An inevitable step

An inevitable step

Giancarlo Strocchia
Interview with Christoph Frei, Secretary General, World Energy Council. While the world's chancelleries appear to analyze the world's energy fate based on the outcomes of oil agreements, many of them seem determined to use production and consumption models focused on other sources. What will the new balance be?

For some time, Vienna has been the center of the world’s energy fate, and more. For example, many global economic growth projects depend on the results of the OPEC agreement on oil production cuts,  painstakingly reached there in November of 2016. On the other hand, a growing portion of the international community is now willing to strongly defend the results of another agreement  - that reached in Paris during COP21 - that aims to safeguard the planet from the increasingly ominous effects of climate change. At the center of this shift are a wide array of international institutions, including one of the most prestigious, the World Energy Council (WEC). We have therefore felt it appropriate, in the pursuit of complete information, to request the authoritative opinion of Christoph Frei, Secretary General of this major international organization. We met Mr. Frei in Rome during the presentation of the 2016 World Energy Scenarios. In your opinion, what effects will the cut in oil production expected from the latest agreement between OPEC countries have on the global energy sector and what countermeasure will be played out by the role of non-OPEC producers? I think it is necessary to make a distinction between long and short-term prospects. Looking at the short term, we can see that, historically, low oil costs have always favored growth. In the same way, this situation inevitably also involves some disadvantages: during a period of low prices, producing countries suffer, with direct and indirect consequences on the global economy. This is a phenomenon we have already witnessed, and this is why I believe it is in the world’s interests to find a balanced price. I believe that the measures implemented so far have been taken for this purpose and, to some extent, seem to be working. The same situation, in my opinion, if assessed over a long distance, has negative connotations. Low prices, especially when they involve economies centered mainly on energy resources, affect the possibility of investing and supporting consumption, therefore affecting global growth.

OPEC's action has often been hampered by the positions taken within the organization itself. What were the elements this time that enabled the agreement to be reached?

I would bring attention to the two key principles that, in my opinion, have made OPEC a successful cartel. First, the most obvious and predictable: by reducing the overall production of crude oil, prices increased immediately. But there is an even more important principle that results from a reality defined by an economist called Harold Hotelling. By constraining the volume of production, positive effects are not only seen in the short term, but also in the long term, because the marginal value is expected to go up due to innovation and other external factors. Now, putting that into the context of stranded reserves, the marginal utility of resources no longer goes up but, actually, the opposite happens. This is why the international community is encouraged to increase its oil reserves as quickly as possible, which goes against the price logic. On the one hand, in the short term, there is a strong global interest in maintaining a degree of equilibrium. While on the other hand, these dynamics seem to clearly suggest that, in the long term, there is not necessarily a sound basis so that oil prices can continue to go back up. OPEC and many other countries are seriously trying to get to grips with this situation. We have seen how Saudi Arabia is restructuring its policy and I sincerely think that the future reality is different from what we have seen in the past, including in OPEC.

Apart from the agreements reached, what role will high-energy demand countries, such as India and China, for example, play in the formation of crude oil prices?

China has proven to be extremely proactive, by investing mainly in renewables and implementing, in a manner I call symphonic, a series of possible measures for combatting energy poverty, which affects around a billion people. Beijing is currently trying to get away from coal, by increasing its energy efficiency levels, decreasing the water footprint, and addressing a whole range of issues in a very thoughtful way. So, I think China may, going forward, take on an increasingly important role, both nationally and internationally. India, for its part, on the other hand seems to have remained behind, but is starting to look at solar power as an opportunity. ''King Coal'' is still in India, but I think that solar power is making its way, together, obviously, with the new business models we have seen everywhere. These new opportunities will change the reality also in other countries, beyond China and India and including those in Africa. As regards the emerging countries, the question is different, and is that which we have asked in the past: can we imagine a leap forward in the energy sector? In past years, it was always that this would not be possible. However, business models now show that there may truly be possibilities for these countries, which do not yet have the infrastructure needed to take a real leap forward.

