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The shifting global landscape of energy markets

Increased output and soaring demand is driving change

The global energy landscape is shifting as increased oil output from the US and Iraq and soaring demand from emerging economies is driving change in markets, the International Energy Agency (IEA) said at a briefing in London today.

“The foundations of our global energy system are shifting substantially with implications for everybody,” Fatih Birol, the IEA’s chief economist, said. “It is mainly a result of the resurgence of oil and gas production in the US, Canada and Iraq.”

In its 2012 World Energy Outlook, which forecasts how global energy markets will evolve to 2035, global oil demand will reach 99.7 million barrels a day (b/d) in 2035, up from 87.4m b/d last year. Crude oil prices will rise to $125 a barrel (in 2011 dollars), compared with an average of $110/b this year.

Strong oil prices in recent years, said Birol, continue to act as a drag on the global economic recovery. 

China will drive the growth in global energy use, with its oil and gas demand to rise by 60% between now and 2035, followed by India and the Middle East. The IEA said that non-OECD countries’ share of global energy demand will rise from 55% in 2010 to 65% by 2035.

Rising supplies from Iraq and the US will drive a fundamental shift in global trading patterns, the IEA said. Within a decade, the US will import “almost zero” crude from the Middle East as its need for overseas oil evaporates. The US will emerge as a net oil exporter, accelerating a switch in the direction of international oil trade, with almost 90% of Middle Eastern oil exports being drawn to Asia by 2035. By 2017, the US will overtake Saudi Arabia as the world’s largest oil producer.

In the IEA’s New Policies Scenario, which assumes a raft of policies to reduce greenhouse-gas emissions and phase out fossil-fuel subsidies, the US would become a net exporter of natural gas by 2020 and be “almost self-sufficient” in energy by 2035.

But the trend towards US self-sufficiency depends also on new fuel-efficiency laws, requiring cars to achieve 54.5 miles per gallon. This will be responsible for 45% of the drop in US oil import needs by 2035, said the IEA, with new production making up the rest.

Iraq’s oil output will soar, accounting for almost half of the growth in global oil production to 2035. Production should almost double to 6.1m b/d in 2020 and reach 8.3m b/d in 2035, as mega projects around Basra come on stream. Iraq will overtake Russia to become the second-largest global oil exporter.

Although a surge in unconventional and deep-water oil output will boost non-OPEC supply over the next decade, the US’ production supremacy will be short-lived as global oil supply after 2020 increasingly relies on Opec, the IEA said.

The group’s oil-output capacity will rise to 46.5m b/d in 2035, up from 35.7m b/d last year.

Iran’s oil output will take a rollercoaster ride, amid international sanctions and a lack of capital investment in new technology. Iran’s output will fall by 1m b/d from last year’s figure to 3.2m b/d in 2015 -- and then gradually recover to reach 4.5m b/d by 2035.

Fossil fuels are set to remain the mainstay of global energy supply, supported by government subsidies that the IEA said increased last year by almost 30% to $523bn. Such subsidies were one of the main obstacles to increasing energy efficiency and reducing carbon emissions worldwide, the IEA said.

“The world has still failed to put the global energy system onto a sustainable path. And appetite for reform appears to be waning in some countries,” the agency’s executive director, Maria van der Hoeven, said. “And despite the climate imperatives, our outlook for energy use continues to be one dominated by fossil fuels and one where we fail to keep to a trajectory of no more than (a temperature rise of) two degrees Celsius.”

Global natural gas demand is set to increase by 50% by 2035 to 5 trillion cubic metres a year (cm/y). Supply will reach 5.3 trillion cm/y, compared with 3.3 trillion cm last year, with nearly half of the increase coming from unconventional gas in the US, Australia and China. The IEA’s Van der Hoeven issued a “note of caution” for the future of unconventional gas outside of North America, however, saying that a global boom in output was not guaranteed. Political and environmental opposition in some countries will determine the potential, Van der Hoeven said.  

Links between regional gas markets will strengthen as liquefied natural gas (LNG) trade becomes more flexible and contract terms evolve, the IEA said, with a gradual disconnection between oil-indexed gas prices. 

Environmental concerns have affected the outlook for other fuels, such as nuclear, particularly in the US, Europe and Japan following the Fukushima disaster. Global nuclear capacity will reach 580 gigawatts (GW) in 2035 -- around 50GW lower than the IEA predicted last year. Nuclear power will supply around 12% of global electricity by 2035, the IEA said, driven by expanded generation in China, India, Russia, South Korea, and the Arab Gulf states.

The IEA also released a new energy Efficient World Scenario (EWS) which claims that by adopting certain energy efficiency measures forecast growth in global energy demand could be cut by half. In the EWS, global oil demand would peak at 91m b/d before 2020 and decline to 87m b/d by 2035.

By following its six steps towards energy efficiency, the IEA said the world could buy time in which new technology, or a global climate deal, would emerge to control emissions.

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