According to the International Energy Agencys (IEAs) World Energy Outlook 2010, the energy world market faces unprecedented uncertainty. The 20082009 global economic crisis threw the energy markets into severe turmoil. The pace of the global economic recovery holds the key to energy prospects for the next several years, but it will be governments responses to the twin challenges of climate change and energy security that will shape the future of energy in the longer term. The worst of the global economic crisis appears to be over. But it will be a hard fight to return to pre-2008 energy levels. In looking ahead, IEA forecasts some changes in the global energy market:
Global primary energy demand will increase by 36% between 2008 and 2035, or 1.2%/yr on average. This compares with 2%/yr predicted from the previous 27-year study. Slower growth is due to national pledges to reduce greenhouse-gas (GHG) emissions and plans to phase out fossil-fuel subsidies.
Non-OECD countries account for 93% of the projected increase in global energy demand. China, where demand has surged over the past decade, will contribute 36% to the projected growth in global energy use; its demand is rising by 75% between 2008 and 2035 (Fig. 1). China overtook the US in 2009 to become the worlds largest energy user. Aggregate energy demand in OECD countries is forecast to rise very slowly.
| Fig 1. Energy demand by region, 2008-2035.|
Global demand for fossil fuels will account for over 50% of the increase in total primary energy demand. Rising fossil-fuel prices for end users, resulting from upward price pressures in international markets and, increasingly, carbon penalties in many countries, will encourage energy savings and switching to low-carbon energy sources, to restrain demand growth for all three fuels.
Oil remains the dominant fuel in the energy mix. Oils share of the primary fuel mix diminishes as higher oil prices and government measures to promote fuel efficiency support fuel switching. Demand for coal rises through 2020 and starts to decline. The share of nuclear power increases from 6% in 2008 to 8% in 2035. Use of modern renewable energyincluding hydro, wind, solar, geothermal, modern biomass and marine energytriples between 2008 and 2035. Its share in total energy demand increase from 7% to 14%.
Natural gas will play a central role in meeting the worlds energy needs. Global natural gas demand, which fell in 2009, is set to resume its long-term upward trajectory from 2010. Demand will increase by 44% between 2008 and 2035at an average of 1.4%/yr. Demand growth for gas far surpasses that for the other fossil fuels due to its more favorable environmental and practical attributes, and constraints on how quickly low-carbon energy technologies can be deployed. Chinas gas demand will grow the fastest, accounting for more than one-fifth of the increase in global demand to 2035. The Middle East leads in expansion of natural gas production; its output is estimated to double by 2035. Over a third of the global increase in gas output is sourced from unconventional sourcesshale gas, coal-bed methane and tight gas. A glut in global gas-supply capacity, which could peak in 2011, will keep pressure on gas exporters to move away from oil-price indexation.
What will shape the future of oil?
The global outlook for oil remains highly sensitive to policy action to curb rising demand and emissions. Primary oil use will increases in absolute terms between 2009 and 2035, driven by population and economic growth, but demand is forecast to decline in response to radical policy action to curb fossil-fuel use. Other trends are:
The oil price needed to balance oil markets is set to rise, reflecting the growing insensitivity of both demand and supply to price. The growing concentration of oil use in transport and a shift of demand toward markets where subsidies are most prevalent are limiting the scope for higher prices to choke off demand and discouraging fuel switching. Constraints on investment mean that higher prices lead to only modest increases in production. In the New Policies Scenario, the average IEA crude oil price reaches $113/bbl (2009 dollars) in 2035up from just over $60/bbl in 2009.
Oil demand (excluding biofuels) continues to grow steadily reaching about 99 million bpd (MMbpd) by 2035. Non-OECD nations are responsible for the net growthalmost half from China alone. Demand by OECD nations falls by over 6 MMbpd. Global oil production reaches 96 MMbpd, the balance of 3 MMbpd coming from processing gains. Crude oil output reaches an undulating plateau of around 6869 MMbpd by 2020, but never regains its all-time peak of 70 MMbpd reached in 2006, while production of natural gas liquids (NGLs) and unconventional oil grows strongly (Fig. 2). Total OPEC production rises continually through to 2035; its share of global output increasing from 41% to 52%. Iraq accounts for a large share of the increase in OPEC output. By contrast, total non-OPEC oil production is broadly constant to around 2025, as rising production of NGLs and unconventional production offsets a fall in crude oil; thereafter, production starts to drop.
| Fig 2. World oil production by type, 1990- 2035. |
The eventual peak in oil demand will be determined by several factors affecting both demand and supply. Production in total does not peak before 2035, although it comes close to doing so. Oil prices are much lower as a result. If governments act more vigorously than currently planned to encourage more efficient use of oil and development of alternatives, then demand for oil may ease. Result: We might see a fairly early peak in oil production, which would help prolong the worlds oil reserves.
Unconventional oil is set to play an increasingly important role in the world oil supply through to 2035, regardless of what governments actions to curb demand. Unconventional oil will meet about 10% of world oil demand compared with less than 3% today. Canadian oil sands and Venezuelan extra-heavy oil dominate the mix, but coal-to-liquids, gas-to-liquids and, to a lesser extent, oil shale also makes a growing contribution in the second half of the outlook period.
