Low oil prices could give Gulf States social problems – World Petroleum chief

With the price of oil in free-fall, countries across the globe are beginning to experience budget problems. As the ‘black gold’ becomes cheaper, this threatens the economic and social wellbeing of many nations. The proponents of green energy claim the days of fossil fuel resources are ending, however, OPEC members still refuse to step in and save the falling market. Is there a chance that oil will rebound? And is the renewable energy really a threat to fossil fuels? We ask the President of the World Petroleum Council - Jozsef Toth who is on Sophie&Co today.

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Sophie Shevardnadze: Jozsef Toth, President of the World Petroleum Council, welcome to the programme, it’s great to have you with us. Now, mr.Toth, Goldman Sachs predicts oil will slip to just $20 a barrel. Now, Russia’s Rosneft is hopeful it will actually hit $170 in the next 20 years. Now, with experts giving such varied estimates, no one can predict its future. Is it that everyone is clueless, or is it even possible to predict?

Jozsef Toth: I don’t think it’s possible to predict. In 2008 we had similar case, there were predictions for over $200 and just an opposite happened, and the prices, by the end of 2008, went down to around $30 per barrel, so predictions are very difficult, and our organisation is a type of organisation which makes predictions. There are institutions, who do make these, and they are valued according to their predictions.

SS: Okay, but let me ask you, your expert opinion - what would be fair for producers and buyers? What price would you think is fair?

JT: Definitely not at this level. The reason for that is that different resources can be exploited at different cost. There are luckier countries who can exploit and produce at lower cost, but the majority are able to produce it for higher price…

SS: So, give me a number, an approximate number?

JT: The lowest cost is definitely below $20 per barrel, production cost, and the higher cost goes up in the range of $100 per barrel.

SS: So, I guess the experts weren’t too far off, predicting some $170 and others $20…

JT: Yes, but this predictions may be based on different elements, which may be speculative, may be other reasons...Definitely, to answer your question, I personally think it would be fair nowadays, between $60 and $80 per barrel.

SS: Wouldn’t that make Russians happy. I want to talk about OPEC. Now, in June, OPEC once again refused to curb oil production. Why doesn’t it intervene and stabilize the over-supply at markets? I mean, does OPEC still have that much control over the price of oil?

JT: OPEC is very significant producer, the group of countries that are very important producers, so they had a practice so far, that they try to modify their production scheme in case there was an interest in finding more stable price situation on the market. It seems to me that this practice is not done again.

SS: But are OPEC members the only ones who need to curb production?

JT: No. This is according to their autonomous rule. If they decide to control their own production, this is up to them to decide. This is a group of countries, exporting countries, they may decide. Now, the latest decision was that they don’t want to curb and modify their production scheme. 

SS: Well, Iran, Venezuela and Algeria have openly asked and expressed their wishes to OPEC to actually curb production. But then you have Saudi Arabia and other Gulf allies that are desperate to keep producing. Why is everyone following the Saudi lead on this one? I mean, what’s the point of OPEC if member-states don’t work together?

JT: This is up to them to decide according which rule they are operating. I think, I am not familiar with the details of the mechanism of their decision-making - whether that a majority decision or unanimous decision should be the best for them, but this is up to them to decide. 

SS: Okay, I am not asking you to speak from the name of OPEC, but this is a huge topic and everyone who is in oil is discussing this. I am asking your opinion - why do you think that OPEC decided to follow Saudi Lead on this one to actually not curb the production while other members are asking to do so? What’s behind it, in your personal opinion. 

JT: Well, this is to secure market share, definitely. The reason why it came to the surface, this problem, is due to the fact that the shale oil production in the U.S. increased significantly so it means that the import demand for the U.S. decreased significantly, so consequently, of course, the oil which was produced, they would like to sell it - so, for me, it’s understandable that the countries which would not like to lose their market share, they are not interested in curbing the production, and there are some other countries, like Iran and other countries who would like to have a higher level of price - for me, it is understandable, difficult to influence from outside. 

