October 17, 2018
By David Yager
Energy Policy Analyst – Oil & Gas Writer
As everyone in the oil business knows, forecasts are fraught with uncertainty. No wonder. Nobel laureate Nils Bohr said, “Prediction is very difficult, especially if it’s about the future”. Mark Twain quipped, “Prophesy is a good line of business, but it is full of risks”. Writing in Newsweek magazine in 1966 famous economist Paul A. Samuelson commented, “Wall Street indices predicted nine of the last five recessions!”
Regardless, the world demands and depends upon forecasts and predictions. It is an integral part of business and life in the 21st century. When a forecast is released everyone involved pays attention, wondering how it will affect them. But when a forecast is wrong most simply shrug their shoulders. After all, nobody can predict the future.
On October 4, 2018 the International Panel on Climate Change (IPCC) released yet another dire forecast about the future of the earth. To sustain the climate more or less as we know it today with the average temperature rising no more than 1.5oC above pre-Industrial Revolution levels, CO2 emissions must fall 45% from 2010 levels by 2030 and carbon emissions must be “net zero” by 2050.
This is a far more aggressive reduction plan than the one following the 2015 Paris climate change agreement at which the governments of Alberta and Canada very publicly committed to do what was necessary to hold the global temperature increase to 2oC by 2100. (Exactly what Canada will accomplish is another matter. This was political virtue signaling of the highest order, and we’re all paying for it. More on this later).
The terrible consequences of not acting immediately need not be repeated here. There is great confidence in IPCC climate models. In the world where forecasts about anything have been proven wrong time after time, climate change forecasts are different. Because climate change alarmists have been promising “end of life as we know it” outcomes for so long, even those who don’t believe the models worry. “What if they’re right?” Fear of the unknown is a powerful force.
Compliance will require a complete upheaval of world energy markets. Coal, oil and natural gas are severely punished. The IPCC admits, “Limiting warming to 1.5oC is possible within the laws of chemistry and physics but would require unprecedented changes”. This includes massive government intervention, global political cooperation and, according to a Bloomberg article October 11, 2018, an investment of US$2.4 trillion year every year through 2035, US$40.8 trillion in total. This would involve the immediate and mass investment in and subsidization of renewable energy sources for electricity to start.
The technical problems of supplying electricity when the wind is not blowing, or the sun is not shining, is not discussed. Nor is the long-term cost of energy with this much new invested capital to service.
There are multiple credible forecasters prognosticating about the future of energy and fossil fuels. They include multinational oil giants Royal Dutch Shell, BP and ExxonMobil. They are publicly traded, broadly owned and heavily regulated. They have decades of historical data from which to draw and significant research budgets. They operate in most of the countries they analyse. It is illegal for these companies to knowingly release information that is false.
Two non-commercial agencies which study this subject are the International Energy Agency (IEA) and the Energy Information Administration (EIA). Their analysis is widely respected and quoted. Their reports regularly move prices for fossil fuels.
All five of these entities rub their computerized, data-driven crystal balls and peer into the future, generally out 20 to 30 years. All five have publicly released forecasts to 2040 and beyond. They don’t always agree. Following is a summary of the general findings with the exceptions noted.
The fundamental drivers of future energy demand are population and economic growth. ExxonMobil sees world GDP in 2040 double that of 2010. Its economic growth forecast is OECD countries (Organization for Economic Cooperation & Development, the 34 countries widely considered to be “developed” in Europe, North America and the wealthiest countries in South America and Asia) growing at an average of 1.9% per year through to 2040 while the rest of the world’s annual growth rate is more than twice that at 4.1%. All five forecasts see total energy consumption in 2040 being 30% higher than 2015.
Energy demand growth will not come from OECD member countries. They already have most of their energy and transportation infrastructure in place; electricity grids to supply virtually every building and dwelling, roads, railways, public transit, and airports. Only a handful like Austria, Luxemburg and Switzerland don’t ports. These countries have electricity on demand, heat in the winter, air conditioning in the summer, a gas station within a few kilometers, and airline service to the rest of the world. Few people freeze, fewer starve. In 2016 OECD countries had a combined population of 1.28 billion, about 17% of the world total.
