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Energy Insights – Energy Supply and Demand

 Energy News

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Energy Supply and Demand

Will the global economy require more energy in the future?

Yes – most definitely. Oil demand is projected to increase from 70 million barrels a day to 150 million barrels a day by 2020. The number of automobiles globally will double – many of these will be in China and India. Gas demand will sky-rocket in Asia Pacific. Coal demand will increase significantly.

The increasing global GDP and population with ever-increasing expectations of wealth and lifestyle are likely to mean a rapid expansion in energy supplies of all types being required to keep pace. To put this into perspective, China’s GDP will likely be larger than the USA by 2040. Imagine 1.5 million people in China and 1 million people in India having the ability to purchase an automobile, have air conditioning and central heating and the myriad of electrical appliances available on the market.

Even if there was no growth in automobile demand in developed countries in NW Europe, Japan and USA, there would still be a significant expansion in the requirement for oil. The only way this would change is if either hybrid gasoline-electric automobiles and/or hydrogen fuel cell or natural gas powered automobiles became popular.

For reasons that are difficult to explain, there has been very little technological progress on the fundamentals of automobile power (by the internal combustion engine) in 80 years. We are still fuelled by gasoline powered by internal combustion via vertically moving pistons in a very inefficient process that wastes much energy via breaking, idling and lack of recycling of energy from waste hot water, kinetic energy, pressure and the like.

Without tax incentives, customers are likely to choose gasoline powered vehicles for the next few years. The question is – will they switch rapidly to hybrid-electric or hydrogen if automobile manufactures market these options more aggressively? Will the take-up be rapid like the mobile phone or internet? It will probably take a proper oil crisis to kick these alternatives in – if/when this happens, some time in the next 20 years – there could be a big shift from gasoline to electric.

That said, we will still need to have fuels to generate the electricity and produce hydrogen – so oil demand might not grow as fast as predicted because of this, but we will still need coal, gas, renewables or nuclear in its place. Unless we “un-invent” the automobile or something totally unexpected happens – overall energy demand will rise dramatically in the next 30 years.

Where will we get our energy from in the future to satisfy the anticipated demand?

An increasing amount of energy will come from long distance imported pipeline gas and imported LNG shipped from other global regions. Oil production in the Middle East will be expanded and an increasing reliance on OPEC along with Russian oil will become the norm.

Coal production is likely to be expanded – particularly in India, Bangladesh, USA and China. Renewable electric supply will be increased through solar in sunny populated regions (e.g. Florida, California, Spain) and wind (UK, Holland, Denmark, parts of the USA). Nuclear supply may expand in some countries such as Japan and France – but this will depend on the individual countries' energy strategies, suitable investment and mitigating environmental and safety concerns.

There is a possibility that Hydrogen and the use of hybrid gasoline-electric automobiles will decrease the dependence on imported Middle East crude oil – but this is most uncertain. The days of low cost energy – from 1986 until 2002 - are likely to be over for good. Commodities prices have approximately doubled for gas, electricity, oil and coal in the developed world in the last 2-3 years.

It seems likely that oil prices will stay above $30 per barrel and possibly head well above $50 per barrel depending on global security tensions, oil worker strikes, supply disruptions and the ability of OPEC producers to expand supply to meet demand.

What’s all the fuss about with regard to the threat of electricity black-outs in Europe and USA?

Investment in electric power generation has trailed well below the increase in GDP in most developed countries. Some reasons for this include de-regulation of electricity markets and privatisation which has caused electricity producers to run with lower spare capacity than previously. Furthermore, low electricity prices caused by the increased competition and lack of demand between 1998 and 2003 in many developed countries did not stimulate investment in new power generation.

The growth in electricity demand in 2003-2004 through a fairly strong economic growth period has caused far higher electricity prices, a shortage of spare capacity and the occasional electricity black-out (e.g. NE USA, Italy in 2002/3).

These supply disruptions have occurred when a surge in demand has tripped power plants. Many electricity experts expect significant problems in NW Europe and USA in the winters of 2004/2005 – particularly if there is a cold snap.

Swing capacity and the increasing reliance on imported electricity from overloaded electricity grids is anticipated to create disruptions in the future. If industry is disrupted for prolonged periods it can have an impact on GDP and investor confidence, as happened in the NE USA at the end of 2002.

One of the underlying causes of the lack of capacity is – again – the capital intensive nature of the business, long investment time frame, low returns on investment and competition from lower capital intensity / higher margin investments – e.g. financial services, real estate, retail.

Many investors view the electricity business as an old low-return (utilitarian) capital intensive business – and government have provided little incentive to invest in these large infra-structure upgrades. Meanwhile, shareholders pressurise management to reduce capital investment and increase returns and dividends. Uncertainties about future demand requirements have not helped planning infra-structure upgrades.

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