The following Q&A is an edited version of my conversation with Fatih Birol, executive director of the International Energy Agency, at the FT Commodities Global Summit on September 28.
The virtual conference examined trends in the global energy transition from fossil fuels; dislocation in the energy market caused by the coronavirus pandemic, stress on petrostates and progress by leading economies towards meeting their commitments to the Paris climate change accord. It occurred just before the IEA’s release of its latest prediction of long-term energy trends last week.
Moderator: David Sheppard, Energy Editor, Financial Times: The coronavirus pandemic has upended global energy markets but we’ve also seen a renewed commitment from many countries to finally mounting a serious challenge to climate change.
Is 2020 turning into a landmark year for the global energy system and where do you see us going next?
Dr Fatih Birol, executive director, International Energy Agency: During the last several months we have all understood how essential energy is for our social lives and our economies. Without energy we could not run hospitals, we could not have IT up and running, we couldn’t have trucks bringing vegetables to market. So energy is essential to us. We have understood that energy is a good thing — but what is bad is emissions.
At the IEA we look at the implications of Covid and the energy sector day by day. Our expectation is, in mid-September, that global energy demand will decline by about 5 per cent [in 2020]- which is seven times larger of a decline compared with the 2009 financial crisis.
Oil is the worst-hit fuel. Year-on-year we expect oil demand to decline by about 8m barrels a day, but the same applies to coal and gas. Renewables are a bit more resilient to the coronavirus crisis, mainly because of the many government-backed guarantees for renewable consumption. And there has been a huge decline in global [carbon] emissions. This year’s decline of about 7 per cent is compensating for the increase in global emissions of the last 10 years. That’s a big decline.
The question here is critical — are we going to see emissions coming down as a result, not of government policies or technical innovation, but as a result of economic crisis and the health implications of Covid? And are we going to see emissions, with the bounce of the economy, going up?
Again, we can look at the financial crisis of 2009. We saw a decline of emissions in 2009 but, with the global economic rebound of 2010, we saw skyrocketing global emissions growth. Are we going to see [this pattern] again or not?
Here the key question is the polices of governments and companies. More governments are coming with commitments — some of them to be net-zero [in carbon emissions] in 2050 while some have less strong targets.
We also have [climate change] commitments from many companies, but here I want to explain a bit. When I read the newspapers, oil companies that are making commitments — this European company, that European company, that American company — well, if you look at the numbers, if you put all these oil companies, which are covering 90 per cent of the pages of newspaper coverage about those making net-zero commitments, they are making less than 10 per cent of global oil production.
There are a huge amount of oil companies in the world which have not yet committed themselves to CO2 reductions.
David Sheppard: Are you becoming more confident that we can hit the target of limiting temperature increases to less than 2 degrees as set under the Paris climate agreement, or will the economic side of the crisis slow down the changes we need to make?
Fatih Birol: This a very bleak year, but I am more confident than ever for the clean energy transitions. For four reasons:
One is that solar, and also offshore wind, have costs that are plummeting very strongly. Solar today is becoming the cheapest source of electricity generation in many parts of the world and offshore wind is coming down very strongly.
Second: many of the clean energy technologies require an upfront substantial amount of investments. And when you look at the several central banks around the world which are setting ultra-low interest rates as an important part of monetary policy, this may well help those clean energy technologies to find their first investments.
Third: more and more governments and more energy companies and giant technology companies are coming on board and stepping up their efforts.
Fourth, and finally, is innovation — the pace of innovation is getting stronger, especially in the areas of hydrogen, and carbon capture and storage.
So, putting all of these things together, I am optimistic there is momentum and this might well be a turning year for the energy and climate change and governments are still sitting in the driving seat.
David Sheppard: Many of the plans to hit next-zero targets rely on technologies such as hydrogen or carbon capture and storage which are not yet scalable or economically viable. How confident are you that these technologies can start to compete in the open market?
Fatih Birol: In order to reach the net-zero global target by 2050, half of the emission reductions need to come from technologies which are not yet commercially available. CCS [carbon capture and storage] is one of them, hydrogen the second. But CCS has strong momentum now. An excellent example is Norway. They are putting a lot of emphasis on CCS and is it going a lot of places.
Hydrogen is the same — I have worked on the energy issue for three decades. I have never seen any technology which enjoys such universal support of all governments. Normally, governments have different views — on nuclear, gas, oil, coal, electric cars, but when it comes to hydrogen, everybody loves hydrogen — and many governments are putting in hydrogen strategies, one after the other.
If we are serious about arresting climate change and solving the problem, we cannot do it solely with renewables, as most renewables are used for electricity generation. We have other parts of our energy system that we have to decarbonise — iron and steel, petrochemicals sectors, cement, long distance transportation — and here we need CCS and hydrogen if we were to solve this problem. We cannot solve these issues only with renewables in those areas.
