OECD Observer
Energy efficiency: A true alternative
Interview with Fatih Birol, Chief Economist and Director of Global Energy Economics, International Energy Agency (IEA)

The IEA’s World Energy Outlook 2012 was released 12 November. Though oil prices are at historic highs, the future for energy is promising, provided the right policies are in place. 

OECD Observer: How high are oil prices as we approach 2013?

Fatih Birol: High oil prices are putting a brake on economic growth, which is particularly worrying where activity has been sluggish. You might remember that they dipped to just above $30 per barrel in the midst of the financial crisis at the end of 2008. Since that time oil prices have averaged more than $90, which is triple their average in the two decades prior, and are currently above $100.

That high oil prices have been sustained reinforces an important message that I have spread for several years and is again clear from the analysis in the World Energy Outlook 2012: the era of cheap oil is over. The basic trends supporting this view are two-fold. First, the rise of emerging economies like China and India has pushed up demand for mobility and oil to fuel it. We expect this to continue as the number of passenger cars doubles to 1.7 billion in 2035, which is the end of our outlook period. Second, the cost of bringing oil to market is rising as companies must increasingly turn to more difficult-to-produce sources, such as oil sands and light tight oil in North America, and deepwater offshore production in Brazil.

Could (and should) governments do more to bring down oil prices?

In terms of lowering oil prices, there is unfortunately not much scope for government action that can change the aforementioned market fundamentals. The best recourse for oil-consuming countries to avoid prices going even higher and to deal with the adverse impacts of high oil prices is to encourage more efficient oil use. It may seem obvious, but a sure way to halve your bill for petrol is to double the fuel economy of your vehicle. We estimate that improvement potential for vehicle fuel economy through to 2035 is substantial, at up to two-thirds, compared with an average vehicle today. This can be achieved affordably with existing technologies, but it is critical that the right policies are in place to prompt their uptake, namely progressively ambitious fuel-economy standards and labelling.

Another policy that governments should pursue is the elimination of subsidies to oil products, which might be tempting to shield consumers from the effects of high prices, but ultimately promote wasteful use of resources and stifle the adoption of more efficient behaviour and technologies. We estimate that the cost of price subsidies to fossil fuels was $523 billion in 2011, the bulk going to oil products. This estimate is derived from complementary work on fossil-fuel subsidies undertaken by the IEA and OECD over several years, where we have looked at subsidies to consumers and the OECD has studied the producer side.

Many policymakers are eager to push for greener, smarter energy mixes. What information and knowledge gaps have to be filled to ensure that the route they take is indeed smarter?

Renewable energy is a vital component to our future energy mix, but their higher cost remains one of the main challenges to increasing deployment. In World Energy Outlook 2012, we expect that renewables will enter the mainstream in power generation, accounting for half of new global capacity additions. This projection hinges on sufficient government support being available to renewables, though they will become more competitive over time–onshore wind, for example, becomes competitive in some regions in our outlook.

The design of renewables support schemes is critical to their success, particularly as governments are facing budget austerity. Renewables subsidies came to $88 billion in 2011, a figure dwarfed by the amount that went to fossil fuels. In thinking about how governments should proceed in supporting renewables, they should first and foremost provide a predictable and transparent framework. Renewable energy policy should be a part of overall energy strategy and policymakers should focus on a portfolio of renewables that is best suited to their country. This strategy should be backed up by ambitious but credible targets, as well as subsidies that are differentiated according to the maturity of each technology and flexible enough to respond to changes in technology costs. System integration is a related issue that must be addressed.

What alternative energy source do you see as being the most promising?

It’s important to recognise that a full suite of energy sources will be needed. In most cases, this is the best approach for developing a robust energy system, as opposed to picking only one or two winners. But if I were placing bets, mine would be on energy efficiency.

Though it is not a fuel in the traditional sense, greater energy efficiency can help satisfy rising energy demand just as effectively as increasing energy supply. Importantly, it can do so economically and without sacrificing the extent and quality of services we receive. Energy efficiency presents a huge opportunity, yet in our central scenario assumed policies would put us on track to achieve just a third of its potential by 2035.

To understand just how compelling the case is, we designed a special scenario that shows the energy security, and environmental and economic benefits attainable if we were to systematically adopt known best technologies and practices to improve energy efficiency on a global level. In this “Efficient World Scenario” global energy demand is reduced by half compared with the New Policies Scenario, which is our central scenario. In particular, there is large potential to reduce demand for fossil fuels: the amount of oil saved, 13 mb/d in 2035, would be equivalent to that produced by Russia and Norway today (see our chart); natural gas saved would be equivalent to US gas demand in 2010.

There are important benefits for the environment, delaying by five years (to 2022) the date at which we become locked in to a CO2 emissions pathway that leads to an average global temperature increase of 2° Celsius. This time may be precious for governments to take action to mitigate climate change. And critically, the additional investment that would be needed in energy efficiency to achieve those energy savings would be more than offset by savings in fuel expenditures by households and businesses. We estimate the scenario would see a 20% savings in fuel bills, among other economic benefits.

Could our countries still be oil dependent in 50 years time?

I would be rather surprised if we are not using oil 50 years from now. That said, I think that we will use it much more efficiently at that time, and almost exclusively in transport. Many economies have come quite a long way already in reducing their oil intensity–oil demand per unit of GDP generated–and paring back its use where alternatives exist. Oil represented just over a quarter of power generation in OECD countries prior to the first oil shock in the 1970s. Today that share is down to 3% and falling. Oil dependence has also been drastically reduced in industry and buildings and should continue to decline.

But transport represents a unique challenge. Unlike other sectors we do not yet have cheaper, scalable alternatives to oil and the internal combustion engine. Because of its high energy density, oil still gives us the greatest “bang for our buck”. But higher oil prices will send a strong economic signal to consumers, incentivising them to reduce their use. Their two options are to consume oil more efficiently or to use other fuels, such as biofuels or natural gas, which can substitute for oil, albeit generally on a small scale. I believe that improved vehicle efficiency is the most effective tool available for cutting oil use in transport. Of course, technology breakthroughs could occur that propel us towards an oil-free future–in batteries and electric vehicles, for instance–but they are very difficult to predict.

For more information on World Energy Outlook 2012, including an executive summary, factsheets and other multilingual materials, visit www.worldenergyoutlook.org/publications/weo-2012

See also www.iea.org


©OECD Observer No 293 Q4 November 2012