An alarming global energy outlook from the IEA
The world needs more energy, but can scarcely afford to pay for it or burn it, says the IEA's World Energy Outlook
If you're the kind of person who loses sleep over gloomy economic forecasts, global poverty, the decline of the West, or environmental catastrophe; or whether you'll have enough money to fill the car at eye-watering fuel prices, avoid the International Energy Agency's (IEA) latest
World Energy Outlook (WEO2011). Its over 650 doom-laden pages are enough to induce insomnia in even the cheeriest reader.
The era of cheap oil, which sustained the advance of Western economies, is over, the
IEA says. Meanwhile, about 40% of the world's population is still without adequate access to basic energy supply. Vast investment is needed, and quickly, in new fossil-fuel production to meet rising demand.
And yet emissions from existing coal, oil and natural gas infrastructure have already taken the world perilously close to its "permissible" emissions limit. In just five years, we will have exceeded it. The window of time in which to implement
policies to contain damaging temperature rises – beyond 2°C – is closing quickly.
The West, meanwhile, where efforts to control climate change at least have some tenuous grip, is no longer where it's at, in terms of rising energy demand. The growing economies outside the developing world will account for 90% of energy demand-growth in the next 25 years. So it's those countries that will increasingly hold sway over what the world does about man-made climate change. And as the UN climate conference in Durban begins, their position looks
as intransigent as ever .
In short, while the
Arab Spring and Eurozone meltdown compete for attention, the old energy problems that the IEA has warned about repeatedly in the past are no longer creeping up on the world – they're on its doorstep.
Start with demand picture: the OECD, the IEA's parent organisation, says Europe is heading back into recession. Yet the agency doesn't believe short-term economic problems will much affect the trajectory of the world's energy needs, which will continue rising, sharply, over the next 25 years.
Under its new policies prediction, global energy consumption will soar by 40% by 2035. Transport will drive oil-demand growth, which will rise by almost a fifth. Gas is the star fossil fuel, trumping the combined absolute growth in oil and coal consumption (which will keep rising for the next decade before stabilising). Renewable energy generation will grow quickly, but won't approach the absolute demand of any fossil fuel. Population and GDP growth, the latter expected at 3.6% a year to 2035, underpin this outlook. Developing, non-OECD economies dominate these projections, accounting for almost all the consumption growth in the next 25 years. Chinese demand will be 70% greater than the US' in 2035, even if per-person consumption will still be less than half. Between them, China and India, which will be the largest coal importer by 2020, account for the bulk of the oil market. Oil consumption will grow more slowly (0.6% a year) than for any other energy source, but it will remain the lynchpin, with demand at 99 million barrels a day (b/d) in 2035, compared with 87 million b/d last year. The world's passenger-car fleet will double during the time period – and electric or non-petroleum-fuelled cars will "take time to penetrate markets". There is greater flux in the power sector. The disaster at Japan's Fukushima-Daiichi nuclear plant has raised questions about the future of that form of electricity generation. Gas, by contrast, will enjoy a golden age, as consumption (rising by 1.7% a year) nearly catches up with coal (see Table 1). Demand for renewables grows more quickly, but remains peripheral.
Thanks to hydraulic fracturing, gas-supply growth – from 13% of energy output in 2009 to more than 20% in 2035 – means "the world's remaining gas resources can comfortably meet the projections of global demand" beyond the next 25 years. Unconventional gas accounts for about half of the world's 800 trillion cubic metre (cm) resource base, says the IEA. Other analysts, such as the US' Energy Information Administration, claim the total number could be far greater.
Russian gas output will rise from 572 trillion cm in 2009 to 860 trillion cm in 2035; rising US production (from 583 trillion cm to 696 trillion cm) will give the country self-sufficiency; and China (85 trillion cm in 2009, jumping to 290 trillion cm in 2035) will become a significant regional producer. Qatar, Australia, and Iran all increase output significantly under the projection. But the IEA sees little effect from unconventional-gas production on EU import needs, which rise to 540 billion cm in 2035: good news for Russia, North Africa and liquefied natural gas producers, whose exports – which reached an estimated 370 billion cm/y in mid-2011 – will account for 42% of the growth in inter-regional gas trade. Where will the oil come from?
The outlook for oil supply is not so rosy. Under the IEA's new policies prediction, production reaches 96 million b/d in 2035 – 13 million b/d more than in 2010, but some 3 million b/d less than forecast demand. And the easy-to-reach stuff is dwindling. Conventional crude supply will never again reach its 2008 high of 70 million b/d; but will plateau just beneath that figure for the next 25 years.
