Spencer Dale joined global energy giant BP as group chief economist in October 2014. Prior to that, he was executive director for financial stability at the Bank of England. In an exclusive interview with Muscat Daily during his recent visit to Oman, Dale talked about a wide range of issues in global energy markets: Oil prices and oil demand outlook, the role of renewable energy in global energy-mix and growth of electric vehicles (EVs). The chief economist of BP said that higher oil prices are unlikely to persist in the long term.
It's been one and a half years since OPEC+ had agreed to cut output to boost oil price. Do you believe oil markets are balanced now, and which factors are presently driving oil prices?
The strategy of OPEC nations and their partners has worked well and this has been reflected in increased oil prices. The clearly-stated objective of OPEC+ was to reduce oil inventories to a normal level - to the level of the five-year moving average. The figures published by this group showed that inventories have declined to that targeted level in recent months. I would say OPEC+ have demonstrated their ability in stabilising the oil markets. Effectively, they have been successful in balancing the markets and oil prices have increased.
However, part of the recent increase in oil prices can be attributed to the worsening political and economic situation in Venezuela and the US administration's decision to pullout from Iran nuclear deal. There is an uncertainty over the situation in Venezuela and about Iran's oil exports. Developments such as these can further send oil prices higher.
With Brent near $80, is the worst over for oil producing countries and big oil companies?
At BP, we are making our decisions and investments based on an oil price assumption of around US$55 per barrel for the next few years. I believe this is a sensible assumption for planning things at the company.
While Brent is currently near US$80, I do not think producers should believe that life can go back where they were before 2014. My best guess is that oil prices won't persist at the current level in the long run.
The key message for oil-rich Gulf nations is the need to diversify economies away from oil. We can see an example of this in Saudi Arabia's Vision 2030, which the kingdom is pushing hard. Similarly, Oman is also focusing on economic diversification. It's important for the Gulf countries to keep pushing for economic reforms and diversification efforts.
Can we expect crude oil to go beyond $100 again?
Oil prices can move all over the place, in any direction. I always prefer to avoid predicting the oil price. My best guess is that the current level of higher oil prices is not likely to persist in the long run. These higher prices may persist for a period of time only. At BP, we do not expect oil to stay as high as it currently is in the long run.
After the oil price crash in 2014, there has been a steep drop in upstream investments globally. Do you think this fall in oil investments could create bigger problems in terms of supply shortages in future?
I agree that there has been a significant reduction in normal investment spending in the past three years. But we have not yet seen the full effect of this reduction in spending in our outlook for oil supply.
Many people do believe there could be a real supply crunch at some point in next two-to-three years due to weaker upstream investments. But there are some areas where investments have picked up substantially, particularly in the US shale and tight oil activities.
My guess is that the US shale has the proven ability to significantly increase supply which can offset any shortages from other parts of the world. So, overall I am less worried about supply shortages in future.
Given the experience of past oil price cycles, could the higher prices harm producers in the long term?
I don't think higher oil prices are good for anyone in the long term - and this includes oil producers.
Higher oil prices would slow down global economic growth, which then would result in weaker oil demand. And higher oil prices would also make alternative energies, such as renewable energy and electric vehicles, more attractive in the long run which could further impact the demand for oil.
On the other hand, there is also a need for oil producing countries such as the Gulf nations to diversify their economies. If oil prices remain higher for a long period, the urgency to do this can move away as people and governments start believing that they do not need to quickly diversify. Higher oil prices should not take away the urgency for the economic diversification in oil producing countries.
Shale oil revolution transformed the energy landscape in North America. Do you think the shale revolution can be replicated in the Middle East or other parts of the world?
There was a perfect set of factors in America which enabled shale revolution to happen. I believe shale oil and gas can be developed in other parts of the word as well if the suitable factors are present there.
For example, some of the learning and knowledge that BP acquired from shale business in the US are at work at Khazzan gas project in Oman. Khazzan is a tight gas project and one of the reasons that BP has been so successful at Khazzan - where other companies had failed - is that BP has brought its learning and knowledge from its US shale gas business and used it in Oman.
There is the possibility that shale projects can happen in other parts of the world as well - certainly America's geology is not unique, there are many other parts of the world that have shale deposits. However, I'm not sure about prospects for shale oil in the Middle East because there is so much conventional oil available in this region. But other parts of the world such as China and Argentina have shale oil and gas reserves.
The success of the American shale revolution was not only due to what was below the ground but what was above the ground which made it possible. There was a perfect set of factors in the US: A political and business environment that encouraged competition, the nature of land ownership rights which provided incentives to land-owners for exploration and production of minerals, and an efficient oil industry infrastructure such as the network of pipelines and logistics. So, the message from the American shale revolution is that what is above the ground is just as, or more, important than what is below the ground.
The world still depends heavily on fossil fuels, but at the same time renewable energy and electric vehicles are growing rapidly. How long it will take renewable energy and EVs when they will start significantly denting global oil consumption?
EVs have grown rapidly in the past few years and this will undoubtedly continue. As per BP's 2018 Energy Outlook, there are currently 3mn electric cars on the planet. And in one of our scenarios this number would rise to more than 300mn electric cars by 2040.
For renewables, our estimate is that wind and solar power will grow more quickly than any other energy source over the next 25 years.
The global economy is growing significantly and most of the growth is coming from the developing world, particularly from fast growing Asian countries like China and India. With this fast-paced growth in the developing world, our estimate is that nearly a third of world's population (around 2.5bn people) will be lifted from lower income to the middle-income level. So the world will need more energy to meet their growing demand for energy and transportation.
In line with the world’s efforts to reduce carbon emissions, I believe the use of renewable energy and EVs will continue to grow rapidly in the coming years. But oil and gas will continue to be a very significant part of global energy mix, although their share will decline.