The Hindu Business Line : IEA's World Outlook Report — Investment can quench thirst for energy

Crude oil prices may be bearish now, thanks to uncertainties about global economic prospects, slowing demand growth, rebounding non-OPEC supply and high stock levels. Easing tensions in West Asia, amid steady OPEC supply and prognostications of slower global economic growth, have dampened crude oil price gyrations in recent months. Though the price of the OPEC basket of crude had been surging steadily from a low of $28.1 a barrel in 2003 to $36.05 a barrel in 2004 to $50.64 a barrel in 2004 and to $61.88 this year, OPEC Secretariat calculations show that the price of its crude oil basket was $54.25 a barrel as on November 2.

Twin visions

But all the apparent softness in global crude oil prices may turn out to be a blip in the radar screen as highlighted by the World Energy Outlook (WEO) 2006 Report, released in London on Tuesday by the International Energy Agency (IEA). The report lays out two visions of the energy future — under-invested, vulnerable and dirty; or clean, clever and competitive.

At the outset, the IEA concedes that the world today is facing twin energy-related threats: That of not having adequate and secure supplies of energy at affordable prices and the environmental harm being caused by consuming too much of it. It is small wonder that the IEA sets store by the need to curb the growth in fossil-energy demand, to increase geographic and fuel-supply diversity and mitigate climate-destabilising emissions.

The IEA Outlook on world energy confirms that fossil-fuel demand and trade flows and greenhouse gas emissions would follow their unsustainable paths through to 2030 in the absence of action by the governments, the world over — the underlying premise of IEA's Reference Scenario. It also reveals, in an Alternative Policy Scenario, a package of policies and measures that countries are contemplating.

In a Reference Scenario, which provides a baseline vision of how energy markets are likely to unfold without any new government measures to alter the underlying energy trends, the global primary energy demand is expected to go up by a hefty 53 per cent between now and 2030, and demand by more than one-quarter in the period to 2015 alone.

Over 70 per cent of the spurt in demand over the period stems from the developing countries, led by China and India with the former alone accounting for 30 per cent. Import of oil and gas in the OECD (Organisation for Economic Cooperation and Development — a club of 30 rich industrial nations) and developing Asia grow even faster than demand.

The world oil demand may reach 116 million barrels per day (mbd) in 2030, up from 84 mbd in 2005. Coal will see the biggest spurt in demand in absolute terms, driven largely by power generation.

The share of natural gas may also rise, though gas use grows less quickly due to higher prices.

The hydropower share of primary energy use is seen rising modestly, while that of nuclear power is expected to fall. Non-hydro renewable sources — including wind, solar and geothermal — grow the quickest, but from a meagre base.

Oil price situation

The IEA contends that most of the increase in oil supply is met by a few big OPEC producers with non-OPEC conventional crude oil supply reaching a plateau by the middle of the next decade.

Even as the market fundamentals presage a modest easing of prices as new capacity comes on stream and demand growth moderates, the IEA apprehends that in the event of new geopolitical tensions or, worse, a major supply disruption, prices could be off on a roller-coaster ride.

The IEA, however, assumes the average industrial world crude oil import price would fall to $47 a barrel in real terms in the early part of the next decade and then move steadily through 2030.

In this context, the IEA warns against rising oil and gas demand which, if unchecked, would accentuate the consuming countries' vulnerability to severe supply disruptions and resulting price haemorrhage.The share of transport demand — which is price-inelastic relative to other energy services — in global oil consumption is slated to rise in the Reference Scenario.

As a result, the oil demand would become less responsive to movements in global crude oil prices. The corollary of this is that prices would fluctuate more than in the past as a sequel to future short-term shifts in demand and supply. Here, the IEA points out the `cushioning' effect of subsidies to oil consumers on demand that also ironically leads to the insensitivity of global oil demand to changes in international prices.

Current subsidies on oil products in non-OECD countries, including India, are estimated at over $90 billion annually. Subsidies on all forms of final energy outside the OECD amount to over $250 billion per year — equal to all the investment needed in the power sector each year, on an average, in those countries!

Increase in emissions

Dealing with the issue of how current energy trends would contribute to accelerated carbon-dioxide (CO{-2}) emissions to make the planet a dangerous place to live, the IEA says that global energy-related CO{-2} emissions would go up by 55 per cent between 2004 and 2030 to reach 40 giga-tonnes (gt) in 2030, with China overtaking the US as the world's biggest belcher of CO{-2} before 2010.

Stating that the gloomy synopsis in the Reference Scenario trends are not set to deter improvements, the IEA calls for "strong policy action to move the world onto a more sustainable energy path". The Alternative Policy Scenario shows that the energy future could be improved if governments across the world implement the policies and measures they are considering, aimed at enhancing energy security and mitigating CO{-2} emissions. These interventions include efforts to improve efficiency in energy production and use, increase reliance on non-fossil fuels, and sustain the domestic supply of oil and gas within net energy-importing countries.

In this situation, the global energy demand reduces by 10 per cent in 2030 — equivalent to China's entire energy consumption of today. Global CO{-2} emissions are reduced by 16 per cent — equivalent to current emissions in the US and Canada combined. According to the IEA Executive Director, Mr Cladue Mandil, "the good news is that these policies are very cost-effective".

The WEO identifies under-investment in new energy supply as a real risk. To quench the world's thirst for energy, the Reference Scenario projections call for a cumulative investment in energy-supply infrastructure of over $20 trillion in real terms over 2005-2030.

Roughly half of all energy investment needed worldwide is in the developing countries. Despite the surge in oil and gas investment in recent years, drilling, material and personnel costs in the industry have soared; in real terms, the investment in 2005 was barely higher than that in 2000.

However, with the Alternative Policy Scenario, world energy situation can be tackled well and this is the long and short of the IEA report of this year on Global Energy Outlook.