Christoph Frei

Christoph Frei

Born in Switzerland, he has been Secretary General of the World Energy Council since April 2009. He is an Adjunct Professor at the Swiss Federal Technical Institute in Lausanne (EPFL). He is also a member of the World Economic Forum's Global Agenda Council on Energy Security

An energy scenario, therefore, that moves between the rebalancing of the energy market and the increasingly strong drive towards what seems to be an inevitable transition towards alternative sources and renewables.

First, from the global scenario, it is clear that the transition process is already on the way, unlike what we would have predicted just three years ago. If I had to sum up in four key points the current context and changes in the global energy scenario, I would say that, first, we are entering a totally different growth reality from the past. To date, we have been used to a reality characterized by steady economic growth and positive development prospects for certain types of activities. Following the sharp slowdown in population growth, the per capita energy demand will reach its peak before 2030. This doesn’t mean that all aspects of energy peak. Gas and electricity are two key components that are continuing to grow, but the peak will mainly affect sectors such as coal and oil, and this is where the final per capita demand will increase. Secondly, according to statistics on growth, there are three main factors that can lead us to change. The first is decarbonization, or the acceleration of the process of taking the global percentage from 1 to the 6 percent that it would take to prevent the temperature of the planet from exceeding the ''critical'' two-degree increase threshold. The decarbonization plan obviously means that some countries have to deal with the phenomenon of stranded resources such as coal and oil. But the decarbonization process is also inevitably linked to the policies implemented as part of global trade agreements, and more. The second significant factor consists of a new business model, and I believe that this is the topic of most interest to businesses. Concepts such as decentralization, the full transition to digitalization and the question of zero marginal cost are naturally coming into energy. This is added to the fact that, nowadays, there are no major obstacles for accessing the market of the various types of energy, unlike in the past. The third factor affecting the growth in energy demand is resilience. What are the risks of cyber-attacks in the energy sector? The changes recorded in this sector are nothing short of dramatic, and a lot of work has been done to understand how best to prepare for bad weather. I believe that we are faced with a very significant period of transition, in a scenario characterized by a different type of growth and driven by decarbonization, with new business models and new risks that require great stamina in the face of adversity.

According to you, what is the best way to react to such rapid changes? Is the world of energy prepared to respond to all this?

The only way to respond to the speed of changes and the clouds of uncertainty is to look at the portfolio that ensures greater flexibility, allowing you to look at the talent required in this predicament. The current situation expresses a complexity that is greater than ever. Therefore, the key to everything is to look at the talent that is capable of understanding the three driving forces for change in a different context and actually make the decisions. Developing the talent is not trivial. I think it takes an unprecedented effort to implement all possible measures to provide the leadership and develop the talent needed to cope with this transition. I believe that all efforts must go in this direction.

In your opinion, what role could the major national and international institutions, such as OPEC itself, play in such a context?

On the institutional side, the World Energy Council has compiled scenarios that enable us to better understand their role and, in summary, I think I can say that the future that awaits us is not perfect, but we will be able to reach many objectives in terms of energy. Specifically, technological innovation will be greater, in terms of energy efficiency; the change advancement process will be faster. If, on the other hand, you build up trade barriers, the opposite happens. Therefore, the first task is to make sure that these technologies are disseminated in an efficient, widespread way. Secondly, the institutions must not stand away from the importance of continued progress and climate agreements. The decisions made in Paris are only a third of the way from what really needs to be done to meet the two-degree threshold increase in global temperature. I believe it is crucial to acknowledge this reality. Great progress has been made, but the process is still underway and is part of a much longer road and we are not yet at the end. Third point: if we consider the solutions to resilience, such as the challenges and the fact that we need to share the greenest and most effective resources, regional integration is a significant part, so it is important to have the support of international institutions, to work with development banks and with the governments of the various countries to promote integration.