Major Industry Trends
Energy is the lifeblood of any economy, and global demand for energy has risen inexorably in the last 150 years, in step with industrial development and population growth. Most global energy needs are supplied by coal, oil and gas—the fossil fuels that formed long ago from the carbon-rich remains of dead plants and animals.
Concern has grown in recent decades about environmental impact. Climate scientists have warned that greenhouse gas emissions, caused by burning fossil fuels and other human activities, must be substantially reduced to avoid climate change. Pressure to replace fossil fuels has focused more attention on renewable sources, e.g. solar and wind.
New technology called fracking is enabling the industry to drill for vast new deposits of oil and gas, which hold the potential to transform the global energy industry, the global economy, and the geopolitical forces that have shaped the world for decades. Fracking involves pumping a mixture of water, sand, and some chemicals into a well under high pressure, allowing oil and gas molecules to be extracted from dense shale rock formations. The technology is being used to the greatest extent in the gas industry in the United States. Indeed, the International Energy Agency (IEA) estimated in 2013 that the United States will replace Russia as the world’s largest producer of natural gas in only two years. The Americans could also become the world’s top petroleum producers by 2017.
According to a report by PricewaterhouseCoopers, published in February 2013, shale oil production could also boost the world economy by up to US$2.7 trillion by 2035. The extra supply could reach up to 12% of global oil production, or 14 million barrels a day, and push global oil prices down by up to 40%. PwC added that the level of global growth could increase by around as much as 3.7% by the extra supply of shale oil, which is the equivalent of adding an economy roughly the size of the United Kingdom to the total world economy by 2035. But the benefits of oil-price reductions as a result of shale oil production are likely to vary significantly by country. Current major oil exporters, such as Russia and the Middle East, could be “significant net losers in the long term unless they can develop their own shale oil resources on a large scale,” it said.
Low natural gas prices—the price of natural gas in the United States is only a quarter of what it was in 2008—have led many analysts to predict a resurgence of American industry. The US government estimates that the shale boom could generate 600,000 new jobs, while other experts even believe that up to three million new jobs could be created in the coming years.
Other countries with large shale reserves are believed to include China, Argentina, Poland, France, and Germany. The United States, however, is likely to be the key beneficiary.
A study by Germany’s foreign intelligence agency, the BND, concludes that Washington’s discretionary power in foreign and security policy will increase substantially as a result of the country’s new energy riches. According to the BND study, the political threat potential of oil producers such as Iran will decline. It is possible, some argue, that, in about 15 years the United States will no longer station aircraft carriers in the Persian Gulf.
Releasing its World Energy Outlook report in November 2012, the IEA confirmed the changes taking place in the global energy marketplace. “North America is at the forefront of a sweeping transformation in oil and gas production that will affect all regions of the world, yet the potential also exists for a similarly transformative shift in global energy efficiency.”
Under its central scenario, the IEA forecast that the United States would become a net exporter of natural gas by 2020, and would be almost self-sufficient in energy, in net terms, by 2035. It added that North America’s emergence as a net oil exporter would accelerate the switch in direction of international oil trade, with almost 90% of Middle Eastern oil exports being drawn to Asia by 2035.
Links between regional gas markets would also strengthen as liquefied natural gas trading becomes more flexible, and contract terms evolve. It forecast that global energy demand would continue to grow, increasing by more than one-third to 2035. China, India, and the Middle East would account for 60% of the growth, while demand would remain largely unchanged in the OECD, although there would be a pronounced shift towards gas and renewables.
Fossil fuels would remain dominant, supported by subsidies that, in 2011, jumped by almost 30% to US$523 billion, mainly as a result of subsidy increases in the Middle East and North Africa. Global oil demand would grow by seven million bpd to 2020 and would exceed 99 million bpd in 2035, by which time oil prices would reach US$125/barrel in real terms (above US$215/barrel in nominal terms).
The IEA believes that renewables will become the world’s second-largest source of power generation by 2015. However, this rapid increase hinges critically on continued subsidies. In 2011, these subsidies (including for biofuels) amounted to US$88 billion, but over the period to 2035 need to amount to US$4.8 trillion.
According to BP, global energy consumption grew by 2.5% in 2011, broadly in line with the historical average but well below the 5.1% seen in 2010. Once again, emerging economies accounted for all of the net growth in energy consumption, with demand in the OECD falling for a third time in the last four years, China alone accounting for 71% of global energy consumption growth. Consumption in OECD countries fell by 0.8%, the third decline in the past four years. The fall in OECD consumption was led by a sharp decline in Japan—in volumetric terms, the world’s largest decline. Non-OECD consumption grew by 5.3%, in line with the 10-year average. Global consumption growth decelerated in 2011 for all fuels, as did total energy consumption for all regions. The data suggests that growth in global CO2 emissions from energy use continued in 2011, but at a slower rate than in 2010.
Fossil fuels still dominate energy consumption, with a market share of 87%. Renewable energy continues to gain, but today accounts for only 2% of energy consumption globally. Meanwhile, the fossil fuel mix is changing as well. Oil, still the leading fuel, has lost market share for 12 consecutive years. In 2011, coal was once again the fastest-growing fossil fuel, with predictable consequences for carbon emissions.
