The Paris-based International Energy Agency monitors global energy trends for its 29 member nations and influences global energy leaders with the publication of its annual “World Energy Outlook.” The agency is headed by Fatih Birol, an economist who has been with IEA since 1995 and prior to that worked with OPEC. He is considered one of the rare energy leaders with an unfettered view of the big picture. In March, Birol spoke candidly in a one-on-one interview at CERAWeek by IHS Markit with IHS senior vice president of energy Dr. Atul Arya. Investor was on hand for the conversation. Here is an edited excerpt.

IEA director Faith Birol [right] discusses global energy dynamics with IHS senior vice presidehnt Atul Arya. (Photo Courtesy: CERAweek by IHS Markit)

Atul Arya Is the market balanced now?

Fatih Birol I think we are on the track to have a balanced market, but the definition changes from one person to another. But what I see is important changes in the dynamics of oil markets.

Arya In The Wall Street Journal, there’s an interview with Mark Papa, well-known shale leader, that there are warning signs that shale supply may be overheating.

Birol We (IEA) see an increase of shale (oil), more than 1.8 million barrels per day (MMbbl/d), and we are expecting at least the next two years of strong growth. Afterward, we are expecting more or less a plateau of shale, not a decline. The sweet spots will see a decline. The key factor in determining the development of shale is price.

So think very carefully about what one wishes for. Higher prices may give an additional boost to shale oil production. What we see is that U.S. shale, as it stands now, for the next five years, covers about 60% of the global oil demand growth, alone. We expect after ’21 there will be a flattening of shale oil and, even with this 60% of the global oil demand growth, it will be covered by the U.S. So this is something to take into account.

So for the next three years, global oil demand growth—which is robust—will be more than covered by the U.S, Brazil, Canada and Norway put together. All are non-OPEC countries.

Arya One thing you said was that we took a lot of capital out of the industry in the last three years, and you expressed concern about that. So the next three to five years will be good to you, but beyond that?

Birol The good news is … oil demand is growing strong. We don’t see any peak in oil in the market at least in the next five years or so. This is good news for the oil industry.

But, (what) is often neglected in the debate, we have found that we are losing each year 3 million barrels per day of oil in decline in existing fields. This is very important. If demand grows 1.3 (MMbbl/d), plus 3 (million), we have to every year (find) new production equivalent of 4.3 (MMbbl/d). But what we are seeing is the investment in upstream (is) a big decline in 2015, 2016, a 25% decline of investment. And ’17 (is) flat, and ’18 a maximum small rebound, 6% to 7%.

So therefore we are worried that in the next three to four years of time, we may well have surpassed this growth of U.S. shale. U.S. shale alone cannot save the world, because demand is growing and decline is down. Therefore, it is extremely important that we see investments coming in a more urgent manner in order to avoid some unpleasant surprises in the markets.

Arya Are you surprised that the OPEC export cut agreement stuck for as long as it has?

Birol I’m never surprised with the OPEC. I worked in OPEC for six years, and they have very strong leaders.

But, if I may (offer) a friendly advisor view to countries with established single-product economies. There is a historic opportunity now—or obligation—of those countries to look at their economic policies for two reasons.

One, because of the shale revolution in the U.S., but also the unconventional oil and gas in other parts (of the world) including Australia, the amount of oil and gas they are going to export will be less. The volumes will be less in the future because competition comes. Second, shale oil and gas will put downward pressure on prices. Perhaps prices may well be lower than they hoped. So they will lose from the volume, they will lose from the price. In the longer term, we will see alternative technologies from the transportation sector to petrochemical sector, from that to renewables and other storage, they will come. They will come and eat up the shale oil and gas.

So my humble advice is the time of the single-product economies is passé; it is over. They have to broaden the base of their economies. Otherwise, if not today, if not tomorrow, definitely the day after tomorrow, they may have negative developments in terms of the economy. Some of the countries are looking to broaden their economic base. There are plans in Saudi Arabia, in the United Arab Emirates—good steps in the right direction. I hope other countries get inspiration from those countries.

Arya You mentioned shale in other countries. It seems that shale has predominantly become a North American story. Do you see other places?

Birol Australia is one of the current players strong in terms of unconventional gas, together with the U.S., and Qatar will be a key LNG exporter in four or five years. There will be some other surprises coming from Argentina, from China and so on, but for the time being, they will never come to the level of the U.S. or of Canada.

Arya So what happened to the Golden Age of gas?

