Wide regional disparities in the prices of natural gas and electricity are set to impact the industrial competitiveness of countries in Europe and Asia over the coming two decades, according to the latest World Energy Outlook (WEO) from the International Energy Agency – giving the US a significant competitive advantage. Other key themes in the influential report include the continuing importance of Middle Eastern oil, despite the surge of light tight oil production in North America, and Brazil's progress towards becoming a major net exporter of crude oil. The agency also warns that much more needs to be done to set the world on a path to meeting the internationally agreed climate change target.
Launching this year's edition of the WEO in London this month, the IEA's executive director, Maria van der Hoeven, said: “Major changes are emerging in the energy world in response to shifts in economic growth, efforts at decarbonisation and technological breakthroughs. For decision-makers trying to reconcile economic, energy security and environmental objectives, it is essential to be aware of the dynamics at the heart of today’s energy market.
“We have the tools to deal with such profound market change. Those that anticipate global energy developments successfully can derive an advantage, while those that do not risk taking poor policy and investment decisions.”
Price differentials to persist over the long term: One of the main themes of this year’s WEO is the substantial widening of the gap between natural gas prices in the United States, Europe and Asia, with electricity price differentials also large between regions. “This is key in our globalised world, where energy costs can be vital to the competitiveness of energy-intensive industries,” said van der Hoeven. While these energy price disparities are expected to narrow somewhat in the central scenario of the WEO, they remain pronounced in the two decades to 2035.
“We think the regional price gaps for natural gas and electricity will be with us for many years to come,” said Fatih Birol, the agency’s chief economist and the editor of the WEO. “They are definitely going to impact the economies of the countries, vis-à-vis each other, and the global economic geography.”
The United States is expected to experience relatively low energy prices, seeing a slight increase in its share of global exports of energy-intensive goods – “providing a clear indication of the link between relatively low energy prices and the industrial outlook”. Conversely, the shares of the European Union and Japan both decline relative to current levels.
The IEA projects that regional differences in natural gas prices will narrow from today’s high levels but will remain large through to 2035. Electricity price differentials also persist. (Source: IEA)
Energy price differentials will continue to impact industrial competitiveness. The US, together with key emerging economies, increases its export market share for energy-intensive goods, while the EU and Japan see a sharp decline. in Europe and Asia. (Source: IEA)
Focus on energy efficiency: Key to adapting to higher energy prices over the longer term would be energy efficiency, said van der Hoeven, “what we have called the ‘hidden fuel’ and, more recently, the ‘first fuel’”.
“I am pleased to say that it has become a focal point of energy policies. As we have emphasised in the WEO this year, there are pragmatic strategies that governments and industry can pursue to reduce energy use and emissions that are either GDP-neutral or positive for economic growth. Still, two-thirds of the economic potential for energy efficiency is set to remain untapped in 2035 – unless market barriers like fossil fuel subsidies can be overcome.”
No Golden Age of Oil? Another focus of this year’s WEO is an in-depth analysis of oil. Van der Hoeven stressed that “while unconventional production may herald the dawning of a ‘Golden Age of Gas”, it does not necessarily create an era of oil abundance”.
New supplies of unconventional oil, such as the recent surge of production in North America, will help reduce OPEC’s share of supply over the next decade, with other new sources – such as Brazil - also contributing.
“Technology is opening up new oil resources, which is very good news,” said Birol. “Shale oil is coming, other unconventionals are coming – but we should not forget that the Middle East is, and remain, the heart of the global oil industry, with its low-cost resource base, for many years to come.”
Van der Hoeven added: “We expect the Middle East to take back its role as the dominant source of oil supply growth from the mid-2020s.” Moreover, all new sources of oil would be crucial to meeting increasing global demand to 2035. “Oil demand growth will be like energy demand growth generally – geographically uneven – barely changing in the OECD and shifting further to Asia and the Middle East.”
Global warning: As in previous years the IEA issued a stern warning about the need for policies to mitigate greenhouse gas emissions.
“As the source of two-thirds of global greenhouse-gas emissions,” says the WEO, “the energy sector will be pivotal in determining whether or not climate change goals are achieved. Although some carbon abatement schemes have come under pressure, initiatives such as the President’s Climate Action Plan in the United States, the Chinese plan to limit the share of coal in the domestic energy mix, the European debate on 2030 energy and climate targets, and Japan’s discussions on a new energy plan all have the potential to limit the growth in energy-related carbon dioxide emissions.”
In the WEO’s central scenario – which takes into account the impact of measures already announced by governments to improve energy efficiency, support renewables, reduce fossil-fuel subsidies and, in some cases, to put a price on carbon – energy-related carbon dioxide emissions sill rise by 20% to 2035.
“This,” says the IEA, “leaves the world on a trajectory consistent with a long-term average temperature increase of 3.6°C, far above the internationally agreed 2°C target.”
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