World oil markets are adequately supplied but oil prices of $110/barrel pose a risk to the still fragile global economic recovery, International Energy Agency chief economist Fatih Birol said Tuesday.
"I wouldn't say how much they should go down but where they stand today, $110/barrel, this is definitely not good news for the countries that import a lot of oil, and also natural gas whose price is indexed to oil prices," Birol said in an interview on the sidelines of the annual Oil & Money conference.
"In Europe, for the first time, this year we expect that the energy import bill will exceed half a trillion dollars."
Birol said he was concerned about the world economy in general and in particular that of China, which accounted for 40% of global economic growth over the past five years and half of the growth in world energy demand.
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CHINA CHALLENGES, IRAN'S RETURN
"If I look around, what worries me most is the global economic situation, especially that of emerging countries, because in the last five years 60% of the global economic growth came from the BRICS and in fact 40% came from China only. And China was responsible for half the growth in global energy demand," he said.
"And China's economy today [has] significant challenges, including the problems in the finance sector and in the property, the housing sector. I hope to see those problems addressed properly and that we see an economic growth of around 7% in China. If there was a hard landing this would not only have an effect on Chinese economy but on the entire global energy market and I would single out this risk as the main worry I have today when I look at the oil markets."
Birol said it was too early to talk about how the potential recovery of Iranian oil exports in the event of an early lifting of sanctions might affect oil markets and prices.
"This is a political process and how this political process will end up and what kind of implication it will have for the energy market is for me a hypothetical question now, and therefore I think it is too early to make an assessment for the energy markets," he said.
In its medium-term oil market report in May, the IEA assumed that US and European Union oil sanctions on Iran would have a significant impact on the country's crude production outlook, forecasting that Iranian production capacity would fall by 1 million b/d from 3.39 million b/d in 2012 to just 2.38 million b/d in 2018.
Birol said there was currently no reason to revise these projections.
"Currently the sanctions are in place. There is no sign that the sanctions are [to be] removed and I would still make my plans and projections on the basis of the current political realities, which are the sanctions, which foresee a declining contribution from Iran," he said.
Nor does Birol see any need for now to revise downward the IEA's medium-term outlook for Iraq, whose capacity he expects to reach 6 million b/d around 2020, which would be almost double the country's current output level.
In its medium-term report in May, the IEA trimmed its forecast for Iraqi output capacity slightly to 4.76 million b/d by 2018, saying that various "above-ground" challenges were slowing down development.
Asked whether a further downward adjustment was likely, Birol said: "Not for the time being, and I hope our adjustment was the last one to do. Our main expectation is that around 2020 Iraq can reach around 6 million b/d, and the main challenge here is the political challenge," he said.
"In terms of reserves, in terms of economics, there is no problem whatsoever," he said.
"We shouldn't forget one thing," he added, "that Iraq in the last three years made a major contribution already to global oil production growth."
Another country whose production potential is heavily linked to the political situation is Libya, Birol said.
"Libya's oil production potential is definitely there. But, again, in Libya [there are] political and management challenges which are the major barriers to coming back to the production level before the war, which is 1.7 million b/d," he said.
"These are not problems in terms of the technology or in terms of the reserves and economics. These are political and project management issues," he said, adding: "They can be overcome. The earlier the better for Libya and the development of the country, as well as for the global oil markets."
Birol acknowledged that the light tight oil revolution in the United States had implications for many producing countries and in particular for producers of crude similar in quality.
"Therefore this may have implications for countries like Nigeria," he said. "However, looking at the medium and longer term, I think the major challenge for Nigeria is not what is happening in the US markets but more the investment framework and the security of the workers, the companies and the industry there," he said.
The rise in US production is already having an impact on world oil markets, but will not change the status of the Middle East as the world's top oil producing region.
"The light tight oil coming from the United States is definitely affecting the markets, but I believe that the Middle East will remain the 'hub' of global oil supply for many years to come," he said.
--Margaret McQuaile, firstname.lastname@example.org
--Edited by Maurice Geller, email@example.com