Birol It is happening now. Gas is going very strongly. (But), it depends on how you consider the gold. The good news is gas is growing everywhere. In all our scenarios, in terms of supply, we don’t see any problem whatsoever. Again, shale is changing the tide.

On the demand side, there are two equal contenders. One is China, the other one is India. In both countries, the share of gas is 5%, 6%, of the total energy mix. Globally, it is just 25%. But in these countries I expect a big growth.

And China, at the end of last year, President Xi summarized the new Chinese energy policy, which is making the skies of China blue again. This (is) meant for heating, as China is moving from coal to gas. And after that meeting in four or five months of time, China started to import LNG. As a result, LNG prices in the region jumped from $6 to $12. India will also go to LNG.

What could be a problem for gas? Number one, price spikes. If the gas prices suddenly go up for a long time, especially in Asia where the demand is to come, it loses this competitiveness as a result of coal, (which) we see it every day getting cheaper to use.

The other one is reducing greenhouse gas emissions. But we all know that during the production of gas, a significant amount of methane may go to the atmosphere, and this is a serious issue because methane is a very powerful greenhouse gas. It is very important that the gas industry take control of the methane emissions and leakages. We have shown at IEA this can be done without new technology, but just having direct mitigation.

Arya It seems at times that gas is squeezed out between coal at the lower cost and regulations driven by strong policy. You seem more optimistic. Why?

Birol Yes, because of one main reason. Here, and in Europe and in other countries, the first (thought) that comes to our mind is climate change. But it is not the real eminent problem in China, India and other countries. It is the local pollution in the cities, and natural gas is an extremely good alternative to coal. I expect gas replaces coal in China first, then in India, especially if the price doesn’t go up as significantly. So I think the main driver of gas in my view would be making the skies of Beijing, Shanghai, New Delhi and other cities brighter and much clearer. This is the main driver.

Arya You said that there were plentiful supplies, but one other thing we are hearing is that, because there have been no FIDs (financial investment decisions), particularly for LNG because right now there is a surplus, that we will potentially see a gap. Do you see that?

Birol We see the same thing here. We see that, after this new wave coming from the U.S. and Australia, we don’t see much coming. But this is a usual market dynamic. First, the price will go up and the new investments will come. From a resource base, there is no problem.

Plus, shale changed the entire dynamics of the story. Only five or six years ago, Russia was the No. 1 country in the world. Today, U.S production is much higher than Russia. Shale production today, which is a result of efforts of only less than 10 years, is equal to five Norways. Five times Norway in less than 10 years of time. It will continue and it will (continue) changing a lot of the dynamics in the energy business: Moving from the pipeline-driven gas trade to an LNG-driven gas trade; shorter contracts, more flexibility. We are going to see the spot markets will be much more lively.

Arya You didn’t mention the Middle East and, of course, Qatar is such a huge gas resource. What should their strategy be in terms of new development?

Birol Qatar is going to (be) the top-three exporter, over 100 Bcf (billion cubic feet). Gas developments, I hope, will first serve the domestic consumption. (The Middle East is) still using a significant amount of crude oil for power generation in that part of the world. This is incredible. This is like you have a car, and you are using a Chanel scent—the perfume—to fuel your car. It’s the same fact of economics working there.

Arya You talked very passionately about two things which seems contradictory. You said we are not investing enough in oil and gas supply, but you’ve also said that we are not doing enough to meet the 2-degree climate target (from the Paris Accords). Consistent?

Birol The energy business is not a Bollywood movie. It is not good people, bad people. We have to find the right mix at the right time; we have to find balance. Climate change is very important for me and for my agency, a very important issue to develop an energy sector alternative. The problem with climate change is reducing the footprint of fossil fuels. There is a conflict there, but not all fossil fuels are the same. Coal is a different story compared to oil and gas. We have to make a distinction there. If gas replaces coal, this is good news.

There is a spotlight on one single country today, which is the country that we are in (the U.S.). But let me tell you that in last two years, the biggest reductions in terms of the world was coming from this country, not from other countries. This is mainly gas replacing coal, and the continuation of support for renewable energies.

Thirty years ago, there was a move of reducing the share of fossil fuels as a result of a report, which was done by the United Nations. At that time, the share of fossil fuels in the global energy mix was 81%. In the last three decades, many things have happened: renewable energy is much cheaper, (there is) more technology, the environment of consciousness is getting stronger and stronger. And after 30 years the share of fossil fuels in the global energy mix today is 81% still. No change whatsoever.

