Prominent goals of many energy policies these days are conservation, the displacement of oil by nearly anything else, and diminished reliance on oil from members of the Organization of Petroleum Exporting Countries. That statement certainly applies in the US, where subsidies and tax preferences favor nonpetroleum fuels and lawmakers have no qualms about proposing specific limits on oil use, especially oil from OPEC or the Middle East. But the US isn’t alone. In France late last month, Finance, Economy, and Industry Minister Thierry Breton announced a plan to force the use of biofuels, mainly 85-15 ethanol-gasoline mixtures, in a vehicle-fuel market now dominated by diesel. “Oil is henceforth a rare and costly product,” he declared (OGJ Online, June 1, 2006).
There’s nothing wrong with cutting oil consumption or, failing that, slowing the rate of consumption growth. There’s nothing wrong, either, with expanding shares of nonpetroleum, non-OPEC fuels in the energy mix. The energy market is in fact making clear that all those developments are in order.
Forecast changes
Late last month the US Energy Information Administration radically changed its long-term energy forecast in anticipation of structural market adjustments to elevated price. Compared with the projection it made last year, EIA assumes 35% higher world oil prices in 2025. Responses to that change are dramatic. For example, global oil consumption in 2025, again in comparison with last year’s forecast, will be 8 million b/d lower. That’s conservation. It’s nearly the demand equivalent to adding a Saudi Arabia’s worth of supply.
EIA’s new projection extends the forecast period to 2030. In the reference case, the total energy market increases by an average of 2%/year as economic growth overpowers price gains. Because of higher prices, however, oil’s share of the market-which in last year’s forecast held steady-declines from 39% in 2003 to 35% in 2015 and 33% in 2030. As oil’s role shrinks in EIA’s new outlook, coal gains 3 percentage points in energy-market share to 27% in 2030. Natural gas gains 2 points to 26% and renewable fuels 1 point to 9%. Nuclear energy loses a point to 5%.
The higher oil prices assumed for the new projection also move the market away from reliance on OPEC oil. Before the price increase, the expectation was that most production-capacity growth would have to occur in OPEC countries. That outlook raised concerns beyond the usual knee-jerk fears about OPEC oil. Observers outside OPEC worried about limits on access to opportunities in OPEC countries. OPEC members themselves worried about committing huge, long-term investments to production capacity in a market that might not grow as expected.
EIA’s new projection implies an easing of those pressures. The higher prices not only dampen demand for oil but also improve economics of new production capacity outside OPEC, especially nonconventional fuels. Last year’s forecast saw a need for OPEC production growth of 24 million b/d between 2002 and 2025. In the new forecast the need shrinks to 11.8 million b/d. Through 2030 in the new forecast, supply from non-OPEC nonconventional sources-including biofuels, coal-to-liquids, and gas-to-liquids-increases from 1.8 million b/d in 2003 to 11.5 million b/d in 2030, nearly 10% of total world petroleum supply.
EIA’s new projection reflects a market characterized by conservation, displacement of oil by other forms of energy, and less future need than has hitherto been expected for oil from members of OPEC. It’s a market already moving toward goals that most governments are only discussing. It’s a market achieving progress that governments can only disrupt when they get around to acting on their fanciful presumptions and ludicrous edicts about petroleum’s rarity.
Persistent irony
A persistent irony of energy politics is the tendency of governments to ignore energy except when supplies are tight, prices high, and political pressures intense. Government responses thus are usually late and wrong. They distort market corrections and create costs, which outlast the problems they are supposed to solve.
This time can be different. This time, governments can learn from history. This time, they can help energy consumers by leaving the energy market alone.
