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 the environmental impact of energy use. 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—for example, solar and wind.
However, a long-established technique called hydraulic fracturing, but more commonly termed fracking, is allowing the industry to exploit vast new resources of oil and gas in quantities that have the potential to transform the global energy industry, the global economy, and the geopolitical forces that have shaped the world for decades. Hydraulic fracturing has been used for decades by the oil industry to increase production from both oil and gas wells, but the first attempt to apply it to the extraction of gas from shale, which is usually impermeable, came only in the early 1990s. In the fracking process a mixture of water, sand, and chemicals is pumped down a drillhole under high pressure, fracturing target rock horizons at depth and enabling oil and gas to be extracted from shale rock formations. The technology is being used to the greatest extent by the gas industry in the United States.
Indeed, the International Energy Agency (IEA) estimated in 2013 that the United States would 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 producer by 2017. However, at the launch of the IEA’s world energy outlook report released in November 2013 executive director Maria van der Hoeven noted that although “unconventional production may herald the dawning of a Golden Age of Gas, it does not necessarily create an era of oil abundance.”
New supplies of unconventional oil will reduce the Organization of the Petroleum Exporting Countries’ (OPEC’s) share of supply over the next decade. Other new sources will also contribute, such as oil from Brazil. However, the IEA said that the Middle East is still the only large source of low-cost oil and that it would reassert its role as the dominant source of oil supply growth from the mid-2020s.
According to a report by PricewaterhouseCoopers (PwC) published in February 2013, shale oil production could 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 as much as 3.7% through the extra supply of shale oil, which is the equivalent of adding an economy roughly the size of the United Kingdom to the world economy by 2035. But the benefits of oil price reductions due to shale oil will vary significantly by country. Current major oil exporters, such as Russia and the Middle East, “could see a significant worsening of their trade balances by around 4%–10% of GDP in the long run if they fail to develop their own shale oil resources,” PwC’s report states.
The United States has already benefitted enormously from the shale energy revolution. Shale production has slashed energy bills by more than two-thirds, and the United States will become energy-independent by 2018, reducing its balance of payments deficit and attracting industries that want to take advantage of its cheap energy. The shale revolution will also have a significant impact on the dollar, with the currency expected to rise sharply over the coming years. In 2013, shale-related business investment in the United States amounted to over US$160 billion and one million jobs have so far been created, with a further two million expected by 2020, according to PwC.
Other countries with large shale reserves are believed to include China, Argentina, Poland, France, and Germany. Estimated shale oil and shale gas resources in the United States and in 137 shale formations in 41 other countries represent 10% of the world’s technically recoverable resources of crude oil and 32% of those of natural gas, or those that can be produced using current technology without reference to economic profitability, according to a report sponsored by the US Energy Information Administration published in June 2013.
The United States, however, is likely to be the key beneficiary. A study by Germany’s foreign intelligence agency, the Bundesnachrichtendienst (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 like Iran will decline. It is possible, some argue, that in about 15 years the United States will no longer have to station aircraft carriers in the Persian Gulf to protect the Strait of Hormuz.
Fracking has drawn concern from environmentalists. Environmental campaigners claim that the process encourages reliance on fossil fuels instead of promoting investment in renewable energy sources. They also say that the extraction of shale oil and gas leads to groundwater contamination, serious health impacts, and significantly higher carbon emissions than other fossil fuels.
However, in a speech in Hong Kong in February 2014, the UK finance minister George Osborne said that shale gas provided a means to counter climate change cheaply. He was quoted as saying: “Let’s not be too theological about which technology we use—let’s get the right mix. For example, there are people in the green movement who oppose civil nuclear power for I would think rather ideological reasons, but it’s clearly a low-carbon source of energy generation. Equally, shale gas has done incredible things to reduce US carbon emissions and there are parts of the environmental movement who don’t like that, again for rather ideological reasons. I would say let’s see more fracking and shale gas in Europe, in the UK and in China.”
Tar sands are another huge potential source of oil. Oil sands in Canada are the third-largest proven crude oil reserves in the world, after Saudi Arabia and Venezuela. About half of the world’s total oil reserves that are open to private sector investment are contained in Canada’s oil sands. Mainly located in the province of Alberta, the oil sands are a natural mix of sand, water, clay and bitumen. Other countries with large tar sands feserves include Russia and Kazakhstan.
