Transport needs around the world will continue to make oil the dominant fuel for the foreseeable future
Financial Times, January 25
By DAVID BUCHAN
As the new year gets into its stride with oil prices lower than last year, it may seem perverse to argue that the best, in terms of energy, is behind us.
Yet the 1990s as a whole was characterised by rising energy consumption and flat energy prices, a combination hard to repeat. It was largely due to two factors, both the result of investments started far earlier.
One was the strength of oil production outside the Organisation of Petroleum Exporting (Opec) countries. The other was the largely unsung contribution of nuclear power which, with output expanding by 30 per cent, was the fastest-growing of the major energy sources in the past decade.
For a variety of physical and policy reasons, these two supply contributions to the world energy balance seem fated to decline, at least after 2010.
The world economy, including even the profligate North American part of it, is gradually learning to use a little less energy as it grows. Energy intensity - consumption per unit of output - has, according to the International Energy Agency (IEA), declined at a fairly steady pace of 1.1 per cent a year since 1971, and the agency sees no reason why this improvement should not continue for the next 20 years.
But this will do little to diminish world energy demand which, the IEA predicts, will rise by 2 per cent a year, amounting to a massive 57 per cent increase over the 1997-2020 period. This projection is based on global economic growth rate of more than 3 per cent a year, close to the rate since 1990, but significantly lower overall expansion in the world's population.
Even so, the population of developing countries is expected to grow 1.3 per cent a year. As they multiply, prosper, industrialise and urbanise, the citizens of developing countries will account for more than two- thirds (68 per cent) of the expected increase in energy demand over the next 20 years, the IEA predicts. Oil consumption by countries outside the Organisation for Economic Co-operation and Development (OECD) will sometime after 2010 overtake that of OECD countries, and will be 20 per cent higher by 2010.
In the process, developing countries will become the leading generators of greenhouse gases by 2020. The carbon dioxide emissions of China, which like India has ample coal and every intention of using it, is expected to climb by 3.3bn tonnes, compared with an extra 2.8bn tonnes generated by the whole OECD area.
But richer countries will have their share of blame for the fact that global carbon emissions will in coming years rise faster than overall energy demand. This is because the share of carbon fossil fuels will rise slightly to 90 per cent of the total primary energy mix, as the increase in renewables sources such as solar and wind power fails to match the decline in the shares of nuclear and hydropower.
The flexibility of oil is set to keep it the world's dominant fuel, at around 40 per cent of the primary energy mix. While developing countries will put their increase in oil consumption to a variety of uses, richer industrialised countries are expected to devote it entirely to transport.
There is a question mark over the extent, at least in the US, to which electric fuel cells might replace oil and the internal combustion engine. Research into fuel cell technology is being driven by obvious environmental concerns and regulation.
The regulatory lead is being taken by California, which has decreed that 10 per cent of new vehicles sold in the state by 2003 should meet very strict, almost zero, emission standards; other US states could follow. According to a study by the ABN-Amro bank, fuel cell vehicles are expected to be available in the 2003-2005 timeframe.
However, the world's largest listed oil company does not believe that such technology, even it catches on rapidly, will have a significant impact on its petrol sales.
In its long-range energy outlook, Exxon-Mobil assumes increasing sales of "high efficiency" cars to reach 15 per cent of the world's fleet by 2020. But if this share were to rise to 60 per cent over the next 20 years, it would only knock 3m barrels off the 23m barrels which it is estimated the world's cars will be using every day by 2020. Behind Exxon's relatively relaxed attitude to the arrival of the new technology is the hope that gasoline will play some part in it.
Another factor influencing oil demand is, of course, price. Opec saw its power to set prices decline drastically in the mid-1980s, when as a result of the surge in non-Opec production and of the cartel's own ill-discipline Opec's share of the oil market dropped to around 40 per cent.
Since then, Opec (or at least those of its members, such as Saudi Arabia, able and willing to take a long-term view of oil) has had to beware of pushing the price back to heights that would spur further non-Opec output and thereby erode the cartel's market share further.
But non-Opec production will soon hit its geological limits, and flatten. The market share restraint on Opec's behaviour will dissipate as the pendulum swings back over the coming years towards Opec's Middle East producers, who hold half of the world's reserves.
Opec, whose output is today equivalent to roughly two-thirds of the rest of the world's production, will by 2010 have drawn almost level again, and according to the IEA could be producing 62m barrels a day (b/d), compared with non-Opec output of 46m b/d. With this cross-over Opec will regain its power to make prices stick.
Elsewhere in the energy mix, another cross-over will take place, the IEA forecasts, as the growth in gas (2.7 per cent a year) outstrips that of coal (1.7 per cent), making gas more important (26 per cent) than coal (24 per cent) in the energy cocktail by 2020. The environmental benefits of this coal-to-gas shift are obvious. But they look like being more than offset by the effects of the neglect of nuclear power.
For all its other potential hazards, atomic power generates virtually no greenhouse gases. Yet, while the world has 436 existing reactors, it has only 38 under construction, of which 23 are in Asia alone. As a new study by the UK's Royal Institute of International Affairs argues, nuclear power could be a fuel for the future, not a relic of the past, and governments therefore need to keep the nuclear option open. |
