How to read today’s big report on the future of energy

The International Energy Agency — the autonomous Paris-based research group funded by an array of mostly European and Asian governments — has released its annual energy outlook (English language executive summary here), one of the most eagerly awaited big-picture prognostications in the business. The takeaway from this year’s report, which was leaked to the Financial ...

David McNew/Getty Images
David McNew/Getty Images
David McNew/Getty Images

The International Energy Agency -- the autonomous Paris-based research group funded by an array of mostly European and Asian governments -- has released its annual energy outlook (English language executive summary here), one of the most eagerly awaited big-picture prognostications in the business. The takeaway from this year's report, which was leaked to the Financial Times last week, is that governments matter: What they do, or don't do, about climate and energy policy in the next decade will determine what we pay for oil, and how much of it we have.

In the IEA authors' words, "the age of cheap oil is over." The question is how expensive it gets. Consider this chart:

The International Energy Agency — the autonomous Paris-based research group funded by an array of mostly European and Asian governments — has released its annual energy outlook (English language executive summary here), one of the most eagerly awaited big-picture prognostications in the business. The takeaway from this year’s report, which was leaked to the Financial Times last week, is that governments matter: What they do, or don’t do, about climate and energy policy in the next decade will determine what we pay for oil, and how much of it we have.

In the IEA authors’ words, “the age of cheap oil is over.” The question is how expensive it gets. Consider this chart:

We’re looking at several energy scenarios for the next quarter-century: a business-as-usual scenario (the red line above), a scenario in which industrialized countries pursue the relatively modest policy goals they agreed to at the last year’s botched Copenhagen summit (the blue line), and a scenario in which those countries pursue the sort of ambitious overhaul of their energy use that would be required to hold the atmospheric concentration of carbon dioxide to the level that climate scientists believe is necessary to avert the worst of climate change, or a 2-degrees Celsius rise in global temperatures (the green line).

Only in the last and most unlikely scenario will oil prices, under the relaxed demand afforded by the widespread use of renewable energy and natural gas, actually stay below $100 a barrel. “[I]t will be governments,” the authors write, “and how they respond to the twin challenges of climate change and energy security, that will shape the future in the longer term.”

When they act also matters enormously. The window on holding the temperature rise to 2 degrees — the ostensible goal of the Copenhagen talks last year — is fast closing. The world needs to be acting, and acting more ambitiously than most countries are currently prepared to, by 2020, or that target “will probably be out of reach for good.” Waiting is not just dangerous, but expensive: In the year since governments reached an impasse at Copenhagen, the cost of adopting the technologies and policies necessary to meet the targets agreed upon there has grown by $1 trillion.

A few more points of interest:

It’s all about China — and natural gas. In the IEA’s middle-of-the-road scenario, virtually all of the growth in energy demand between now and 2035 will come from countries outside of the Organization for Economic Cooperation and Development — and more than a third of it will come from China. That growth is expected to change the makeup not only of where fuels are going, but which fuels are going there. The rise of China is likely to mean the rise of natural gas, with a 44 percent increase in the fuel’s use worldwide by 2035 — and potentially more than that, if environmental concerns in China lead to a shift away from coal. (If you read O&G, you’ve heard about this already.)

The future of oil is unconventional: Canadian oil sands, Venezuelan extra-heavy oil, and an array of less important sources. The IEA expects production will quadruple from last year’s rates by 2035, to 9.5 million barrels a day.

If you want to cut fossil fuel dependence, stop subsidizing it. In June the IEA released a report for the G-20 calculating just how much countries spend underwriting oil, coal, and gas use. The total tab for 2009 came to $312 billion. Those findings are underlined here — the authors estimate that phasing out the world’s fossil-fuel subsidies by 2020 would not only return billions of dollars to national treasuries, but would also cut primary energy demand worldwide by 5 percent — the equivalent of buying two and a half years’ time at current consumption growth rates.

Peak oil will happen — if we want it to. We are likely to see oil production begin to fall in the coming decades, the IEA believes — but because of demand, not supply. The peak could come as early as 2020, if more ambitious emissions reduction targets are met; otherwise, it will likely be another decade and a half down the road. “The message is clear,” the authors write: “if governments act more vigorously than currently planned to encourage more efficient use of oil and the development of alternatives, then demand for oil might begin to ease soon and, as a result, we might see a fairly early peak in oil production. That peak would not be caused by resource constraints.”

Charles Homans is a special correspondent for the New Republic and the former features editor of Foreign Policy.

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