Sustained Brent crude prices over $100 a barrel will cause as much damage to the global economy as the record prices of 2008 which preceded the financial crisis, Nobuo Tanaka, former executive director for the International Energy Agency (IEA), said on Monday.
The burden of high energy costs on growth contributed to the sharp slowdown in the global economy in the wake of the financial crisis in 2008. High prices led to such a sharp slowdown in fuel demand that oil producer group OPEC was forced to make record output cuts.
“If $100 oil continues, it will be as bad as 2008,” Tanaka told the Singapore International Energy Week (SIEW) conference.
Brent at over $100 would cut global oil demand by around 1 million barrels per day (bpd) from what fuel consumption would be at a price of $70 to $80 per barrel, Tanaka said. That would slice over 1 percent from the world's total fuel consumption.
A price of $70 to $80 was just right for producers and consumers, he said. Anything less was not enough to encourage producers to invest in increasing output, while anything more was detrimental for the global economy, he said.
Brent crude has stayed above $100 a barrel since February, when civil war cut output from OPEC producer Libya. The price has averaged over $111 this year. Brent traded at near $109 on Monday.
The IEA had coordinated a release of oil from emergency stocks this year to help avoid a sharp slowdown in the global economy sparked by high oil prices, Tanaka said.
“We should use the IEA stock release to make a soft landing rather than the hard landing of 2008,” he said. Tanaka was the head of the West's energy watchdog until the end of August and at the helm during the stock release.
Given the increase of demand led by China in Asia, and the growing role of the region in the global oil market, IEA member countries and Asian governments would need to cooperate on emergency oil stockpiles, Tanaka said.
Otherwise, any future release from stocks by the IEA would have a diminishing impact, he added. “There are several options for emerging Asian economies, they can join the IEA or build a new IEA for Asia.”
The only way for Asian and other countries to increase their energy supply security was to coordinate, Tanaka said.
“One cannot enhance energy security by risking somebody else’s,” he told the conference.
Japan will need to import an additional 500,000 barrels per day of oil if all nuclear reactors in the country are shut, Tanaka said, adding the country would also need to import 30 billion cubic meters of gas per year to compensate for lost power supply from nuclear plants.
No reactors taken offline for routine maintenance have been restarted since a devastating March earthquake and tsunami triggered the world’s worst nuclear disaster in 25 years at Tokyo Electric Power Co’s Fukushima Daiichi plant in Japan’s northeast.
Nuclear policy in Japan was in a “chaotic situation,” Tanaka said, due to the understandable public concern about safety. A full nuclear shutdown would cost Japan 3 trillion yen, he said, and for that reason alone, it was logical that a restart in nuclear supply should come early next year.
“I hope Japan will take a very responsible, very rational decision on nuclear eventually,” he said.
The nuclear disaster and the loss of Libyan oil supplies had made policy makers’ planning for future energy even more fraught, he said. Gas was likely to form a bridging fuel and producers needed to invest in shale gas and other unconventional gas supplies worldwide, he added.
Power grids in Japan, Southeast Asia and elsewhere needed to be better connected to guarantee supply security, he said. That supply needed to come from as wide a variety of sources as possible, be they oil, renewable, nuclear or coal.
“Security of power supply is the challenge of the 21st century,” he said. “Security of oil supply was the challenge of the 20th century.”