OECD Observer
Global energy

Energy production and consumption patterns are shifting. So are the challenges for investment and global energy policy.

The surge in energy prices in 2000 and most of 2001 has drawn attention once again to the availability and security of energy resources. Not that the world is suffering an energy shortage, it is not. In fact, the world has abundant supplies of energy: proven reserves of oil and natural gas, for instance, are more than adequate to meet demand until 2020 and beyond. Over 95% of the net increase in energy production over the next two decades will occur outside the OECD. The Middle East and the transition economies together will account for about half of the increase. But while the bulk of investment in the production, transformation, transportation and distribution of energy is needed in transition economies and in developing countries, the sheer scale will require major capital inflows from industrialised countries. Securing this investment will present a major challenge. Middle East oil producers are a case in point: they have the resources to meet expected demand, yet might face stiff constraints in mobilising capital, particularly given the current investment climate.

Growing international trade in energy, especially fossil fuels, has major geopolitical implications. At the heart of these is the regional mismatch between the location of demand and production. Dependence on the Middle East will continue to grow in the net oil-consuming regions – essentially the OECD area and some parts of Asia. In fact, dependence will be mutual between producer and consumer, but the world’s vulnerability to a price shock induced by a supply disruption will remain a concern. Oil-supply chains from drilling to final user will lengthen, and tightening security of international sea-lanes will be important.

There is little doubt that oil will retain its position as the single largest source of primary energy over the next two decades. In fact, by 2020, oil demand will reach 115 million barrels per day, compared with 76 million b/d today, and will represent 40% of the world’s energy mix, roughly equivalent to today’s share. The trouble is, while global proven reserves of oil are ample, supply is not guaranteed. And this time the problem is not just geopolitical. Production in ageing oil reservoirs is declining and new capacity will have to be built if expected demand growth is to be met. This is one of the key findings highlighted in WEO 2001 – Insights (see Books section).

The Middle East OPEC countries account for some 50% of the world’s oil reserves (OPEC overall holds 63%). Russia has a further 14% and OECD countries some 8%. OPEC’s share of global oil production will rise from 40% today to 54% in 2020. Major Middle East oil producers have an opportunity and a challenge to exploit their low-cost resources, but their ability to mobilise capital is uncertain. Their production and investment plans will be closely linked to the evolution of world energy prices, and they may have to attract foreign investment in to help meet capacity.

While oil will be the main energy source, natural gas use will also grow. It is another area for heightened security concerns, and supply costs are likely to increase as near-to-market reserves, for instance in the North Atlantic, are depleted. This means significantly adding to infrastructure costs in an effort to bring in supplies from further afield. Again, geopolitics may come into play here, a risk which a recent disruption in liquefied natural gas (LNG) supplies from Indonesia brought home. On the other hand, an expected expansion of international LNG trade could help reduce these supply risks by spurring more short-term LNG trading and hence, a more flexible marketplace.

Like oil, natural-gas resources are abundant and should easily meet the expected surge in demand in the next two decades. Proven gas reserves have doubled over the past 20 years. Most of today’s gas reserves were discovered in the course of exploration for oil, but searching specifically for gas accounts for a growing proportion of overall exploration spending.

Just two countries – Russia and Iran – hold 50% of global gas reserves. Nevertheless, gas reserves are slightly more widely spread among regions than is the case for oil. The former Soviet Union holds 36% of the global reserves, but its share of production has decreased steadily over the past decade, as a result of low exploration activity in Russia. Around 36% of world gas reserves are found in the Middle East and its share is growing as major discoveries and expansions of existing fields are made in countries like Iran, Saudi Arabia and Qatar. As for the OECD area, its share in global reserves is shrinking slowly, but it still represents some 17 years of current OECD production.

The outlook for oil and gas supplies should be bright, therefore, as long as geopolitical or capacity issues do not pose a problem. But what of renewable sources of energy? These are expected to grow even more rapidly over the next two decades, but their share in the global energy mix will probably remain small, particularly without determined government intervention. Given their important benefits in terms of environmental protection and security of supply – renewable energy sources, relative to fossil fuels, do not emit much in the way of greenhouse gases and are by definition geographically dispersed, even local – governments may see their interest rise.

First, the costs of renewable-energy technologies, though having fallen, will have to decline further for them to compete with fossil fuels. The rate at which costs will decline in the future is uncertain. Renewable energy may be cost-effective in the future: some wind technologies are close to being competitive, though not the majority of them. In short, this raises a dilemma: for the costs to fall further, the technologies have to be adopted, diffused more widely and developed. But to adopt the technologies, the costs have to come down further.

The shape of world energy demand is likely to shift, too, with the OECD’s share of world energy consumption declining in favour of developing countries. China and India together are expected to account for over 20% of world energy demand in 2020, compared with some 13% in 1997. The main factors behind the shift are rapid economic growth and industrial expansion, population increase and urbanisation, and substitution of modern for traditional fuels, like fuelwood and dung. This shift has far-reaching implications for the world energy system and the environment, with CO 2 emissions from developing regions and their dependence on oil imports both rising. Higher demand clearly means substantial investment requirements for expanding power generation there.


 World Energy Outlook, IEA, 2000

For more information on the WEO, contact Fatih.Birol@iea.org

©OECD Observer No 231/232, May 2002