The population of the world is about 7.5 billion. Energy demand growth will come from the other 83%, about 6.2 billion people. Big countries that are not OECD members include Argentina, Brazil, China, Columbia, Cost Rica, India, Indonesia, Russia, Saudi Arabia and South Africa. They have a total population of 3.48 billion or nearly 47% of the global total. The other non-OECD countries are the rest of Africa and the Middle East, most of South America and the other countries of Asia except South Korea and Japan which are OECD members.
Most of these are the “have not” nations playing energy “catch-up” with OECD countries. In the U.S. there is nearly a car or light truck for every citizen, almost 300 million. China, with more than four times the population, has only half the vehicles. The World Economic Forum estimates about 1.1 billion people, almost 15% of the world’s population, still don’t have electricity. That’s almost as many people as live in all 34 OECD member countries. There are 200 million cars registered in India for a population of 1.3 billion people. India is widely regarded as being one of the world’s fastest growing markets for all types of energy as it modernizes and industrializes. Canada, with a population of 36 million, has about 22 million vehicles on the road that weigh less than 4,500 kg.
The EIA demand growth forecast is geographically granular. It sees the Americas, Europe and Eurasia flat from 2015 to 2040. Asia’s will see its energy needs grow by 50% from 2015 in the 25 years to 2040, accounting for half of the total demand increase of 29%. The other areas requiring more energy are Africa and the Middle East.
The composition of the anticipated global energy demand growth varies somewhat, but overall the role of carbon energy remains very strong. BP, for example, sees less than 30% supplied by non-fossil fuels in the form of renewables, hydro-electricity or nuclear power. Coal as a percentage of the total energy and fossil fuel mix will decline as it replaced by natural gas or more electricity is generated by renewables, wind and solar. Natural gas growth is anticipated in all models as a replacement for coal.
The elephant in the fossil fuel room is crude oil and its pivotal role in petrochemicals and transportation.
One-quarter of crude oil production is used as feedstock for petrochemicals resulting in products essential to everyday life such as plastics and chemicals. There is no substitute. Demand for oil as petrochemical feedstock will grow with the economy and transportation.
About 70% of oil is used as transportation fuel in three main areas. Airplanes and ships consume about 25% of all petroleum. A growing population and economy will place further demands on intercontinental and intra-continental transportation served by air and water. Nobody currently has any idea how to power these machines by another means on a large scale. This percentage of oil consumption looks very sturdy unless curtailed by government regulation.
The next big block of transportation fuel powers heavy trucks and trains, another 25%. Growth in population and GDP will result in more things moving everywhere. No substitutes exist except for one prototype heavy hauler built by Tesla. This portion of demand appears strong unless it is intentionally restricted or prohibited.
The dynamic portion of the crude oil forecast for the next 20 years comes from light cars and trucks, currently consuming about 20% of the world’s petroleum. This is the riskiest element of oil forecasts. Depending upon the rate of adoption of electric vehicles (EVs) peak oil demand for light vehicle transportation could be reached by 2030 if not sooner.
BP is of the view EVs will have a big impact by 2040. There will 100 million EVs in service, a combination of battery electric and plug-in hybrids. There were only about 2 million EVs on the road in 2016. This growth in 24 years can only be described as meteoric. The big auto manufacturers all see this number and are modifying their products offerings accordingly.
The sobering part of BP’s EV forecast is the total number of cars on the road will reach 2 billion, about twice that of 2015. However, continued progress in fuel economy will help shrink this portion of oil demand on a unit basis. BP figures a world passenger car fleet that averaged 7 litres of fuel for every 100 km in 2015 will go twice as a far on a litre refined petroleum by 2040.
