“Oil forecasts should be observed with the same precautions that are adopted to read insurance policies: only at the bottom, really at the bottom, is it explicit that we are faced with a conflict of interest. And the interest is that of influencing behavior on the market”. Having made this premise, Alberto Clô, former minister, economist, scientific coordinator of Rie and one of the leading Italian energy experts, analyzes the energy scenarios in tumultuous change: crude oil plunged to 35 dollars, the damages or benefits that this causes to the economy, the growth of renewables, the challenge of fighting climate change and the energy poverty that still afflicts billions of people on the planet. How to reconcile all this? What will 2016 hold for us and what judgment can be given on how the Renzi government has operated on these issues? Here is Clò's interview with First online.
FIRSTonline – Professor, Goldman Sachs forecasts that oil could even sink to 20 dollars a barrel next year before regaining some equilibrium in the fourth quarter of 2016. Opec estimates a barrel at 70 dollars over the horizon 2020. Who has reason?
CLO' – “As we said at the beginning, we cannot ignore the conflict of interest of those who, like Goldman Sachs, are also one of the leading operators on the oil financial markets. To evaluate the credibility of the forecasts it is useful to look back and verify the ability demonstrated in the past at least in understanding trends. The same goes for Goldman but also for the International Energy Agency (IEA) in Paris which has never guessed a forecast in 10 years: in 2008 it saw the nuclear renaissance, the following year the Golden Age of gas and did not grasped the only revolutionary fact, American shale production. So let's look at what happened in this last year”.
FIRSTonline – Where do we start?
CLO' – “Since last June. We have witnessed an unexpected, but not unpredictable, collapse in oil prices. However, the oil industry held up well: everyone suffered but less than one might expect. There was no panic, as happened in the past, finance continued to support the oil industry. Production not only held up but actually increased by 2,5 million barrels/day. The increase came from Saudi Arabia, Iraq, Russia. In the USA, the disruptive production overcapacity held up until mid-2015, then production began to decline and finally lost 400 barrels. World demand, despite the drop in Chinese demand, the increase in energy efficiency and the drop in subsidies, has increased by just under 2 million barrels: it is lower than expected but it is not a small amount”.
FIRSTonline – What are the other factors that marked the oil industry in 2015 in your opinion?
CLO' – “The other fact of great value is la resilience to falling prices demonstrated by companies in the sector who have greatly improved efficiency and productivity. The break even that Goldman Sachs once estimated at $100 has dropped to $80-85. And this has reduced the suffering of the sector”.
FIRSTonline – In which direction 2016 will take us: collapse or recovery in prices?
CLO' – “Unfortunately there are elements of uncertainty. The first: will the demand for energy consolidate the positive trend already shown last year? It will depend on the economic growth of Asia and the Western world”.
FIRSTonline – During the press conference at the end of the year, Prime Minister Renzi argued a few days ago that oil at 35 dollars is bad for the economy and for ENI. Does she agree?
CLO' – “If we talk about ENI, yes. On the other hand, it is questionable whether low crude oil prices are bad for the economy. In recent years, with oil skyrocketing, Italy's foreign trade surplus was offset by the cost paid for the purchase of energy. This year the energy bill will drop by about 10 billion. Out of the 27-28 billion expected trade surplus, that's a nice gain, don't you think? In addition, electricity and gas prices are falling. Basically oil is once again the pivot of energy systems. We must then expect a recovery in US demand, also supported by the strengthening of the dollar”.
FIRSTonline – The conclusion?
CLO' – “My idea is that a supply surplus will still remain in 2016 and will gradually run out. In the second half of the year, prices could start to rise again. And this excludes the hypothesis floated by Goldman Sachs of oil at 20 dollars. How soon will prices recover? We won't go back to pre-crisis levels but the OPEC estimate of a barrel of around 60-70 dollars in the next few years seems realistic to me”.
FIRSTonline – The collapse in oil prices has wiped out new investments. Will we pay the consequences sooner or later?
CLO' – “With oil at 120 dollars, the oil companies had adopted somewhat reckless business models: pharaonic, frontier projects, investments at extremely high costs. The drastic cut in new investments, valued at around 200 billion, will push them to find a more sustainable model: lower costs and greater efficiency. Long-term sustainability brings interest back to the Middle East – Saudi Arabia, Iran and Iraq where production costs are lower – and Africa. It is no coincidence that while the others have cut investments, the Saudis have instead increased them to be ready with additional capacity on offer when prices recover”.
FIRSTonline – Eni, then, is well positioned: with the discovery of Zohr in Egypt and with the productions in Africa it can play its cards well…
CLO' – “Eni is the leading operator in Africa and has had mining successes which place it in an excellent position. Unlike other major majors, it has had reserve replacement rates in excess of 100%. It is the only one, among the big companies, to have reduced investments but also the dividend. No one else has done it and I want to see if they will be able to keep the promised payout also in 2016”.
FIRSTonline – Aren't the acceleration on renewables, the push towards energy efficiency just as much mines for the oil sector and the recovery in prices?
CLO' – “Are you asking me if what happened to Big Tobacco will happen to Big Oil, if they are destined to progressive decline? For both there is a problem of social acceptance and the challenge is not only industrial but also depends on the demand that moves public opinion. It will be important to see the events that will follow the Cop21 in Paris. Precisely in those days the IEA released its forecasts: in 2040 renewable sources will represent only 5% of world energy while fossil sources will guarantee 75-80% confirming themselves as the pivot of the world energy system. And all the more so if we want to fight energy poverty. Today, 2,5 billion people still lack access to energy to survive. The energy transition is presented in a utopian, unrealistic way. In this regard, Paris has not given any answers: where to find the resources? Nothing binding came out of the summit, I don't think it's a great historic turning point".
FIRSTonline – Coming to Italy, the Renzi government has recently drawn up its year-end balance sheet. On the subject of energy, do you think it passed the exam?
CLO' – “I appreciated that it was the first government, after many years, to have changed its attitude towards ENI. Renzi has supported what I believe to be the largest Italian company, the only one capable of ensuring Italy a primary role in international politics and has overturned the previous approach which made it a problem rather than an opportunity. For the rest, I would have been more cautious about the abolition of the protection regime for electricity and gas customers because I would not want a generalized increase in prices. Instead, I would have expected a greater stance with Europe on the Energy Union which has so far proved to be a real failure, and not only on Nord Stream. Finally, the problem of how to reconcile the State and the Market remains open in this sector: it would be important to resume a soft energy planning to which operators and institutions can refer".