The rate at which unconventional resources are exploited will be determined by economic considerations and the cost of mitigating their environmental impact. Unconventional sources of oil are thought to be hugeseveral times larger than conventional oil resourcesbut they are among the most expensive available. Consequently, they will play a key role in setting future oil prices. The production of unconventional oil generally emits more GHG/bbl than that of most other conventional oils. But, on a well-to-wheels basis, the difference is much less, as most emissions occur at the point of use. In the case of Canadian oil sands, well-to-wheels CO2 emissions are typically between 5% and 15% higher than for conventional crude oils. Mitigation measures will be needed to reduce emissions from unconventional oil production.
How big are the potential gains from getting rid of fossil-fuel subsidies?
Fossil-fuel subsidies, which remain commonplace in many countries, result in an economically inefficient allocation of resources and market distortions, while often failing to meet their stated objectives. Subsidies that artificially lower energy prices encourage wasteful consumption and exacerbate energy-price volatility. For importing countries, subsidies often impose a significant fiscal burden on state budgets, while for producers, they quicken depletion of resources and thereby reduce export earnings over the long term.
Fossil-fuel consumption subsidies worldwide amounted to $312 billion in 2009. The annual level fluctuates widely with changes in international energy prices, domestic pricing policy, exchange rates and demand. In 2008, when international energy prices spiked, subsidies amounted to $558 billion. In 2009, oil products and natural gas were the most heavily subsidized fuels, attracting subsidies totaling $126 billion and $85 billion, respectively. Subsidies to electricity consumption were also significant, reaching $95 billion in 2009. At only $6 billion, coal subsidies were comparatively small. The vast majority of these subsidies are in non-OECD countries, which are projected to contribute 93% of incremental global energy demand to 2035.
Phasing out fossil-fuel consumption subsidies could represent an integral building block for tackling climate change. A complete phase-out would reduce CO2 emissions by 5.8%, or 2 Gigaton (Gt), by 2020, equivalent to the current combined emissions of Germany, France, the UK and Italy. This amounts to over 40% of the abatement needed to be on track by 2020 to limit global warming to a 2°C rise.
Although the stated intent of many energy-consumption subsidies is to make energy services more affordable and accessible for the poor, the reality is that only a small proportion of fossil-fuel subsidies go to poor households. In countries with low levels of modern-energy access, subsidies in the residential sector for kerosine, electricity and LPGfuels that often support the basic needs of the poorrepresented just 15% of fossil-fuel consumption subsidies in 2009. Nonetheless, subsidy reform programs need to be carefully designed, as low-income households are likely to be disproportionately affected by their removal.
How green will the energy future be?
Renewable energy sources will have to play a central role in moving the world onto a more secure, reliable and sustainable energy path. The potential is unquestionably large, but how quickly their contribution to meeting the worlds energy needs grows hinges critically on the strength of government support to stimulate technological advances and make renewables cost competitive with other energy sources. Government support for renewables can be justified by the long-term economic, energy security and environmental benefits they can bring, though it is essential that support mechanisms are cost-effective.
The power sector will provide the greatest scope for increasing usage of renewables in absolute terms. Renewables-based generation triples between 2008 and 2035, and the share of renewables in global electricity generation increases from 19% in 2008 to almost one-third (catching up with coal). The increase comes primarily from wind and hydropower, although hydropower remains dominant over the outlook period. Electricity produced from solar photovoltaics increases very rapidly, yet its share of global generation reaches only around 2% in 2035. The share of modern renewables in heat production in industry and buildings increases from 10% to 16%. Use of biofuels grows more than four-fold over the outlook period, meeting 8% of road transport fuel demand.
Renewables are generally more capital intensive than fossil fuels, so the investment needed to provide the extra renewables capacity is very large. Investment in renewables to produce electricity is estimated at $5.7 trillion (2009 dollars) from 20102035. Investment needs are greatest in China, which has now emerged as a leader in wind power and photovoltaic production, as well as a major equipment supplier. The Middle East and North Africa region holds enormous potential for large-scale development of solar power, but there are many market, technical and political challenges that need to be overcome (Fig. 3).
| Fig 3. Renewable energy demand by region, |
Although renewables are expected to become increasingly competitive as fossil fuel prices rise and renewable technologies mature, the total value of government support will rise as their contribution to the global energy mix increases. Estimated government support worldwide in 2009 amounted to $37 billion for electricity from renewables and $20 billion for biofuels. Total support grows to $205 billion, or 0.17% of global GDP, by 2035. Over the outlook period, 63% of the support goes to renewables-based electricity. Support per unit of generation on average worldwide drops over time, from $55 per megawatt-hour (MWh) in 2009 to $23/MWh by 2035, as wholesale electricity prices increase and their production costs fall due to technological learning.
Biofuels consumption is expected to increase rapidly over the projection period, thanks to rising oil prices and government support. In looking ahead, global biofuels usage increases from about 1 MMbpd today to 4.4 MMbpd in 2035. The US, Brazil and the European Union are expected to remain the worlds largest producers and consumers of biofuels. Advanced biofuels, including those from ligno-cellulosic feedstocks, are assumed to enter the market by around 2020. The cost of producing biofuels is often higher than the current cost of imported oil, so strong government incentives are usually needed to make them competitive with oil-based fuels. Globally, government support to biofuels is projected to rise to about $45 billion/yr between 2010 and 2020, and $65 billion/yr between 2021 and 2035. Government support typically raises costs to the economy as a whole. But the benefits can be significant too, including reduced imports of oil and reduced CO2 emissionsif sustainable biomass is used and the fossil energy used in processing the biomass is not excessive.
Copies of the IEAs World Energy Outlook 2010 are avaiable at www.iea.org. HP