Energy crunch looms says IEA

Stock up on propane and Solar panels. The world is in for a roller coaster few years of lurching from one energy shortage to another as crises intensify. This is the forecast in the latest authoritative report from the International Energy Agency (IEA). Unless governments switch from increased burning of fossil fuels to more nuclear and renewable, and unless there are huge energy-savings, there will be skyrocketing fuel prices, blackouts and supply disruptions, says the report, World Energy Outlook 2006, produced by the IEA with input from leading international experts. It has long been recognised as the leading source of energy analysis.

It pointed to a 50 per cent surge in energy demand by 2030, saying Chinese and Indian economic growth will propel global oil demand from 84 million barrels per day to 116 million bpd by 2030 with most of the increased supply coming from Saudi Arabia, Iraq and Iran. Non-Opec oil supplies will peak in the beginning of the next decade, reckons the IEA, raising the risk of supply disruptions until then, which could push the crude price as high as $130 per barrel.

Carbon emissions are set to soar by more than 55 per cent over the period, accelerating the process of climate change. In a striking change to previous forecasts, the IEA predicted that coal is coming back, driven by the high cost of natural gas and the huge reserves of coal in the United States, China and India. Two new coal fired power statons have been announced inthe past 24 hours, one in the UK and one in Australia.

The biggest increase in energy use will come from coal, Fatih Birol, the agency’s chief economist, said. One of the consequences is CO2 will grow faster than energy demand, due to increasing coal use and declining nuclear share.

WEO-2006 reveals that the energy future we are facing today, based on projections of current trends, is dirty, insecure and expensive said Claude Mandil, Executive Director of the IEA at the launch. But it also shows how new government policies can create an alternative energy future which is clean, clever and competitive the challenge posed to the IEA by the G8 leaders and IEA ministers, Mr. Mandil emphasised.

The IEA offered a choice of two scenarios. In its reference case, which provides a baseline vision of how energy markets are likely to evolve without new government measures to alter underlying energy trends, the agency paints a picture of soaring demand and increasing risk of supply disruptions as dependence rises on a diminishing number of gas and oil suppliers.
Global primary energy demand increases by 53% between now and 2030. Over 70% of this increase comes from developing countries, led by China and India. Imports of oil and gas in the OECD and developing Asia grow even faster than demand. World oil demand reaches 116 mb/d in 2030, up from 84 mb/d in 2005. Most of the increase in oil supply is met by a small number of major OPEC producers; non-OPEC conventional crude oil output peaks by the middle of the next decade. Global carbon-dioxide (CO2) emissions reach 40 Gt in 2030, a 55% increase over today’s level. China overtakes the United States as the world’s biggest emitter of CO2 before 2010. These trends would accentuate consuming countries vulnerability to a severe supply disruption and resulting price shock. They would also amplify the magnitude of global climate change.

This energy scenario is not only unsustainable but doomed to failure, said Claude Mandil, head of the IEA.

The IEA describes an alternative scenario in which global energy demand is reduced by 10 per cent by 2030, oil demand reaches 103 million bpd and OECD carbon emissions peak around 2015.

More efficient energy production and consumption would account for 80 per cent of the avoided emissions, says the IEA. For the first time, the agency recommends the nuclear option but states that this will happen only if the governments . . . play a stronger role in facilitating private investment.

The IEA chief said that the alternative policies are cost-effective, despite considerable upfront costs. The production of nuclear power is cheaper than gas-fired power generation at equivalent oil prices of $40, he said.

In a stark reminder of the risks, Mr Mandil pointed to the need to invest $20 trillion to meet rising demand for energy. It is far from certain that this investment will actually occur, said Mr Mandil. The apparent soaring investment by oil companies was illusory, he said, because of inflation in drilling costs.

An Alternative Policy Scenario demonstrates that the energy future can be substantially improved if governments around the world implement the policies and measures they are currently considering. In this scenario, global energy demand is reduced by 10% in 2030  equivalent to China’s entire energy consumption today. Global carbon-dioxide emissions are reduced by 16% equivalent to current emissions in the United States and Canada combined in the same time-frame. In the OECD countries, oil imports and CO2 emissions peak by 2015 and then begin to fall. Improved efficiency of energy use contributes most to the energy savings. Increased use of nuclear power and renewables also help reduce fossil-fuel demand and emissions. Just a dozen specific policies in key countries account for 40% of the reduction in global CO2 emissions. The shifts in energy trends described in this scenario would serve all three of the principal goals of energy policy: greater security, more environmental protection and improved economic efficiency.

The good news, said Mr. Mandil, is that these policies are very cost-effective. There are additional upfront costs involved, but they are quickly outweighed by savings in fuel expenditures. And the extra investment by consumers is less than the reduction in investment in energy-supply infrastructure. Demand-side investments in more efficient electrical goods are particularly economic; on average, an additional $1 invested in more efficient electrical equipment and appliances avoids more than $2 in investment in power generation, transmission and distribution infrastructure.

The energy picture has changed appreciably since the 2004 Outlook, the last major update of the IEA’s global energy projection. The realities of the energy market have become harsher and the relative competitive position of fuels has changed. Oil and gas prices this year have been between three and four times higher than in 2002 and this is reflected in a new oil price assumption for the projections. But world economic growth has remained robust, as the recessionary effects of higher energy prices have been more than offset by other factors. Coal is now cheaper than natural gas for electricity generation, while nuclear power may, in some cases, be cheaper than both coal and gas even where there is no penalty for emitting CO2. Coal has led the recent surge in global energy demand and is on a stronger growth path than in previous WEOs. China and India are the predominant sources of global energy demand growth.

WEO 2006 identifies under-investment in new energy supply as a real risk, said Mr. Mandil. To quench the world’s thirst for energy, the Reference Scenario projections call a cumulative investment in energy-supply infrastructure of over $20 trillion in real terms over 2005-2030 substantially more than was previously estimated. Roughly half of all the energy investment needed worldwide is in developing countries. It is far from certain that all this investment will actually occur. There has been an apparent surge in oil and gas investment in recent years, but it is, to a large extent, illusory. Drilling, material and personnel costs in the industry have soared, so that in real terms investment in 2005 was barely higher than that in 2000.

The Outlook demonstrates that nuclear power could make a major contribution to reducing dependence on imported gas and curbing CO2 emissions in a cost-effective way. But this will happen only if the governments of countries where nuclear power is accepted play a stronger role in facilitating private investment, especially in liberalised markets. Nuclear power remains a potentially attractive option for enhancing the security of electricity supply and mitigating carbon-dioxide emissions but financing the upfront investment cost may remain a challenge, Mr. Mandil underlined.

Biofuels can make a significant contribution to meeting future road-transport energy needs, helping to promote energy diversity and reducing emissions. Biofuels reach 4% of road-fuel use in the Reference Scenario in 2030 and 7% in the Alternative Policy Scenario, up from 1% today. The United States, the European Union and Brazil account for the bulk of the global increase and remain the leading producers and consumers of biofuels in both Scenarios. But rising food demand, which competes with biofuels for existing arable and pasture land, and the need for subsidy in many parts of the world, will constrain the long-term potential for biofuels production using current technology. New biofuels technologies being developed today, notably ligno-cellulosic ethanol, could allow biofuels to play a much bigger role if major technological and commercial challenges can be overcome.

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