Many governments and companies are pushing these technologies, not mainly because they want to be part of the solution, but they also want to be the industrial leader of clean energy technology in the future. They also have a business approach to the issues in addition to a social one.
David Sheppard: When you see countries making bold commitments on climate change, does it make you think that a potential peak in oil demand has been dragged forward by this crisis?
Fatih Birol: The peak in oil demand, in the short- to medium-term, will not be as a result of what we are seeing with behavioural changes [caused by the pandemic]. If governments do not take strong measures very quickly, especially in two areas — electric cars and the petrochemical industry — I don’t expect oil demand to peak.
If the global economy recovers quickly, in this context, in the geopolitical context, I can see that it goes 100m barrels a day and even beyond [pre-crisis demand levels] — but this might well be hindered by the right government policies in place.
David Sheppard: We have spoken earlier this year about the terrible impact the violent crash in oil prices would have on the poorer countries in Opec and other oil producers, many of which are almost entirely reliant on oil revenues to fund their governments and social programmes.
If we see the peak in oil demand in the next few years, what should those countries be doing to prepare for such a scenario?
Fatih Birol: April may go down in the history of the oil industry as “Black April”. We have seen negative oil prices in April. This is perhaps the last opportunity for an ‘exit’ for the many oil-producing countries — countries whose economy critically hinge on oil prices. Not only demand will be affected by clean energy transitions, but also the price will be affected.
We think oil prices may be more modest for some time to come because of economic recovery from Covid and all these new technologies we are talking about.
In the last couple of decades, there has been a lot of discussion about the diversification of the economies of those countries — but I think it has never been urgent than it is today.
But, unfortunately, it happens that this change in the course of these countries comes at a time when most of these countries don’t have the funds to change economic direction.
But it is a must. We see examples today — Iraq, Nigeria, Libya, Venezuela and others — even some countries which have a stronger financial position that are going through very difficult times. There is no way out for these countries except to diversify their economies away from oil and gas.
There will be no oil and gas company and no oil and gas country which will not be affected by clean energy transitions.
David Sheppard: In April you led the IEA in supporting oil production cuts by Opec and other countries to prop up the price at a very difficult time for the global energy industry.
Should large developed countries be changing how they think about oil prices and not always assuming lower is better, given the need to fund the energy transition?
Fatih Birol: The IEA was founded as the “anti-Opec” — but we have changed a lot. We look at all the fuels, all the technologies and, today, I can proudly say that the IEA is the global leader of clean energy transitions around the world.
In the past, we were considered the rich man’s energy club. But in the last five years, we have now China, India, Indonesia, Brazil, South Africa that have become part of the IEA family.
There are two big strategy changes for the IEA. In the past, the motto was “the lower the oil prices are, the better it is”. I don’t agree with that. I believe that oil prices at $10 [a barrel], that we have seen, I didn’t think it was the best thing for the global economy and for the developed or developing countries and, therefore, a reasonable price would be much better.
Oil is still the most strategic commodity in the world, and a crash of the oil markets could have major implications for the financial stability of the world.
The crash of the oil markets [helped nobody] and I think today there is more stability. But I am telling to my Saudi friends, my friends from the Middle East and everywhere: you have to diversify your economies — you cannot rely on oil for years to come . . . demand for oil will be weaker and weaker in the future, so, therefore, please prepare your economies accordingly.
In many countries, oil revenues are also a guarantee for the social stability and political stability of those countries. As such, it has implications beyond the energy sector.
David Sheppard: China has now committed to reaching net zero emissions by 2060. How confident are you that the US will follow China in making a commitment towards hitting net-zero, to give the world a real shot at reaching the Paris targets?
Because it seems apparent that without the world’s two biggest economies on board, these plans will struggle.
Fatih Birol: China’s announcement of President Xi [Jinping] was of historical importance. Why? Because . . . China has been the largest emitter in the world. It emits about 25 per cent of [global] emissions. It’s a very welcome announcement. I would like to see how this peak emissions within this decade will happen in China — what are the policy buttons that China’s government will push?
There is a very important opportunity — very soon will they will publish the next five-year plan in China which will tell us how serious the China government is. I am sure they will make the right announcements. When it comes to the US, believe it or not, in 2019, and 2020 the largest reductions in emissions in the world came from the US — because of the very strong role of solar, wind, and natural gas replacing coal.
I hope the US government continues to press the buttons for the green energy transitions . . . as the US is the second-largest emitter after China today. If these two countries plus Europe and other major emitters all come together, I am optimistic that the world can reach its global energy and climate cause in a timely manner.
We have the technology coming through. We need the political determination to all come together as a grand coalition. There may be differences between us but it [tackling climate change] is a major issue I am sure we can make this happen — and the IEA is doing it’s best to bring this grand coalition of these countries together.