SS: And then you have China, which has been buying record amounts of oil lately and, you know, briefly becoming the world’s top importer. Why isn’t this type of demand pushing the price up? And, will it drop further, if the slowdown in the Chinese economy prevents further mass-importing?

JT: Demand in China has increased significantly in the past few years, basically due to the motorisation and this is now reaching close to peak levels. It cannot be expected that in the future the same growth rate in the car population can be reached - so I think China’s importance in the quantity of oil required will remain, but will not significantly increase in the future. This could have been foreseen, this was evident that if reaches the top, then it will not continue to grow in the same speed. 

SS: So, you don't think China’s movement in that direction will in any way affect the price or push it up? 

JT: Of course, if their demand appears on the market...appeared on the market, it had an influence on the market price; of course, it had an influence. But, there’s no given demand from the Chinese side, and this will maintain the demand level, but not increase with the same speed as it was before.

SS: Okay, but if China still becomes more influential as a buyer, which it has, with oil trade - any scenario, do you see any scenario where the oil trade moves away from the Western standards and the dollar and the BRENT standard eventually?

JT: I personally don’t think so. That is a very well-settled system of oil trading supply, very established system. I don’t think that basic changes can be expected in this respect. I don’t think so.

SS: Gulf states, like Iran, Iraq, Saudi Arabia - they are all competing to offer the lowest price of oil to China. Who do you think will win this price war? Can there be a winner?

JT: I think we are in the middle of a price problem, whether you call it a “war” or any other way. There’s a huge problem for the future, for the safe supply of the globe. So, I don’t think that we can say that this is a very “special price war” between the Gulf states and China; or, in this frame,  as a Gulf states and China: this is a market mechanism. 

SS: U.S. shale production has grown by 50% in the past 3 years, but now analysts in the U.S. Energy Information Administration say shale oil production will fall by one million barrels per day, while the International Energy Agency says the latest price rout will stop U.S. growth in its tracks. Is the shale revolution going to continue?

JT: I don’t think that we can call it further on as a shale revolution. I think that is a proven track record that shale oil can be produced relatively economically, at a higher price level, of course, but due to the technological developments which happened during these past few years, decreased production costs for shale oil, so shale oil is one of the sources. This will continue to be part of the supply pattern, but I don’t think that we can call it further on as a “shale revolution”. It’s an important part but not decisive.

SS: The IMF says Saudi Arabia and the Gulf monarchies will lose up to $300 bn in revenue this year alone. How long can they keep this up? I mean, I understand they are very rich, but it is still a lot of money.

JT: I don’t know, I cannot reflect to this, because I don’t know in details the individual budgets and so on… but, in general, of course it will be difficult to overcome, this missing amount of money, this will lack in the budget, definitely.

SS: Yes, and why I am asking is that, for instance, going back to times when oil was expensive, the Middle-Eastern petrol  monarchies were spending a lot of money on social development - now, that this flow of cash is dying out, could there be political consequences, I mean, unrest, protest, instability - if budgets will be cut? Is that a factor in the oil price politics, what do you think? Do they take that into consideration?

JT: This is…we reached now a point where as a President of World Petroleum Council, I cannot answer this question, because we are a professional, non-political organisation, and I don’t like to make any political consequences, drawing out of the situation. So, please, excuse me for that. 

SS: But, okay. This is not a political statement, just, you know, an observation - I am not a politician either or I am not an expert in oil, but don’t you think this could affect oil prices? I mean, isn’t everything driven by politics and what’s going on on the ground in the country in the first place? 

JT: Oh, yeah. The problem is evident, that if in the state budget the income is not coming and is not appearing, then they’ll have to cut a lot of expenses. So, it is, definitely, at the end of the day, it can lead to social problems, and that’s what many would like to avoid. For the 4 years before we had prices that were relatively stable. The only time during the 3-decade history of oil pricing there was that period of stability. Of course, many governments had temptations to see it that it remains as it is, so I think missing income will cause definitely serious budget constraints and lead to cost cuts.