Therefore, one technology for me is critical, which is carbon capture, utilization and storage, or CCUS. It’s a technology which did not get enough attention. I have difficulties to understand why. And I am seeing this government here (push) for a significant amount of tax credits for CCUS. (Birol is referencing tax credits in President Trump’s December tax code revision that provides incentives for capturing and storing carbon emissions.)

So we have to find that balance between the oil and gas continuing to grow, to help economies to grow, and for the first time having energy excess. At the same time, work with technologies such as CCUS. Our numbers show that in a 2-degree world, we still need oil, we still need gas and we may even need coal, but with the CCUS all put together. In my view, to ask for investments for oil upstream to avoid the supply crunch is not inconsistent with reaching the Paris Accords.

Arya Do you think the 2-degree target is a realistic target?

Birol That is a minimum target if you want to achieve the rather fragile equilibrium of our planet here, but when I look at the trends, we are definitely not on track to reach the Paris targets today.

Arya Do you think we need a carbon price or something like it?

Birol We need a carbon price but that doesn’t mean it’s going to happen, unfortunately. But it would be very good if there was an international carbon price. That there are no leakages between the countries, no free riders. But to be realistic, to expect an international carbon price to be established, the chances in my view are close to zero.

I appreciate the latest move (of the U.S. government) in terms of CCUS, but some other governments—Canada, Norway, the U.K., Netherlands, Australia, China—they’re also keen to deliver, to push the CCUS button. I am cautiously hopeful CCUS can have a new momentum now after this decision in the United States. It was a surprising move in my view, because you use CCUS only for one thing: to adjust the climate change. So, this is a very good move, and I hope it will be also giving a momentum to other countries as one of the key priorities when it comes to clean energy technologies.

Arya Let’s talk about another technology, which is hotter than CCUS today—electric cars, or EVs. Too much hype?

Birol If you don’t mind, I will say yes. Electric cars are growing very strongly for two reasons. One, the cost is coming down. Second, many governments are giving generous subsidies. In Europe as well in China last year, electric cars sales were record sales. This is huge. But put (this) in context. Record sales of electric cars meant only one out of 100 cars sold in the world is an electric car. This is No. 1.

No. 2, index to oil demand. I asked my colleagues to correlate if not one of 100 cars sold was electric car but if every second car sold was an electric car, what would the oil demand trend look like? Oil demand will continue to grow for the following reason.

Oil demand growth is not driven by cars in a way. It is driven by trucks. It is driven by the petrochemical industry, and third, by jets. Cars are about 25% of the global oil consumption today, but we see more impact of efficiency improvements in cars and oil demand growth rather than electric cars.

The second thing about electric cars: If I am buying an electric car to save the climate; (that is) completely wrong. Today in the world, we are at about 2 million electric cars, and we expect a strong penetration in 2040, 300 million electric cars. If we have 300 million electric cars, what is the impact of this on the CO2 emissions? And you know what the answer is from 2- to 300 million? The answer is the impact on the CO2 emission reduction is less than 1%.

One, cars in general are not the main driver of the CO2 emissions. Second, if you cannot decarbonize your power system—because you get electricity for the cars from the power—the total impact is very, very small. So if you think, “I bought an electric car, so I feel good,” it is wrong. You don’t need to feel good about this.

But electric cars are good for local pollution in cities. It is the reason why China, for example, is making a big push for electric buses in the cities today. About half of the buses (sold) in China today are electric. So electric cars will grow definitely very strongly, but to expect a peak in oil demand will be wrong because the growth is coming from somewhere else.

Arya One of the scenarios many people are projecting is what I call an all-electric world—you electrify everything and get that energy from clean sources. How realistic?

Birol First of all, electrification is the future. In the last five years, there’s an interesting trend: world electricity consumption increases at twice the rate of the world energy consumption, and it will continue like this in the future. So the share of electricity in total energy is going to increase as a result of one issue—air conditioners. Electricity is the future in my view.

But to have 100% electricity from renewables is in my view in the very, very (distant) future, not immediately. But one thing is clear, renewables are coming on very strongly. Today, solar is the cheapest source of electricity generation in many countries, and this (cost) is going down. In the last three years, the average cost of solar is halved. And we expect in the next three years another halving of solar. It is the cheapest source of electricity generation. We have to acknowledge that. But, if you think about 100% renewable electricity generation in the short or in the medium term, (this is) something that is extremely difficult, if not impossible.