Meanwhile, Opec's share of output also rises by 2035, from 42% to more than half, as production outside the group falls. Only Canada, Brazil and Kazakhstan provide any real upside growth from non-Opec countries. Even including more output from some Opec members, the total gains, once depletion is accounted for, are marginal. Iraq's plan, based on several technical-services contracts signed with international oil companies (IOCs), is to increase oil-output capacity beyond 12 million b/d as early as 2017 – a monumental task that would create rivalries within the Mideast Gulf and Opec, and surely soften oil prices ( PE 12/10 p6). Yet the IEA believes volumes will come nowhere close to this, hitting just 5.4 million b/d in 2020 and 7.7 million b/d in 2035. Saudi Arabia will manage 1.3% growth over the same period, taking its capacity to 13.9 million b/d. But several Opec countries – Iran, Qatar, Angola, Ecuador, Libya and Nigeria – will increase production only slightly, or lose capacity. Unconventional oil production (from Canada, Venezuela, the US and elsewhere) will make gains, replacing some lost capacity, but won't come to the rescue, suggests the agency. In the US alone, light, tight oil, of the kind found in the Bakken, Niobrara and Eagle Ford shales could yield 1.4 million b/d by 2020. But this is overly cautious: the Bakken, say some analysts, could on its own be producing 1 million b/d in the next decade. Liquids-rich shale-gas plays will continue to emerge as drilling for dry gas spreads internationally. The IEA's outlook for Iraq is bearish and Kurdistan, where ExxonMobil's entry may signal the arrival of other IOCs, could yet chip in with significant production growth – especially if Iraq's politicians resolve an impasse between the Kurds and the federal government in Baghdad. The IEA has repeatedly underestimated Libya's oil production in the past six months, predicting a far slower recovery than the one under way. So its caution may mask much larger production gains than WEO2011 predicts. On the other hand, with the exception of Saudi Arabia and, to lesser extents Brazil and Canada, oil producers have offered little evidence in the past decade that they can raise output as quickly as they claim. Opec says its members are committing $290 billion to lift group output capacity by 19 million b/d (a 10 million b/d increase) – but there is little clarity on where the gains will be made. Meanwhile, the investment needed to lift production are immense: $8.7 trillion (in 2010 dollars) to meet the supply requirement over the next 25 years, says the IEA.
Almost 20% of this must be invested in the Middle East and North Africa, because the IEA projects those countries will be responsible for 93% of oil-production growth to 2035. Yet the Arab Spring has thrown a spanner in those works. And conflict in the world's most combustible region would have an even greater affect on upstream spending. Deferred investment – because, say, teetering regimes divert cash from the upstream to social programmes or, for example, Western powers go to war with Iran – could leave a 6 million b/d supply shortfall by 2020. The result could be oil prices reaching $150 a barrel again, says the IEA.
That's a worry for the global economy. Indeed, the IEA's oil-price forecasts should make people shudder. Oil at $150/b would eventually help to balance the market, the agency says, as demand fell and production came on line elsewhere in the world. But this sounds optimistic: 6 million b/d is a lot of demand to shed, and previous oil-price-spike induced contractions of world oil demand came during deep recessions – the last one in 2008.
Indeed, for all the cheer that oil producers will take from the IEA's long-term oil price forecast – $120/b (in 2010 dollars) in 2035 – consumers should feel none. Fatih Birol, the agency's chief economist, has said repeatedly since the beginning of 2010 that oil prices above $100/b are a threat to the world economy and could strangle its recovery. But prices this year marked the low-point of the next 25, suggests the IEA. Either there will be a fundamental downward shift in demand (or sharp decrease in energy intensity to leave economies less exposed to sustained strong prices), or the world's oil consumers are in for 25 years of pain. This is a political problem for the West. Importers will see their oil bill continue to rise. That will have long-term implications for international relations. For developing import-dependent nations, subsidies continue to shelter consumers – but governments will increasingly take the hit. Fossil-fuel subsidies amounted to $409 billion in 2010, says the IEA. Although some countries are phasing them out, the global bill will rise to $660 billion in 2020. (Ending subsidies would save 4.4 million b/d in demand, as consumers reacted to higher retail fuel prices, says the IEA.) Subsidies are an inefficient way to help the world's poor, notes the agency. But, as riots in Asia following rising fuel prices have shown, governments that want happy voters sell them cheap fuel; once in place, however, subsidies are difficult to end. And while the rich consumers in the West may bleat about costly energy, 39% of the world's population doesn't have access to modern energy services. So sustained high oil prices will spread the pain to those that can least afford it. Delivering energy to these people, the IEA calculates, will need investment of $48 billion a year: three times the sum it foresees under its new policies outlook. But who will pay for this? The other problem
All of this presumes that the climate can withstand vast expansion of a fossil-fuel network that dominates the energy matrix now and will for decades. But carbon dioxide (CO
2) emissions are soaring: they reached 30.4 billion tonnes in 2010, an unprecedented year-on-year rise of 5.3% . In the IEA's present-policies prediction, which would leave policies as they are now, CO 2 emissions would reach 43.3 billion tonnes in 2035 – a figure that would blow away any hope of stopping climate change. Throw in other anthropogenic greenhouse-gas (GHG) emissions and the figures are even larger. Even the under the new policies outlook, the rise in GHG emissions to 36.4 billion tonnes in the next 25 years is alarming. Under that forecast, says the IEA, "the world is on a trajectory that results in a level of emissions consistent with a long-term average temperature increase of more than 3.5°C. Without these new policies, we are on an even more dangerous track, for a temperature increase of 6°C or more." In short, the measures the world has proposed aren't enough to stop damaging climate change. And few countries are yet coming good on their existing targets. The IEA's solution is in its 450 plan, so called because it would restrict the long-term atmospheric concentration of CO 2 equivalent gasses to 450 parts per million and, in doing so, keep temperature rises within 2°C. Under 450, many of the problems would dissolve: energy demand would grow far more slowly; green energy would have a far bigger share; energy supply would face less daunting investment requirements and schedules; energy efficiency would be much greater; and emissions would fall back to around 1990 levels.
