World Energy Outlook-2002: Key Strategic Challenges?

Date February 28, 2003
Speaker Fatih BIROL(Head, Economic Analysis Division, International Energy Agency)


Today I will present the findings of the IEA's 2002 World Energy Outlook. Looking at the next 30 years, if there were no change in the policies around the world, growth of primary energy demand will be fastest for gas in absolute terms and for non-hydro renewables in percentage terms. Coal will be used less in rich countries. And oil will remain the dominant fuel in 2030. There will be no major changes in the overall composition of fuel shares. We see four key challenges in the area of energy going forward.

The first is security of energy supplies. The composition of energy demand is dynamic, with China being an important new player. Of the increase in world demand between 2000 and 2030, 62 percent will come from developing countries, especially from developing Asia. Meanwhile, almost all of the increase in production will occur outside of the OECD, up from 60 percent in 1971-2000, from countries such as those in the Middle East. Also in the next 30 years, energy trade between regions will more than double, most of it in the form of oil. And demand will grow fastest in the developing countries.

Around 75 percent of the increase in demand for oil will come from the transport sector. And in the transport sector, it is difficult to substitute oil with other types of fuel, so there is an extra rigidity. Oil demand will grow worldwide, and the reliance on OPEC oil will progressively increase, as production in non-OPEC areas will decline. Asia will see the biggest jump in import dependence, while OECD imports will also continue to rise. The Middle East will strengthen its position as the world's largest oil exporter.

In terms of power generation, more than 40 percent of new capacity worldwide will be gas-fired, which is relatively cheap and environmentally friendly. Of the power generation capacity additions ordered to 2010, 70 percent are gas fired. Alternatives to gas have problems: some are not environmentally friendly; the alterative fuels are expensive; and nuclear has political problems. Remaining sources of proven gas reserves are an estimated 453 to 527 tcm. More countries are relying on fewer sources.

China is emerging as a strategic buyer of oil. Its net imports will surge over the next 30 years.

The second challenge is investment in energy infrastructure. Of the nearly 5,000 GW of capacity that will be built in 2000-2030, almost half will be in developing countries. In the next 30 years, 5,000 GW will be needed, 4,000 GW to meet demand and 1,000 to replace old capacity. Cumulative worldwide investment in new power plants will amount to $4.2 trillion by 2030, more than half of which should be in developing countries. The problem is that while the need for investment is greater in developing countries, the overall FDI to these countries is falling.

The third challenge relates to the environment. World emissions will increase by 1.8 percent per year to 38 billion tons in 2030 or 70 percent above 2000 levels. A significant contribution will come from developing countries. Emissions will increase faster than demand over the next 30 years because the share of fossil fuels in the energy mix will grow. Carbon intensity will increase because of the declining share of nuclear energy. If current policies under consideration are enacted into law, there could be an emissions reduction of 16 percent.

The final challenge is energy poverty. Today, 1.6 billion people have no access to electricity, 80 percent of which are in South Asia and sub-Saharan Africa. Four out of five people that lack access to electricity live in rural areas. By 2030, in the absence of radical new policies, 1.4 billion will still have no electricity. Today, 2.4 billion people in developing countries rely heavily on biomass for cooking and heating, with implications on productivity, health, gender and the environment. By 2030, over 2.6 billion people will still rely on biomass.

Governments will need to take strenuous action if these security, investment, environmental, and poverty concerns are to be addressed.

Questions and Answers

Q: What is your projection of China's demand elasticity?

A: Income elasticity is higher for developing countries. But China is special, as we are skeptical about its GDP numbers. Our expectation is that China's demand elasticity is between 0.6 and 0.7 while other developing countries' is between 0.4 and 0.5.

Q: How can we strengthen energy security in Asia?

A: Many more countries are becoming gas and oil importers, while the reliance will be concentrated in just the Middle East and Russia. So if prices rise, the effect will be large. What can be done? A lot, but it will be difficult. First is taxation. Oil and gas products should be taxed to dampen demand growth and reduce waste. Second, energy sources should be diversified: nuclear is an important option towards strengthening energy security and protecting the environment; renewables are important but expensive; and it is also good to increase the number of sources of imports (West Africa and the Caspian region, for example).

Q: Are your four challenges fed back into your model?

A: We made a reference scenario to show to governments what will happen if they do not change their policies. We did not feed them back on purpose, as our message is this: if you do not change your policies, it will not be sustainable.

Q: In the investment, it is clear that the government should make some efforts. Could you give us some specific measures?

A: Political and economic uncertainty dampens investment. So governments must provide political stability and guarantee returns on investment or make sure that promises are fulfilled. Governments should also review their subsidy and pricing policies.

Q: If the price of oil goes up to 40 dollars a barrel, will there be more producers?

A: A price of 40 dollars a barrel would be a nightmare for OPEC because demand would fall, the share of non-OPEC producers would rise as the North Sea and other areas become efficient as sources, and alternative technologies, such as fuel cells and biomass, will get a push. So OPEC probably will not let prices rise for a long period of time.

*This summary was compiled by RIETI Editorial staff.