantage of the current good
opportunity to get prepared for the next generation.
Fifth, how the long-term trend toward a low-carbon or decarbonized society would affectdemand for natural gas as one of the fossil fuels is uncertain. Over a short or medium to long term,
however, natural gas and LNG demand will continue robust growth mainly in Asia thanks to air
pollution concerns, according to a dominant view at the panel discussion. China has been
symbolically driving growth in natural gas demand. It replaced South Korea as the world’s second
largest LNG importer in 2017 and is growingly expected to become the world’s largest LNG
importer in place of Japan in the mid-2020s. A prospect given at the panel discussion was that theglobal LNG supply-demand balance will reach an equilibrium around 2020 following the present
oversupply and tighten later as LNG demand expands in China, India, Southeast Asia and South Asia.
However, such tightening may bring about the next investment boom and price hikes working todecelerate demand growth, leading to the next relaxation of the supply-demand balance. Given
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massive initial investment required for any LNG project, a boom and bust cycle is likely to berepeated. Amid such cycle, buyers and sellers in the LNG market must pursue truly sounddevelopment of the market.
In both oil and LNG markets, stakeholders will be continuously required to decide on
policies, investment or procurement even amid an uncertain or unclear market environment.
Prospects for the future oil and energy situation will remain important for the world and for Japan.

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