World Thirst for Energy

Ioannis Michaletos, February 6, 2013

As the global economy slowly recovers from the 2008 financial crisis, indicators point to a significant mid- and long-term rise in energy consumption, specifically in oil and natural gas. Despite recent developments in renewable energy resources and the increasing production of hydrocarbon from shale reserves, it looks likely that both consumption and prices will climb higher over the coming decades.

The International Energy Agency (IEA) in Paris, in its annual review for 2013, reported that, despite energy efficiency regulations by developed countries, global consumption rates are on the rise. In 2012 the average Brent Index price for a barrel of oil was $111.7, a historical high, while since 2010 prices have not gone under $100, a clear signal that the era of cheap oil is gone. The IEA predicts a 30 percent increase in global energy consumption between 2012 and 2035, the largest increase in human history in terms of volume consumed. In similar fashion, ExxonMobil's annual review also anticipates a 35 percent increase by 2040, which will be driven by demand in the developing world, most notably China, India and Latin American countries. ExxonMobil plans to invest $185 billion over the next five years in various global energy projects. Oil is expected to remain the top global energy product, with natural gas passing coal for second. Nuclear energy and renewable resources are projected to climb as well.

The IEA also projects that North America could be a net exporter of energy by 2030. The United States is again becoming a top hydrocarbon player, and solar and wind energy technologies continue to advance. Europe seems to be lacking the resources to be a player of significance, due to the gradually depleting North Sea hydrocarbon reserves. BP estimates that by 2020 about 60 percent of the continent's natural gas needs are going to be imported regardless of the European Union's commitment to decrease energy consumption 20 percent by 2030 through the massive use of renewable energy.

The elevated role of natural gas has been noted in all energy reports over the past few years. IEA estimates that China's consumption of natural gas will increase from 130 billion cubic meters (cbm) in 2011 to 545 billion cbm in 2035. In the United States, gas consumption will surpass that of oil by 2030, while Europe will start an upward trend after 2020 in parallel with a drop in its gas production, leading to big increase in imports.

Oil's era, though, is far from over, as an immense number of people across the globe are acquiring an automobile for the first time, and consuming in ever increasing numbers oil-based products such as plastics, chemicals, fertilizers and many others. Another point of interest is that national oil companies in countries such as Russia, Algeria, Venezuela, Iran, China, Brazil, Kazakhstan, Saudi Arabia and the Gulf states have managed over the years to tap all production sites in their territory and exclude Western-based energy multinationals. That led to rising production costs for the latter, which were obliged to seek oil in regions with higher production costs. The British forecasting service IHS calculated that the costs for setting up and maintaining energy platforms by world energy companies reached a historical high in 2012. At the same time, profits for private international energy companies are either decreasing or remaining flat despite the high oil prices. Thus, Bloomberg wire service notes that in 2012 the MSCI World Oil & Gas index lost 0.5 percent, while the respective general economic index gained 13 percent.

The idea that the North American oil sector can boost production and thereby stabilize world prices is misleading to a great extent, because the gap between U.S. oil production and consumption is still great. According to the Energy Information Administration, U.S. daily production was 6.5 million barrels in September 2012, roughly the same amount it had back in 1998. Daily consumption for the same period was around 19 million barrels of oil. It is likely that the United States will not be able to narrow this gap in the foreseeable future, unless rapid developments in natural gas production and energy efficiency are able to curb the domestic demand for oil.

Chinese oil consumption has increased from 4.1 million barrels in 1998 to 9.8 million barrels in September 2012, with a 5 percent further increase expected for 2013, while its domestic production is slowly decreasing. Major oil-producing states and sates with low costs of extraction are either experiencing political turmoil (Libya, Iraq, Venezuela), isolated from the markets (Iran), or close to war zones with potentially unstable political futures (Saudi Arabia, Algeria, Nigeria, Mexico, Colombia). In short, the price of oil seems to be heading to higher levels over the coming years, even without taking into account the possibility of peripheral war in the Middle East of political upheaval in Latin American. In the coming years, states and corporations will continue to be deeply tapped in to the quest for energy resources.

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