According to BP’s “Energy outlook 2035,” published in January 2014, global energy demand in the future will mainly be driven by emerging economies—led by China and India. It expects global energy consumption to rise by 41% from 2012 to 2035—compared to 52% over the previous 20 years and 30% over the previous 10. Around 95% of the growth in demand is expected to come from the emerging economies, while energy use in the advanced economies of North America, Europe, and Asia as a group will grow only very slowly—and will begin to decline in the later years of the forecast period.
BP anticipates that oil, natural gas, and coal each will account for around 27% of the total energy mix by 2035, with the remaining share coming from nuclear, hydroelectricity, and renewables. Among fossil fuels, gas is growing fastest, with gas increasingly being used as a cleaner alternative to coal for power generation as well as in other sectors.
In its report “The outlook for energy: A view to 2040” published in early 2014, ExxonMobil pointed out that while its projected rise in energy demand from 2010 to 2040 is substantial, it is only about 80% of the growth seen between 1980 and 2010. ExxonMobil also identified three significant drivers of global energy trends: increasing population, urbanization, and rising living standards. The company said that urbanization and rising incomes—particularly in China, India, and 10 other key growth countries—are driving demand for energy not just for basic needs, but also for modern uses such as air conditioning, appliances, and electronics.
ExxonMobil also points out that urbanization brings a shift away from traditional fuels. In India and Africa, millions of people still get a significant amount of energy from biomass fuels like wood. Growth in the use of these fuels is slowing in favor of modern energy sources, such as natural gas, liquefied petroleum gas (LPG), and electricity. Modern fuels burn much more cleanly, and far more efficiently. When used for cooking, modern fuels such as natural gas and LPG are about four times more efficient than wood, according to ExxonMobil. ExxonMobil cited the International Energy Agency as estimating that 2.6 billion people, mostly in Africa and developing Asia, lack access to modern cooking fuels, .
ExxonMobil adds that the industrial sector is a major consumer of energy, accounting for about half of all the electricity consumed around the world and about 30% of primary energy use. However, the company says that urbanization and rising living standards continue to drive industrial demand for energy. The expansion of urban infrastructure is creating new demand for steel, cement, and other energy-intensive industrial goods. Growing middle-class populations will also boost demand for consumer goods—appliances, apparel and electronics—that require energy to manufacture.
China is the world’s largest industrial energy user and is projected to remain so for the foreseeable future. But ExxonMobil expects that China’s industrial energy demand will likely peak around 2030, reflecting efficiency improvements and the natural maturing of its economy after decades of rapid growth.
According to BP’s Statistical review of world energy June 2013, global primary energy consumption grew by 1.8% in 2012, well below the 10-year average of 2.6%. Once again, emerging economies accounted for all of the net growth in energy consumption, with China and India alone accounting for nearly 90% of the net increase in global consumption. Consumption in the Organisation for Economic Co-operation and Development (OECD) countries declined for the fourth time in the past five years, led by a large decline in the United States. Despite the slowdown, consumption and production reached record levels for all fuels except nuclear power and biofuels.
Fossil fuels still dominate energy consumption, with a market share of 87%. Renewable energy continues to gain, but currently accounts for only 2% of energy consumption globally. Meanwhile, the fossil fuel mix is changing as well. Oil remains the world’s leading fuel, at 33.1% of total energy consumption, but for the 13th consecutive year it also continued to lose market share. Its current market share is the lowest in BP’s data set, which began in 1965.
ExxonMobil’s Energy Outlook to 2040
In its report “The outlook for energy: A view to 2040,” published in early 2014, ExxonMobil made the following predictions as to how the global energy market will develop over the next 30 or so years.
Population, the global economy, and energy demand. Between 2010 and 2040 the world’s population is projected to rise from 7 billion to nearly 9 billion, and the global economy will more than double in size. Over the same period global energy demand is likely to rise by about 35%.
Energy efficiency will offset growth in demand. The importance of energy efficiency is illustrated by recognizing that the projected rise in population and GDP by 2040 could cause global energy demand to rise by more than 100%. But much of that increase in demand will be avoided because of advances in energy efficiency across all sectors.
