Taking the long view

The dual spectres of climate change and energy security present many challenges to global energy policy makers. In this interview, IFandP discusses the long-term picture with Dr Fatih Birol, chief economist at the International Energy Agency.

IFandP: Is there any advice you would like to give to power utilities in both OECD and developing countries? How do you feel they could best position themselves in the years to come?

Dr Birol: They should not be short-sighted – take a look at the longer term when they make investments. There are many challenges ahead, particularly with regards to energy security and climate change. Investment decisions do not always take into account such factors. A global agreement to reduce GHG emissions will involve reductions over a very long period, requiring a major transformation of the energy sector. The power sector will have to adapt to these new conditions.

IFandP: In the IEA’s recent press conference, you singled out wind power as the renewable source with the greatest growth potential. Why do you think this is the case?

Dr Birol: In many cases, wind power can now compete with fossil-based technologies and it gets a lot of government support, so we see a large potential for growth. A carbon price would make it even more competitive.

IFandP: How do you see power utilities dealing with the problem of intermittency created by increased wind power?

Dr Birol: At the moment, intermittency is not a major problem, because the share of wind is still small in most countries. But as its share rises, power companies will have to add backup power and eventually use storage technologies. They will also need to invest more to strengthen the electricity grid.

IFandP: How much influence did return on energy investment considerations will continue to gain ground at the expense of the independents. How do you see the latter adapting and what, if any, measures can be taken to counteract the under-investment typically seen in countries dominated by national oil companies (NOCs)?

Dr Birol: One way to deal with this is to create synergies between independents and national oil companies and also for consuming countries to increase investment in energy efficiency and alternatives to oil as this would help moderate demand and consequently take some of the burden from the shoulders of the NOCs.

IFandP: Many of the challenges highlighted by the WEO 2008 could benefit from a concerted international approach, yet the possibility of a supply crunch could result in greater resource nationalism. Is this inevitable or will skilful diplomacy and enlightened self-interest win the day?

Dr Birol: I believe the need for dialogue between producing and consuming countries to promote stability in the oil market has rarely been greater than it is today. All governments must work together to create an investment environment where the industry is able to accomplish its task of providing secure, affordable, clean energy whilst making a decent return. I am confident this is achievable and can assure you that the IEA is committed to playing its part in developing an increasingly productive producer-consumer dialogue.

IFandP: You predict the need for US$26tn investment package between now and 2030 in order to meet the world’s energy requirements. In addition to money, this will require a phenomenal amount of energy in itself. Is there enough energy readily available globally, assuming a business-as-usual scenario for the world economy, to realise all these needed projects?

Dr Birol: The world’s total energy endowment – including oil, natural gas and coal – is large enough for output to grow to meet the growth projected in the WEO 2008. But the challenge is whether the investment needed to turn these resources into production will be forthcoming in a timely manner. One particular uncertainty in this respect is climate policy. To provide adequate assurances about the circumstances that will govern future investment in energy-supply infrastructure, negotiations need to be concluded urgently on an international agreement on combating climate change and the implications for national policies quickly assessed.

IFandP: The WEO calls for the equivalent of six Saudi Arabias to be brought online by 2030 to counteract declining production in existing oilfields and increased demand. How feasible in your opinion is such a scenario?

Dr Birol: There is enough oil left in the ground to support demand until beyond 2030. After all, ultimately recoverable conventional oil resources are estimated at 3.5trn barrels and only a third of this total has been produced up to now. However, the bulk of the increase in world oil output is expected to come from OPEC countries, their collective share rising from 44 per cent in 2007 to 51 per cent in 2030. Their reserves are large enough to meet that challenge. But it cannot be taken for granted that these countries will be willing to make this investment themselves or to attract sufficient foreign capital to keep up the necessary pace of investment.

IFandP: To what extent in your opinion do efforts to limit climate change hinge on an agreement between the US and China?

Dr Birol: Both countries are major emitters and their engagement in a climate agreement is necessary. More generally, we need non-OECD countries to participate in a global agreement to reduce GHG emissions. Our analysis shows that if non-OECD countries do not participate in such an agreement, it will be impossible to get on a 450ppm stabilisation path, even if OECD countries reduce their emissions to zero by 2030.

IFandP: In the WEO, you are quite clear in your support for cap-and-trade systems for greenhouse gas emissions to be adopted by the major economies. Do you consider the problem of carbon leakage a substantial one and if so, how would you suggest that governments tackle the issue?

Dr Birol: A global cap-and-trade regime that is as inclusive as possible would reduce carbon leakage: the more countries that participate under the same constraints, the less the scope for carbon leakage and loss of competitiveness. International sectoral agreements provide a way of addressing these concerns. Other possible solutions include the free allocation of emissions allowances to affected industries and border-price adjustment mechanisms, under which importers pay a tax equivalent to the carbon price within the constrained area. But even in the absence of such policies, analysis suggests that any negative impact on competitiveness and emissions abatement may be small.

Dr Fatih Birol is the chief economist and director of the office responsible for the economic analysis of energy-policy at the Paris-based International Energy Agency (IEA). He oversees the annual ‘World Energy Outlook’, the flagship publication of the IEA. He is responsible for the recently-founded IEA Energy Business Council, which draws together leaders from the world’s foremost energy corporations to provide a business perspective on a broad range of energy market challenges.

Dr Birol has received several awards in recent years, including awards from the Russian Academy of Sciences, the US Department of Energy, the French and Austrian governments in recognition of his work in energy policy.

Prior to joining the IEA in 1995, Dr Birol worked for six years at the Organisation for Petroleum Exporting Countries (OPEC) in Vienna. A Turkish citizen, he was born in Ankara in 1958. He earned a BSc degree in power engineering from the Technical University of Istanbul. He received his MSc and PhD in energy economics from the Technical University of Vienna.