The global future of nuclear as a power source was called into question after the disaster that occurred in March 2011, when a Japanese earthquake and tsunami rocked the reactors at Fukushima, leaving radioactivity leaking from the plant. However, many governments are continuing to pursue nuclear energy as a key part of their energy strategies. In the UK, for example, all but one of the country’s 16 reactors—supplying almost a fifth of the UK’s power—are set to close by 2023, but replacements planned.
In March 2013, the British minister Vince Cable said: “Nuclear power has the potential to play an increasing role in meeting the UK’s future energy needs. It is a source of low-carbon energy and can contribute to the UK’s energy mix and security of supply longer-term. This strategy—like those for offshore wind and oil and gas—will achieve a more effective alignment and integration of energy and industrial policy to enable the UK to deliver competitive energy technologies in future, with significant input from UK-based industry.” The British government said that £930 billion will be invested globally in building reactors over the next 20 years, with £250 billion being spent on decommissioning disused stations.
However, Germany has adopted a more radical solution, vowing to phase out the country’s nuclear power plants by 2022, while expanding the use of renewables. The decision, announced in May 2011, makes Germany the biggest industrial power to announce plans to give up nuclear energy. Chancellor Angela Merkel set up a panel to review nuclear power following the crisis at Fukushima in Japan. Nearly a quarter of Germany’s electricity currently comes from nuclear power.
Controversy also continues to surrounds biofuels, with many reports that it is contributing to an increase in food prices, which is hurting the world’s poorest people. In August 2012, however, Harald von Witzke, Professor of Agricultural Economics at Humboldt University in Berlin, told the BBC that only 3% of the world’s farmland was being used for biofuel. This, he estimated, was responsible for perhaps one-tenth of the doubling in food prices since 2000, suggesting that reports of the impact of biofuels on food prices has been exaggerated. However, in October 2012, the EU said it was changing its policy on biofuels to encourage energy production from waste rather than from crops.
The European Commission said that clearing land in order to plant biofuel crops can often cancel out the environmental benefits of biofuel. In some cases, forests are chopped down. The EU is putting a cap of 5% on the food-based biofuel allowed in the renewable energy used for transport. New biofuel installations will have to meet a minimum 60% threshold in terms of their efficiency in reducing greenhouse gas emissions. Meanwhile, the UN has appointed a special rapporteur on the right to food, Olivier De Schutter, who has sharply criticized the direct and indirect effects of biofuels on the poor.
According to BP’s 2012 Statistical Review, world biofuels production grew by 0.7% in 2011, the smallest increase since 2000. Increased output in North America was offset by declines in South and Central America, and Europe. Biodiesel accounts for just 27.5% of global biofuels output, but accounted for all of its growth in 2011. Global ethanol output declined by 1.4%.
According to BP’s 2012 Statistical Review, the rapid growth of renewable power generation continued in 2011. Global growth was 17.7%, only marginally slower than in 2010, and the ninth successive year of double-digit growth. It was the largest-ever volume growth, at 129 TWh, contributing 20% of the growth in global power generation, and representing 10% of world energy growth.
OECD countries remain the main source of renewable power generation (76% of the world total in 2011), according to BP, but non-OECD growth has accelerated sharply, and has exceeded OECD growth in percentage terms in each of the six years to 2011. The share of renewable power in global power generation reached 3.9% in 2011, up from 1.5% in 2000. Renewables accounted for 6% of OECD power generation in 2011, compared to 1.8% in the non-OECD. While the aggregate shares remain low, for some individual countries renewables now contribute a significant share of power. Fourteen countries now have a renewables share of more than 10%, up from just eight countries in 2010.
However, according to a PricewaterhouseCoopers report published in February 2013, the worldwide expansion of relatively cheap shale oil could put investment in renewable energy and global emissions targets under threat, as well as posing other environmental risks. The report also noted that cheaper oil could displace production from higher cost and more environmentally sensitive areas, such as the Arctic and Canadian tar sands, while tax windfalls could provide finance for carbon capture and storage, and other low-carbon technologies.
In its report, “The Outlook for Energy: A view to 2040,” published in early 2013, Exxon Mobil made the following predictions as to how the global energy market will develop over the next 30 or so years:
Efficiency will continue to play a key role in solving global energy challenges. Energy-saving practices and technologies, such as hybrid vehicles and high-efficiency natural gas power plants, will help OECD countries—including those in North America and Europe—to keep energy use essentially flat, even as OECD economic output grows by around 80%.
Energy demand in developing nations (non-OECD) will rise by 65% by 2040 compared to 2010, reflecting growing prosperity and expanding economies. Overall, global energy demand will grow by 35%, even with significant efficiency gains, as the world’s population expands from about seven billion people today, to nearly nine billion people by 2040, led by growth in Africa and India.
This growth will generate greater demand for electricity. Electricity generation represents the largest driver of demand for energy. By 2040, it will account for more than half of the increase in global energy demand.
Growth in transport demand will be fueled expanding commercial activity. However, energy consumed by personal vehicles will gradually peak, and then begin to fall as vehicles become much more fuel-efficient.
Technology is enabling the safe development of once hard-to-produce energy resources, significantly expanding available supplies to meet the world’s changing energy needs. Oil will remain the number one global fuel, while natural gas will overtake coal for the number two spot. Use of nuclear power and renewable energy will grow, while demand for coal peaks, and then begins a gradual decline.
Evolving demand and supply patterns will open the door for increased global trade opportunities. By around 2030, North America will likely become a net exporter of oil and oil-based products.