Brace for another energy crisis. A new authoritative assessment forecasts sharply higher demand that will raise prices and increase reliance on the Organization of the Petroleum Exporting Countries (OPEC) and unstable regions for oil supplies. While some experts dismiss the analysis as alarmist, we need to prepare for a world characterized by increasing energy scarcity — and think creatively about how to do so.
In its most recent report, the International Energy Agency (IEA) projects that global oil demand will grow on average by 1.9 million barrels a day, or 2.2 percent, a year to reach 95.8 million barrels a day by 2012. In its last report, it anticipated growth in energy demand of just 2 percent a year. About two-thirds of the increase will come from developing economies in Asia and the Middle East. Chinese demand for oil will total nearly 10 million barrels a day in 2012 — more than 10 percent of the total — creating a considerable shortfall given domestic production of only 3.9 million barrels a day.
Unfortunately, there is little indication that supply will keep pace. Older sources of supply, such as the North Sea and Mexico, have matured and the oil they produce is increasingly expensive. The IEA forecasts that British oil production will fall from its current level of 1.7 million barrels a day to 1 million b/d by 2012.
On the positive side, production in Brazil, Russia, Canada, Kazakhstan and Azerbaijan is expected to increase significantly. Unfortunately, some of those projects are already behind schedule. In total, non-OPEC production should grow about 1 percent a year, considerably less than the increase in demand.
This means that the world will be forced to rely on production from OPEC nations, which already supply more than 40 percent of the world’s oil. The IEA estimates OPEC will have to pump about 36.2 million barrels a day in 2012, a considerable jump over today’s production of 31.3 million barrels per day. OPEC nations have spare capacity and can ramp up production — somewhat.
But the IEA believes that the pressures created by burgeoning demand will cut the OPEC “shock absorber” margin to 1.6 percent of global demand, an alarmingly low level. Thus the IEA concludes that “oil looks extremely tight in five years’ time” and there are “prospects of even tighter natural gas markets at the turn of the decade.”
The world needs to begin preparing for this economic landscape now. Alternative fuels are an option, but they offer only limited relief. The IEA estimates that production of biofuels will double by 2012, but will still only supply 1.75 million barrels per day due to economic constraints.
New coal and nuclear power plants will help cut demand for oil, but they will not be on line until 2015. Moreover, coal is a dirty fuel that will add to greenhouse gas emissions and release other pollutants into the environment.
One way to ease the crunch is to cut demand. The IEA estimates that a reduction in GDP growth from 4.5 percent annually to 3.2 percent until 2012 would cut the need for OPEC oil by 2 million barrels a day. But that is a cut on the margins — it merely postpones by one year the point at which growth in demand overtakes growth in global oil capacity — and it ignores the negative impact of reduced global economic activity. China, for example, a key element of the global growth equation, can ill afford a slowdown without risking social instability.
Some critics charge that the IEA report is alarmist, alleging that IEA reports have been responsible for pushing up oil prices. Other analysts note that demand remains stubbornly high, futures prices continue to bump against historic ceilings, and there is little indication that some technological breakthrough will ease the supply-demand equation.
One area upon which we should focus is energy efficiency. China, in particular, has a pressing need for progress in this field. While there is a range of estimates of Chinese energy use per capita, all agree that substantial improvements are needed. The Chinese government’s own figures put per capita energy use at 3.4 times the world average. Last year, China launched a five-year effort to cut energy use per unit of economic output by 20 percent.
Japan, as a leader in this field, should be taking every opportunity to promote the spread of energy-efficient technologies and processes to help restrain demand. This effort would provide a substantial international public good, help support Japanese industries that are leaders in the field, and consolidate good relations with China.
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