Shell is of the view that light vehicle carbon fuel demand will peak as early 2025. But this is qualified. In a Forbes article on September 18, 2018, Shell’s projection is analysed stating, “Van Beurden (Shell CEO) described peak demand in 2025 as the ‘Goldilocks’ scenario” whereby all countries abide by the rules outlined in the 2015 Paris climate accord. That’s not happening…The problem with peak oil demand forecasts is that there are too many variables at play. Good luck trying to forecast how rapidly the low-carbon energy transition will play out. Small changes in assumptions – about technology development, the penetration of electric vehicles, the cost of renewable and alternative energy sources versus conventional fuels – can lead to vastly different conclusions. The energy transition will happen over the coming decades, but an array of political, economic and social considerations will determine how long it takes to “de-carbonize” the entire global energy system, if ever”.
Despite the unknown element of the variables around EVs, the overall forecasts of the three oil companies plus the EIA and IEA are similar. Shell is the most aggressive on EVs but realistic about heavy transport. The November 2017 World Energy Outlook from the IEA was titled, “A world in transformation”. The opening line in the website link read, “The resurgence in oil and gas production from the United States, deep declines in the cost of renewables and growing electrification are changing the face of the global energy system and upending traditional ways of meeting energy demand…A cleaner and more diversified energy mix in China is another major driver of this transformation”.
The IEA sees the next quarter century (from 2015 to 2040) unfolding as follows. “Over the next 25 years, the world’s growing energy needs are met first by renewables and natural gas, as fast-declining costs turn solar power into the cheapest source of new electricity generation. Global energy demand is 30% higher by 2040 – but still half as much as it would have been without energy efficiency improvements. The boom years for coal are over…and rising oil demand slows down but is not reversed before 2040, even as electric-car sales rise steeply”.
The IEA summarized oil this way. “…it is too early to write the obituary of oil. Global oil demand continues to grow to 2040, although at a steadily decreasing pace…other sectors – namely petrochemicals, trucks, aviation and shipping – drive up oil demand to 105 million barrels a day by 2040”.
Which summarizes the prediction all five forecasts share. Despite warnings from climate change alarmists to abandon fossil fuels as soon as possible, oil demand which will exceed 100 million b/d in 2018 or early 2019 will be 105 to 110 million b/d by 2040.
Natural gas, the most benign of the fossil fuels based on carbon molecules, has a very promising future to 2040. The IEA wrote, “…a strong emphasis on cleaner energy technologies, in large part to address poor air quality, is catapulting China to a position as a world leader in wind, solar, nuclear and electric vehicles and the source of more than a quarter of projected growth in natural gas consumption”.
Shell is particularly bullish on natural gas having made significant investments in global gas supplies and LNG while abandoning Alberta’s oil sands. On its website Shell reports only 100 million tonnes of LNG were produced in 2000 versus 300 million tonnes in 2017. That’s just the beginning. Shell sees 40% of energy demand growth in the next 20 years coming from natural gas with an average demand growth of 4% per year for LNG. This would take the global LNG market to over 600 million tonnes per year by 2037.
In its 2018 natural gas outlook disclosure Shell wrote, “Final investment decisions on new LNG supply projects are required soon to avoid a supply shortage in the 2020s”. This explains why Shell and partners sanctioned the Canada LNG project at Kitimat on October 2, 2018.
The good news is the economy of the developing world is forecast to grow at over 4% per year through to 2040 and the energy mix will be making the largest transition in history away from high carbon fuels such as coal and oil which, at least percentage wise, will shrink.
The bad news is that despite all the improvements that will and have been made, GHG emissions will rise for the next 20 years. The IEA wrote, “While carbon emissions have flattened in recent years, the report finds that global energy-related CO2 emissions increase slightly by 2040, but at a slower pace than in last year’s projections. Still, this is far from enough to avoid severe impacts of climate change”. ExxonMobil sees CO2 emissions from energy demands continuing to rise with transportation, electricity generation and industrial demand (petrochemicals) being the primary drivers.
Just in case you missed it, energy analysts figure CO2 emissions will be higher in 2040 than today. The IPCC says the world must cut them by 45% by 2030 to avoid greater climate catastrophes. Somebody is going to be very disappointed.
