China, Government Policy to Drive Energy Prices

Most of us want to know if we’re going to be paying more for a tank of gasoline next week, not how much we’ll be paying in 2035. That kind of thinking is left to the International Energy Agency, IEA, and every year the agency publishes its World Energy Outlook including its latest projections on what the world’s energy demand will look like going forward and how the world will meet that demand.

 
In this year’s version of the report (executive summary here),  the agency correctly points out that energy demand is no longer driven by the developed nations, but instead by the emerging economies of China and India in particular. The primary fuel that will meet the energy demands of emerging nations is oil, but the percentage of oil use in the overall mix will fall from 33% in 2008 to 28% in 2035.

 
Demand for crude oil will grow to 99 million b/d by 2035, up from about 87 million b/d currently, and almost half the increase comes from China alone. Demand from the developed countries falls by 6 million b/d. Production rises to 96 million b/d by 2035, with the remaining demand met by processing gains. Much of the production gains are met by unconventional oil (read “oil sands”) and natural gas liquids. OPEC’s share of production rises from about 41% today to 52% of world supply by 2035.

 
The IEA has developed a new scenario, which it calls the New Policies scenario, in which the world’s governments actually put into practice the policies they have all so eagerly announced. The agency notes that if the policies were implemented, the world’s primary energy demand increases by an average of 1.2% annually from 2008 to 2035, compared with a previous scenario, called the Current Policies scenario, in which demand grows at an annual average rate of 1.4%. Under a more restrictive emissions policy, called the 450 scenario, the average annual rate of energy use grows by just 0.7%.

 
The Outlook also points out that natural gas will play a critical role in meeting world energy needs over the next 25 years. The IEA projects that demand for natural gas will grow at an average annual rate of 1.4% through 2035, led, of course, by demand from China which will account for 20% of the annual growth. To meet that demand, the IEA states that production from the Middle East will double by 2035. That seems about right, given the massive deposits of natural gas in the region.

 
According to the IEA, if the New Policies scenario is implemented, crude oil prices will rise to $113/barrel by 2035. The logic here is interesting. The Outlook states that the rising price of crude reflects “the growing insensitivity of both demand and supply to price.” Because oil is the major source of transportation fuel and demand is shifting towards subsidized markets (read “China”), the ability of higher prices to cut demand is limited and there is little incentive to switch from gasoline to, say, electricity as a transportation fuel. The IEA also notes that “constraints on investment mean that higher prices lead to only modest increases in production.”

 
The Outlook describes the role the Caspian Sea deposits of oil and natural gas will play, with oil production rising from 6% of world supply to 9% and natural gas production rising from 4% of world supply to 11%. The IEA also examines the role of eliminating subsidies for fossil-fuel production. In 2009, the IEA notes that subsidies for fossil fuel consumption and inputs to power generation totaled $312 billion worldwide.
The IEA expects renewable energy sources to increase from 19% of total supply to about one-third of total supply by 2035. The increase is expected to come from wind and hydropower, with hydro being the dominant source. Solar photovoltaic is expected to contribute just 2% of the world’s energy supply by 2035. The IEA estimates that worldwide government support for electricity generation from renewable sources totaled $37 billion in 2009 and that governments spent an additional $20 billion to subsidize biofuels (read “ethanol”). That’s still less than 20% of the subsidies governments paid for fossil fuel consumption, and the IEA figures that will rise to about $205 billion annually by 2035.

 
If the world is going to do anything to reduce the effects of greenhouse gases on climate, the IEA says that governments must begin “vigorous implementation of current commitments” in the next 10 years and take “much stronger action” in the following 15 years.

 
Paul Ausick