March 15, 2016
Low Oil Prices: Good News at the Pump, Bad News for the Environment?
Interview with Ken Koyama, Chief Economist and Managing Director at the Institute of Energy Economics, Japan
By Ashish Kumar Sen
“It may have an impact on the energy choice and, as a result, on global CO2 emissions as a whole,” said Koyama.
Japan imports most of its oil and gas from the Middle East. It was forced to reduce its energy imports from Iran as a result of international sanctions over the Islamic Republic’s nuclear program. Now, under a deal Iran struck with the P5+1 countries—the United States, the United Kingdom, Russia, China, France, and Germany—in July of 2015, those sanctions will be lifted in exchange for Iran curbing its nuclear program. That is good news for Japan, said Koyama. He predicted Japan and Iran would soon ramp up their energy ties.
Ken Koyama spoke in an interview with the New Atlanticist’s Ashish Kumar Sen on a visit to the Atlantic Council in March. Here are excerpts from our interview, which has been edited for clarity.
Q: What new opportunities does the lifting of sanctions on Iran create for Japan and what is Japan doing to avail of these opportunities?
Koyama: Any increase in the supply of oil or natural gas to the global energy market has a positive effect [on] either supply and demand fundamentals. As an importer of natural gas, Japan will benefit from the increase in supply from any country, including Iran. Japan used to import lots of oil from Iran. Under the sanctions, Japan reduced [imports of Iranian crude oil]. Once Iran comes back into the international oil market, Japan may find that Iranian oil is economically attractive. Subject to that economic attractiveness, Japan may also find that Iran is [again] a good crude oil source.
Japan and Iran have a longstanding [and] very good relationship. [With] the expectation of sanctions [being] lifted and Iranian oil coming back [on the market], I think there [are] ongoing negotiations between the counterparts in the energy sector in both countries and the governments will also think that lifting of sanctions may be a good opportunity to enhance the economic and energy relations between the two countries. So, something may happen [in] the two countries’ energy relationship.
Q: What impact has the decline in global oil prices had on Japan?
Koyama: Japan is a large-scale energy importing country. In terms of fossil fuel, we are almost 100 percent dependent on imports. Declining oil prices and commodity prices is, of course, economically very good [for Japan] particularly in contrast to the difficult period after 2011 up to the first half of 2014 when the oil price exceeded $100/barrel. That coincided with the difficult time Japan suffered from the Fukushima nuclear accident. Japan needed to procure a huge amount of additional oil, gas, coal from the international market because of the need to offset the decline in nuclear power generation.
In a low-price environment, our trade deficit significantly decreased and our energy costs declined. [The fall in energy prices is] a kind of tax break for consumers in Japan.
Recently, we realized that too low prices have a potentially negative consequence for Japan, but also to the world as a whole. The price decline has contributed to concerns about instability in the global economy. A lower price may also hinder the promotion of energy saving efforts, the [promotion] of non-fossil fuel energy like renewable and nuclear, and pose a problem for stability in the producing countries.
Q: Could you elaborate on the impact of low oil prices and increased consumption of fossil fuels on efforts to move consumers toward clean energy?
Koyama: If the price of a commodity declines it will naturally give an economic incentive to use more. Typically, we noted that oil consumption in the United States rebounded very strongly [because of] a lower oil price. Theoretically, if the low-price environment continues it may stimulate the consumption of oil products and this may happen as [long as] oil prices remain low.
At the same time, we should also pay attention to another ongoing trend in the improvement of fuel-efficient vehicles. Also, in the low crude oil price environment, many developing countries are now starting to remove fuel subsidies. We need to closely watch what all this means in terms of the impact on the growth of oil product consumption.
Generally speaking, I think the low oil price may become a factor to slow down the incentive for efficient use of oil products. As for non-fossil fuel use, I think that as energy options compete with each other—when the fossil fuel price declined significantly and is expected to continue to be a very low range of price—this will possibly affect the development of non-fossil fuel power generation like renewable and nuclear power. It may have an impact on the energy choice and, as a result, on global CO2 emissions as a whole.
Q: What should Japan be doing to diversify its sources of energy and thereby ensure its energy security?
Koyama: Most importantly, last February we noted that there is increasing potential that the United States will become a significant exporter of energy to the global market. The typical example is the large-scale energy export project being planned and implemented in the United States. We expect that around 2020, US energy export volume may surpass sixty million tons and [will be] very close to [one of] the world’s largest energy exporters—Qatar’s export level. Some Japanese companies have already decided to import energy from the United States and this is a good example of how Japan is [diversifying] its import source.
US LNG (liquefied natural gas) has advantages of flexibility of contract terms and supply, and is also priced off the domestic Henry Hub, which is quite different from Japan’s traditional LNG, which is linked to crude oil prices. One of the very important topics for energy imports diversification is US energy.
Q: What can Japan do to help Middle Eastern oil producers that are struggling with low oil prices?
Koyama: The lowering of oil prices creates a lot of challenges and difficulties for major exporters in the region. Some rich oil-exporting country may endure a low-price environment [longer than] others. We in Japan think that depending on one single source of revenue may be economically risky. Many oil and gas exporters in the region are a so-called monoculture economy. They need to diversify their economic structure—or [upgrade] their economy. Of course, the upgrading or diversification of the economic structure will probably take decades. But I think countries in the Middle East need to really think seriously about economic diversification, to which Japan may help or contribute together with some other industrial nation like the United States.
Q: What are your thoughts on the solution proposed by Saudi Arabia and Venezuela to freeze oil production? Is that a solution that can work without getting Iran on board?
Koyama: If we closely look at the content of the so-called freeze agreement, there are several issues to be very carefully considered. Firstly, it is a freeze agreement not an agreement to reduce production. The level agreed to freeze is extremely high. In January this year, OPEC’s production level was historically high. So also [was the case with] Russia. Given the current surplus situation in the market, [whether] maintaining a very high level of production is good or not is questionable. Also, the agreement has a condition that some other major exporters, like Iran or Iraq, need to agree with this freeze. This is also a very challenging condition.
I think this is a first step for coordination among major producing countries…although the effectiveness of the current agreement may be questionable.
Ashish Kumar Sen is a staff writer at the Atlantic Council.