Are the forecasts of the IPCC and these five energy players/analysts correct? Unequivocally no. Because they involve things that haven’t happened yet, they will never be right. Success in the forecasting game is outcomes that are the least wrong. But so long as the methodology is reasonable, one must either believe them all or reject them all. It is disingenuous to support the forecasts that agrees with your view of the world and reject the ones that don’t.
The collective conclusions of five forecasts for rising world energy demand are based on the certainty that the 6.2 billion people that don’t live in OECD countries want access to electricity, food, shelter, clothing and transportation and they need cheap energy to do it. These forecasts are also based on the certainty that renewable energy in the form of hydro, solar or wind or carbon-free nuclear power will not replace carbon resources for petrochemicals or transportation fuel for airplanes, ships, trains and big trucks.
The IPCC forecast warns of the terrible outcome to the world’s climate unless mankind collectively does something massive, expensive and immediate to render these forecasts completely wrong. The only way this will happen is through a major advancement in energy technology that is currently unknown, or a level of intergovernmental cooperation that has eluded the world for three decades is reached because countries collectively conclude the climate disaster costs of low-cost carbon energy are greater than the socioeconomic benefits, and force change upon their citizens.
Change of this magnitude will take more than more dire warnings from the IPCC.
As for the veracity of the forecasts, the behavior and consumption patterns of our fellow citizens of the earth are much easier to measure, model and forecast than the future behavior of the climate of the entire planet. Climate science is very new compared to decades of economic modelling.
IPCC models of the future impact of rising CO2 levels are to some degree based upon historical data extracted then extrapolated from tree rings, ice cores and lake bottom sediments. This is not to say they are wrong, but they are certainly more theoretical than the intensively studied and analysed energy consumption patterns of a world population growing in age, wealth and numbers.
The dislocation and potential damages caused by climate change is well reported. The dislocation by massive energy disruption is not. The desires and aspirations of billions of our fellow citizens is in its own way a force much more powerful than any storm or weather event the world’s climate may unleash on us.
Climate alarmists say if we don’t stop global warming millions will suffer, starve and die. If these same people are denied cheap energy or lose what energy they have because non-carbon alternatives are unaffordable, millions will suffer, starve and die.
Meanwhile, Canada is going down two opposing and irreconcilable paths simultaneously.
On the one hand we are a safe, honest, reliable, ethical and transparent supplier of the carbon energy all credible forecasts indicate the world needs. Today. That the world needs our energy is not a forecast but a fact. If Canada’s 7.5 million barrels of oil equivalent oil, natural gas liquids and natural gas were removed from the market it would be enough to spike prices overnight resulting in massive damage to the world’s economy and measurable suffering to the billions of people who depend on carbon energy to survive in their daily lives. Excessively high energy prices have been a problem in the past. It can happen again.
At the same time, too many Canadians and too many politicians are pretending one small country can make a difference on global GHG emissions and the climate of the future through a patchwork of poorly-conceived policy initiatives that are affecting our global economic competitiveness and hobbling our domestic carbon resource industries in a purely symbolic, enormously expensive and ultimately meaningless attempt to save the world.
The current disastrous oil price differentials caused by decades of pipeline opposition are breathtaking in their financial devastation and their immaterial reduction to global CO2 emissions. Exactly how the world will deal with these diametrically opposing forecasts is unknown. There is carbon reality, which is well understood, and carbon consequences, which remain alarming but theoretical.
Those concerned about the future of the world say the climate change modelling and forecasts are getting better. No argument here. But energy demand forecasts, and the billions of people they take into consideration, are generated from very robust economic models.
What a mess!
About David Yager
David Yager is currently finishing a book about the future of Alberta in a low-carbon world. It will be published in early 2019. The foregoing is an excerpt from the section titled, “Carbon Future”. David Yager is a Calgary-based oil writer, energy policy analyst and former oil service executive. More at www.davidyager.ca.