There are many constraints on economic growth, but no constraints – for the foreseeable future – on available energy resources. This is according to Group Chief Economist and Vice President of BP, Christof Rühl, who spoke on BP’s recently released Energy Outlook 2030 at Wits University on Tuesday, 1 October 2013.
There will be 8.6 billion people in the world by 2030, GDP is expected to double, and energy consumption is expected to grow by just over 30%. Almost 100% of the future energy demand growth will occur in developing countries. “There’s a huge, pent up demand for industrialisation,” said Rühl.
He referred to the assumption that if China, India and Africa continue to grow at their current pace, the world would run out of energy resources, and said he commonly heard the concern that we would need four planets to fuel the kind of growth that is expected.
“There is, in the data for the foreseeable future, no evidence of this.”
Although there are many constraints on economic growth, proved reserves (resources which can be produced with given technologies and given prices) have gone up by almost 60% over the last 20 years. Natural gas went up by about 50%.
“Over the last 10 years energy prices have been steadily rising and are now record high. If you take the last five years and compare them with a five year period 10 years ago (from 1997 to 2002), with all prices in real terms, inflation adjusted, a basket of oil prices are up 240%, a basket of coal prices are up 140%, and a basket of natural gas prices are up 90%,” said Rühl.
Increasing prices should theoretically see more fuel supplies become available, and maybe some innovation as people are incentivised by high prices. “This is indeed what happened. We are not only seeing more of the same – more coal in South Africa, more natural gas in neighbouring countries – we are also seeing more technological innovation. The most prominent innovations in the fossil fuel sector have been shale gas and tight oil,” said Rühl.
Recently, the single biggest decline in carbon emissions has come from a country not known for its climate change policies – the US. This is due to the revolution in shale gas and tight oil.
Conversely, after 20 years of climate change policy, Europe has increased the percentage of coal in its energy mix. What happened?
The year 2011 was the beginning of the Arab Spring and the civil war in Libya. “For oil markets that meant that 1.2 million barrels of oil was taken off the market – the single biggest supply disruption since the collapse of the Soviet Union,” said Rühl.
In 2012, some of the Libyan oil came back, but there were sanctions against Iraq, plus a number of smaller disruptions.
The OPEC countries saw these outages, they witnessed the debate on Iran sanctions, and they produced more oil to compensate. But actually the single biggest increase in oil production last year came from tight oil the US.
On the demand side, consumption of oil by OECD countries started decreasing in 2005. “Oil consumption is back to where it was in 1992. In the European Union, it’s back to where it was in 1969. Population growth is stagnant. Everyone who wants a car has a car. So what you have is massive efficiency improvements outpacing demand. And these efficiency improvements are as a result of these very high prices,” said Rühl.
In 2005, US oil imports peaked. Since then they have fallen by 45%. At the same time, Chinese imports last year had gone up by 85%.
When it comes to gas, demand has been driven by the usual suspects of high economic growth, but also by the urgent need of Japan to replace its nuclear power after Fukushima. This has led to very high prices for liquefied natural gas in Asia.
On the other end of the extreme, prices are at a record low in the US – a direct effect of the increase in shale gas. “In 2011, there was a record increase in shale gas production. By the beginning of 2012, there was already a massive oversupply of natural gas in the US. The Americans cut back on imports but it wasn’t enough to deal with the oversupply,” said Rühl.
In the end, the only sector capable of absorbing the oversupply was energy generation.
(Globally, the biggest user of energy is the production of other energy sources. The second biggest user is industry, and the third biggest user is transport. In Africa, the transport sector plays a bigger role than it does globally, because of the huge demand for cars. People in the non-OECD countries, particularly those with higher incomes, are very prepared to spend a higher fraction of their income on continuing buying cars rather than cutting down on transport when it comes to tightening the belt.)
In the US, there was a massive 20% increase in natural gas used for power generation, with a 12% decrease in the use of coal. With all the redundant coal, it became 35% cheaper for Europe to buy American coal and create power with coal than to use imported liquefied natural gas. As a result, Europe had an almost equally massive switch out of gas and into coal, and let expensive gas deliveries pass on to Asia. “These huge cargos of gas passed by Europe and disappeared into Asia,” said Rühl.
According to Rühl, attributing the massive increases in oil and gas production in the US and Canada to an increase in reserves would be a mistake. “We know that Venezuela has more reserves than Canada. And yet nothing came out of Venezuela in response to these 10 years of high and rising prices,” said Rühl.
His explanation boils down to the existence of competitive energy markets – free entry markets, where anyone can and does invest. “Competition bred the new technologies. If you double the price for jackets, you will get innovation for jackets in a few years. In the energy market, it might take 10 years. And worldwide, in this industry, innovation doesn’t come from markets controlled by governments which exclude incentives to experiment.
“There is going to be an increasing role for political discussions in determining where future production will come from. We are used to a situation where nature distributes it and then much of the politics are concerned with who controls those supplies. Because of the widespread nature of this new resource (shale gas and tight oil), you’ll see a lot of discussion centred around competition entry and environmental considerations.”
BP’s forecast, which it describes as being at very pessimistic end of the spectrum compared to other forecasts, is that by 2030, about 9% of global oil supplies will be produced with tight oil.
What does this mean for oil prices? “If the oil market was a market like any other, prices would come down. But the oil market has a cartel – OPEC. We think that OPEC will be willing and capable of cutting production to neutralise this new production,” said Rühl.
What does it mean for the oil market in general, and geopolitics in particular? “For the last 50 years, oil was the dominant fuel and the Middle East was the primary supplier. That’s going to change. Twenty years ago, China was a net energy exporter. By 2030 it will be importing roughly 80% of its oil and more than 60% of its gas. Europe, already a big importer, will remain the same.
“Where things are going to change is the US. They are already exporting coal and there’s no reason to think that will change. Everybody agrees it will become an exporter of natural gas. It may be conceivable that a Mr or Mrs American President looking at some trouble in the Middle East and thinking: no skin off my nose – we need very little oil, and what we need, we can get from Mexico and Canada.”
North America’s shift from oil into gas also has good news for climate change. Although renewable energy increased its share of global energy consumption from 2.2% to 2.4% last year, BP’s prognosis is that it will take a long time for that share to increase. By 2030, it is expected to be around 7%. According to Rühl, renewable energy – like nuclear energy – will hit a glass ceiling if massive subsidies have to continue to support a lack of cost efficiency.
However, creating energy using gas rather than coal already creates a 50% reduction in carbon emissions. “A shift between coal and gas is going to dwarf any gains made by switching to renewable energy,” said Rühl.
Perhaps the most promising point to come out of the Energy Outlook 2030 is that there is a hint of a gap starting to open up between energy consumption and GDP, , driven by market forces.
There’s been a shift in energy consumption. In 2009, the non-OECD countries started consuming more energy than OECD countries. Over the last 20 years, global energy consumption increased by about 50%, and over the last 10 years, it increased by 30%. Almost all of that 30% came from non-OECD countries.
In the last five years, for four out of five years, energy consumption in the OECD countries has declined. Three out of these four times of declining energy consumption, it happened despite positive economic growth.
“We at BP have long held the view that oil consumption in OECD countries has peaked. I think it’s too early to make a similar call for primary energy for the totality of all the fuels. But certainly this is a very interesting phenomenon. Is it possible, over long periods of time, to have economic growth with declining energy consumption?”
Rühl’s presentation was based on two publically available documents:
Source: University of Witwatersrand