SS: Here’s another thing that puzzles me, as far as the oil prices… Major oil producers like Iraq and Libya and in crisis, and there’s a war in Syria, oil rigs exchange hands between terrorists and armed groups. Why isn’t continuing instability, war in the Middle East, driving the prices up?

JT: It’s a very complex issue…

SS: Let’s try to understand, because it’s very interesting, really. 

JT: Normally, it would be the case to increase...that the prices would increase in case of political constraints in the Middle East. But I can tell you the example of what happened in January 1991, when Kuwait war was ending, when the NATO freed Kuwait, the oil prices didn’t increase, the oil prices dropped sharply, and that was contrary to the expectations. So, it is difficult to make a conclusion that if there’s a political constraint, problems in Libya, in Syria, in the Middle East, that prices automatically will go up. We see - this is not a rule. That’s why it’s so difficult for us, for the oil people to forecast what will happen. 

SS: Also, it’s a well-known fact that the Islamic State has its hands on some oil rigs. Who is buying this oil. Do people who buy from Islamic State not care where the goods are coming from at all?

JT: I don’t have any information in this respect. 

SS: You surely discussed this in your circles. Come on, we discuss this every day: where does the IS get the oil and who buys it? What are your versions? 

JT: Nobody can answer this question. Somehow it disappears and converts into weapons or money. Our organisation definitely is not capable to trace this route. There are official lines who can find out - if they can find out, we shall note it, but I don’t think that we can say which channel is this. It happened also during the war in Iraq… in the Iraq-Iran war, that a lot of oil illegally left the country. So, it is happening… 

SS: But is this something that worries you as someone who is a leading figure in the industry - is it a worrisome factor or is it a passing thing that you don’t really think is worth paying attention to? 

JT: Everything worries us which is not according to our basic principle - the World Petroleum Council is an organisation which, since 1933 has got the responsibility to help to manage the oil resources for the benefit of mankind. So, I think, everything which is not in line with normal procedure - we cannot agree. But, our world is not a political, it is a professional world. 

SS: Demand for oil is diminishing in Europe as well as in other developed economies, and, for instance, vehicles are becoming more energy-efficient. Does the world just simply need less oil today? 

JT: No, we have to see the growing population of the world. In total, there is a growth in the oil demand. Of course, there are regions where the oil demand is even stagnating or a little bit decreasing because of the efficiency increase in using of oil. So, globally seen, the oil requirement will increase, basically because of the population growth.

SS: So, is this whole “peak oil” thing a myth? With all kinds of oil reserves being discovered all the time, with all the new technology - we’re never really going to run out of it,are we? 

JT: I used to cite one saying from my, let’s say, from my old friend, former Saudi Oil Minister, mr. Yamani, who was asked sometimes “when the oil era will end?” - he said: “I don’t know, but the Stone Age did not end because we ran out of stone”, - so, I think it will be the case here. A lot of effort is done in order to make substitutes in the energy mix, especially in the fuel side… 

SS: So you think we’re not going to run out of oil, but eventually solar and wind energy will bury the oil? 

JT: No, I don’t pick up one or other renewable energy form. There are various efforts in the industry, even in the oil industry, to get positive research results on how to substitute with renewable energy, the current fossil energy. In the fuel side, there was and still is going on a research to have some biofuel components to be blended into the fuel; wind energy is one, solar is the other one - and there is a lot of other research going on to use non-food materials for energy purposes. So, there’s huge research effort on the way, and when the results will be - it’s difficult to forecast. My opinion is it will be continued growth in renewables in the energy mix.

SS: Alright. Thank you very much for this interview, mr. Toth. We were talking to Jozsef Toth, President of the World Petroleum Council, discussing the fall of oil prices, the state of industry and its effect on the future of the world. That’s it for this edition of Sophie&Co, I will see you next time.