Surge in energy sanctions raise concern over transparency of market, head of KAPSARC says

The recent surge in sanctions targeting the energy sector is raising concerns about a decline in the transparency of market activity and is creating a shadow market, according to the head of a Riyadh-based think tank.

The president of the King Abdullah Petroleum Studies and Research Center (KAPSARC), Fahad Alajlan, told Anadolu that trade activity has slowed in the market due to sanctions.

Speaking on the sidelines of the 45th International Conference of the International Association for Energy Economics held in Istanbul, Alajlan said that ‘a lot of the trade is not happening in the market’ and the market is moving towards being ‘not transparent.’

An increase in the number of sanctions ‘can cause issues, especially around transparency and volatility in the market,’ Alajlan argued, adding that there could also be a cause for concern over safety.

He said that the spread of sanctions may affect oil and natural gas mobility as well as commercial transactions, as more ships going offline and turning off the transponder system ‘may become a problem in the future.’

Last month, the EU adopted the 14th package of sanctions against Russia, targeting especially its LNG sector over its war on Ukraine that started in February 2022. Last week, the US also slapped Iran with further sanctions on entities and vessels trading in Iranian petroleum or petrochemical products.

– Oil markets are functioning ‘relatively well’

Energy demand picked up after a period of slowdown following the COVID-19 pandemic, Alajlan said.

Commenting on the energy landscape following the pandemic, the Russia-Ukraine war and tension in the Middle East, Alajlan said that the increase in demand led to significant price fluctuations and heightened market volatility, affecting oil, gas, coal, and other commodities.

The Organization of Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, have been able to ‘manage the volatility of the oil market,’ he explained referring to the group’s several voluntary production cuts.

‘Oil prices have been relatively stable. They haven’t gone up as much as natural gas and they have relatively stayed the same,’ he added.

According to Alajlan, several factors contribute to market stability, such as ‘the cooperation between OPEC and OPEC+ countries, open communication, the transparency among market participants and finally the availability of spare capacity.’

Many OPEC+ and OPEC countries have spare capacity that can be used when necessary and it ‘has helped the market to operate smoothly and relatively calmly,’ Alajlan said.

Noting that the market has been functioning ‘relatively well,’ Alajlan said that ‘especially over the last two years, oil prices have stayed relatively stable and volatility in the market has gone down.’

– Volatility would lead to less investment

Highlighting key issues for a successful energy transition, Alajlan explained the importance of energy security.

He noted that it is needed to guarantee reliable energy access for producers and consumers to achieve Paris climate goals.

Volatility in the market and fluctuation in prices cause consumers and market participants to get confused, he argued.

Noting that investors make informed decisions as they look at the horizon for over 20 to 30 years, Alajlan said, ‘They need to have a relatively clear market view. Volatility in the market would lead to less investment.’

He also pointed out the importance of ensuring energy affordability and access globally.

Around 3 billion people globally do not have access to clean cooking solutions and have to use coal and wood for heat and cooking fuel, while almost 800 million people don’t have access to electricity.

‘Making sure that we address this issue of energy poverty and access is critical as part of the energy transition,’ he said.

• Abdullah Petroleum Studies
• Fahad Alajlan
• Organization of Petroleum Exporting Countries
• Research Center (KAPSARC)