Four factors that will shape the energy future

The International Energy Agency’s annual World Energy Outlook has become a prominent and much-cited reference work on the future of energy. One of its leading authors is Fatih Birol, the IEA’s chief economist, and he told the World Energy Congress that as the organization finalizes its latest report he sees four crucial factors that will be important for the energy future.

1. Energy markets are facing unprecedented uncertainties
The principal driver of energy demand is economic growth, and the outlook for growth is a very important factor in the decision making processes of businesses and governments, yet there is little consensus about the direction it is taking, he said. Views range from expectations of a rapid recovery to a lengthy period of sub-par performance.

One of the biggest changes in energy markets over the past year has been the development of a glut in natural gas, which may continue for longer than many expect, Birol added. The glut is creating losers as well as winners, and how traditional gas producing countries that are losing out will react will be important for the gas market and for competing fuels overall, he said.

Further, after missing the boat to have a legally binding agreement at the Copenhagen climate conference in 2009, there is uncertainty on the way forward for climate action, the IEA’s chief economist said. Although some 100 countries have made pledges since then on emissions reductions, many of these targets are difficult to measure, and in some cases the reduction targets are much more modest that a business-as-usual trend, he warned.

2. Growing insensitivity of oil demand and supply to price
While oil used to be used by almost every sector of the economy, 90 percent of the growth in past five years has come in the transportation sector where few alternatives to oil exist. In addition, demand has stalled in OECD market economies and is mostly growing in emerging markets where prices are often so heavily subsidized that an increase in the price of oil on international markets has little impact on behavior in these markets, Birol said.

3. Evolution of China’s energy system
The scale and speed of change in China will be a key determinant of the future of the global energy system, Birol said. In 2000, China was consuming half as much energy as US but has now already caught up. And despite this growth, China’s per capita energy consumption remains just one third of the OECD average. So the policies China follows will have an impact on the energy systems of every other country. As an example, Birol said the province of Xinjiang has 40 percent of the country’s coal reserves but accounts for just 5 percent of national production. Plans to tap more of this could have a major impact on global markets, just as Chinese imports of coal totaling about 3 or 4 percent of global production had a big impact on prices.

Since China’s market is so huge, its investments in new technologies might help to considerably bring down their price and thereby accelerate their adoption worldwide, Birol added.

4. Role of public policy
Finally, Birol said that some challenges, such as climate change, are so complex and so urgent that there is a greater role for public policies, whose main goal should be to provide stable and clear signals to enable the deployment of advanced technologies.