Among 450's new measures to achieve all this would be the introduction of carbon pricing and various levels of emissions market trading in all OECD countries, as well as in China, Russia, Brazil and South Africa. Fossil-fuel subsidies would also be gone in every importing nation; and in the Middle East they would decline to 20% of their value now by 2035.
Meanwhile, carbon-capture and storage, new fuel-economy standards in the transport sector and "strict energy-efficiency measures" for buildings would also be in place. China, the US and other big polluters would see their emissions fall by half, or more. It's wishful thinking. What the IEA doesn't tell us about this path out of the mess is that politics will never allow it. For all the IEA's warnings, the COP 17 summit of international climate negotiators in Durban is likely to go the way of its predecessors in Copenhagen and Cancun, and leave the world no closer to the kind of comprehensive agreement on ways to tackle emissions. The same friction has already emerged between China, representing the developing world, and climate hawks SUCH AS the EU, which remains one of the few groups of countries willing even to keep pressing on with the Kyoto Protocol.
China has complained about an EU measure to penalise airlines for their emissions. Governments, already distracted by worries about the global economy, are more likely to delay, again.
It all makes for a worrying future. Energy costs are rising; easy oil is dwindling; renewables are not advancing on the scale needed; the climate continues to change; billions of people still lack basic access to energy; and, with each passing year, the solutions grow more difficult to implement. Barring new, unforeseen, disruptive technologies, an unexpected supply side shock of the kind that transformed the forecasts for natural gas, or a huge political breakthrough on emissions, the outlook for the coming decades should alarm energy consumers and governments everywhere. The IEA's three forecasts
The agency hedges its bets as it forecasts energy trends by offering three possible paths.
Present policies option: governments pursue an energy strategy over the next 25 years based on existing policies – so, for example, the EU keeps its course to achieve by 2020 a 20% reduction in emissions compared with 1990 levels; and China implements measures announced in its 12th five-year plan to reduce CO2 intensity by 17% by 2015.
New policies prediction: the IEA says this is the central forecast of the WEO2011. It is a little hazier and incorporates "broad policy commitments and plans that have been announced by countries around the world to tackle energy security, climate change and local pollution, and other pressing energy-related challenges" – even where the specific measures haven't yet been announced, let alone enacted. New policies, says the IEA, would include measures such as the adoption of carbon pricing by the US from 2015: or a 40% reduction in CO2 intensity (compared with 2005) in China by 2020, where non-fossil fuel energy could also reach 15% of supply by the same year.
450 forecast: this outlook sees the world getting its act together on climate change and countries setting energy policies that would give a 50% chance of stopping average global temperatures rising by 2°C. The 450 refers to the limit, in parts-per-million terms, of the concentration of GHGs in the air. The 450 prediction has become more difficult to achieve than before. After a dip in emissions in 2009, because of the global economic recession, they rose by a record 5.3% last year, to 30.4 billion tonnes. So the starting point against which cuts would be made is higher than ever.
Policies envisaged under 450 include the introduction of CO2 prices in all countries; $100 billion a year of financing for non-OECD countries; and sharp reductions in tailpipe emissions. EU emissions would fall by 30% in the next decade compared with 1990; the US would slice 17% of its emissions compared with 2005; and China would reduce carbon intensity by 45% against 2005 levels by 2020.
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