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Cheaper oil, recession a twin challenge: IEA

Oil at near $40 a barrel has slowed investment in oil projects, he told Reuters, raising the possibility of a supply shortfall once demand resumes.

“The current price level has a negative impact on investment in new oilfields,” Nobuo Tanaka, executive director of the Paris-based agency, said on the sidelines of the World Economic Forum in Davos.

“We are concerned about slowdown, slippage, cancellation of projects. When demand comes back, we may have a supply crunch,” said the head of the IEA, energy adviser to 28 industrialised countries.

Oil has fallen by more than $100 from a peak last July of nearly $150 a barrel as deepening recession eroded demand for fuel worldwide.

“To stimulate the economy, you need a low price, but to stimulate investment long-term the price should be higher,” said Tanaka.

“In the mid to long term, oil prices will go up.”

Opportunity to go green

Any stimulus package for the world economy should be as green as possible, he said—even though the temptation in the short term might be to burn more polluting fuel if it is cheaper.

“Economic slowdown is a real challenge, but we should make it an opportunity,” he said.

“If governments are spending ... for a stimulus package, why not spend it on renewables ? It stimulates the economy short-term and in the long-term is sustainable. You kill two birds with one stone.”

As part of its efforts to diversify supply and help to prevent a repeat of the upheaval caused by the Ukraine-Russia pricing dispute, which resulted in the disruption of Russian gas flows to western Europe this month, he said the European Union needed to focus on an improved grid and a single energy market.

That has particular relevance in moving renewable supplies, which tend to be generated more erratically than conventional energy, across borders to wherever they are needed most.

“The grid connection is a key,” he said.

For now energy demand in general is much lower, which plays a part in lower emissions of planet-warming carbon.

The IEA earlier this month predicted a fall in global oil consumption this year, catching up with other forecasters who had already predicted a decline.

Countering criticisms the IEA has reacted too slowly, he said the IEA’s models incorporated economic forecasts from the International Monetary Fund.

“We are following IMF numbers. That’s the reason we are slow,” he said.

Whether the IEA would revise demand downwards when it issues its next set of numbers would depend on the IMF once again.

“So far we don’t see optimistic indicators,” he said.