The head of the International Energy Agency has warned that low oil prices could pose a threat to energy security as investment sinks in the sector, putting the world increasingly at the mercy of the geopolitically less stable Middle East for supplies.
Dr Fatih Birol, executive director of the Paris-based body, said investment in oil supply had dropped by 20 per cent last year, with a further drop of at least 16 per cent expected this year, making the first consecutive two years of declining investment in the industry's history.
Sustained low prices around current levels would also cause higher cost projects to be cancelled or delayed, with the result that the share of world production from the only major low-cost region, the Middle East, would see its share of the market rise from about half at present to 75 per cent, he said.
"The geopolitical developments in the Middle East today may mean that low oil prices may not necessarily help to improve oil security," Dr Birol said in an interview during a visit to Canberra at the invitation of federal resources and energy minister Josh Frydenberg.
Dr Birol said it was a "grave mistake" to overlook the risks that depressed oil prices posed for energy security, and suggested governments may need to do more to relieve pressure on the sector, through cutting taxes or royalties, for example, should oil prices stay low beyond this year.
He does not rule out further testing of last month's lows in oil prices of around $US27 a barrel through this year, saying the market was "awash" with oil while demand is "weak" compared with last year.
"I would be surprised if we see a strong push this year upwards," he said, assuming no significant change in economic and geopolitical conditions.
"We may well see throughout this year – 2016 – we continue to have downward pressure on prices: the markets are awash with oil and demand is not very strong in order to provide upward pressure," Dr Birol said.
Australia not compliant with IEA requirements
Mr Frydenberg said Dr Birol's comments were a reminder of why the IEA, a body founded in 1974 to coordinate a response in the case of a major supply disruption, was set up.
"Dr Birol conveyed an important and somewhat sober message that lower oil prices do not mean endless supply," Mr Frydenberg said.
But the minister welcomed Dr Birol's comments on the importance of Australia to world energy security given it is set to become the world's biggest exporter of LNG by 2020 and its position as the world's second largest exporter of coal.
Dr Birol's remarks have put a spotlight on Australia's non-compliance with the IEA's requirements on oil security, which require member countries to be able to accesss 90 days of oil and fuel supplies in case of disruptions.
Mr Frydenberg said an inter-departmental committee was studying options to meet the requirement, describing it as "an issue that has bedevilled both sides of politics."
"Australia is looking to get back to full compliance, we're looking at the various options and we will do so in the most cost-effective way," he said.
Dr Birol acknowledged the low oil prices had heaped pressures on Australia's new LNG projects, which are coming into production amid low prices and oversupply. But he rejected the suggestion that the country has mistimed the market and said the investment would have longer-term benefits for Australia and more broadly.
"Australia made a very good move to be the champion of LNG around 2020," he said.
"The prices may be currently lower than what we used to see, but definitely we will see upward pressure on prices and the market conditions changed, and then, to be an established LNG exporter is good for Australia, good for the countries in the region and good for the global gas security."
Dr Birol was confident the current weak LNG demand in Asia would see a turnaround, with demand to strengthen in Japan, Korea, China and India.