Although oil will remain the fuel of choice for transportation, natural gas is emerging strongly as a preferred fuel for other sectors. Utilities and other consumers are turning to this abundant, affordable, and clean-burning fuel. Half of the growth in demand for natural gas is being driven by the need for electricity around the world, which is expected to increase by 90% from 2010 to 2040. Nuclear and renewable energy will also grow to support electricity needs.
Domestic consumption will shift away from biomass fuels. Rising living standards and urbanization will also enable many people to change the types of fuel they use in their homes. The world will see a continued shift toward electricity and natural gas and away from biomass fuels, like wood, which currently still account for approximately 40% of global residential energy needs.
Vehicles will be more fuel-efficient. In 2010, about 75% of the world’s vehicles were in OECD countries. However, looking ahead, about 80% of the growth in the global fleet will come from non-OECD countries. Importantly, the increase in the number of light-duty vehicles in the world by 2040 will likely be nearly offset by the fact that the vehicles themselves will be far more fuel-efficient. As a result, the average efficiency of the world’s vehicle fleet is projected to reach about 46 miles per gallon (about 5.1 liters per 100 km) compared to 24 miles per gallon (9.8 liters per 100 km) in 2010.
An increase in the use of hybrid vehicles. By 2040, hybrids are expected to account for about 35% of the global light-duty vehicle fleet, up from less than 1% in 2010. Over the same period, electric and plug-in vehicles are expected to grow to about 70 million cars, or less than 5% of the total fleet. This slower growth is attributed to the relatively higher cost of the vehicles, reflecting the cost of batteries.
Growth of commercial transport sector. While global energy demand by personal transportation is expected to be relatively flat over the next few decades, the demand for energy for commercial transportation—trucks, planes, ships, and trains—will continue to grow significantly as economies expand and evolve. Global demand for energy for commercial transportation is expected to rise by 70% from 2010 to 2040, driven by the projected increase in economic activity and the associated increase in movement of goods and freight.
Oil remains dominant, but with a changing mix of other energy sources. Over the coming decades energy sources will continue to evolve and diversify, driven by changes in technology, consumer needs, and public policies. But liquid supplies—primarily crude oil—are projected to remain the single biggest source of energy and vital to transportation. Natural gas will continue to play an increasingly important role in meeting global energy needs. Utilities, industries, and other consumers are choosing this fuel because it is versatile, affordable, and produces relatively low emissions.
Natural gas will be the world’s fastest-growing major energy source through 2040. Global demand for natural gas is projected to rise by close to 65% from 2010 to 2040 and it will account for about 40% of the growth in the global energy supply. By about 2025 natural gas is expected to overtake coal as the second-largest energy source, behind oil.
Coal’s share to decline after 2025. Coal is currently the top fuel for power generation and accounts for the second-largest share of energy supplies today. Demand will continue to rise until around 2025 and will then decline—despite the existence of a huge resource base. Driving this decline will be demand reductions in OECD countries as well as in China, which currently consumes approximately half of the world’s coal output. By 2040 coal’s share of the global energy mix will fall from approximately 25% in 2010 to below 20%.
Nuclear energy will see solid growth. Although some countries scaled back their nuclear expansion plans in the wake of the 2011 Fukushima incident in Japan, many other countries are expected to expand the use of this energy source to meet electricity needs while reducing emissions. Growth will be led by the Asia-Pacific region, where nuclear output is projected to rise from 3% of total energy in 2010 to close to 9% by 2040.
Renewables will continue to grow. Renewable energy supplies—including traditional biomass, hydro, and geothermal, as well as wind, solar and biofuels—will grow by close to 60%, led by hydro, wind, and solar. Wind, solar, and biofuels are likely to make up about 4% of energy supplies in 2040, up from 1% in 2010. Wind and solar are predicted to provide about 10% of electricity generated in 2040, up from about 2% in 2010.
Expanding energy provision will require trillions of dollars in investment. The International Energy Agency (estimates that meeting the world’s energy needs will require expenditures on the energy supply infrastructure of approximately US$1.6 trillion per year on average through 2035. About half of the investment relates to projected oil and natural gas needs, while approximately 45% arises from expected power generation requirements.