Wall Street History

---

Wall Street History

06/29/2007

More on Energy Demand

The other day I saw a piece in the London Times quoting Royal
Dutch Shell CEO Jeroen van der Veer who called for a “reality
check” when it comes to the prospects for renewables meeting
our energy needs down the road. Even with major technological
breakthroughs, renewables may only account for up to 30% of
energy supply in the middle of the century. He also says we
greatly underestimate growth in demand from developing
countries.

So, I looked up the Royal Dutch Shell site [shell.com] and read a
recent speech Mr. van der Veer gave May 31, 2007. Think of
the following excerpts as an addendum to last week’s piece.

---

Jeroen van der Veer

In the energy industry we make multi-billion euro investments
for projects that often have a lifespan of 30 years or more. So for
us, thinking about the future isn’t just a hobby – it’s an absolute
necessity.

This is especially true now that the world is both hungry for
energy and worried about greenhouse gas emissions. The energy
challenge is made even more challenging by three medium- to
long-term trends. I call these the three “hard truths.” .

First, the global demand for energy is accelerating not just
growing, but accelerating. The reason is that China and India in
particular are entering the energy-intensive phase of their
development.

Second, the growth rate of supplies of “easy oil” will struggle to
keep up with growing energy demand.

And, third, increased use of coal, plus the overall dominance of
fossil fuels, will cause higher CO2 emissions, possibly to levels
we deem unacceptable.

Zooming in on the first hard truth, the consumption of energy in
2050 could be at least twice as high as it is today.

The two main drivers for accelerating energy demand are
population growth and greater wealth, driven by the globalization
of markets. Population growth translates into greater economic
activity. Economic activity translates into higher demand for
energy. Higher energy consumption based on fossil fuels
translates into higher CO2 emissions. The world’s population
could well reach 9 billion by the middle of this century. That
means there would be three times as many people on the planet
in 2050 as when I was born. Think about it: 3 billion new
participants in the global economy between now and 2050.

The second driver of energy demand is economic growth, fuelled
by the globalization of markets, in particular finance,
information, communication, technology and production.

Globalization is the great driving force behind the speedy
economic development of China and India. It allows these
countries to attract capital, expand manufacturing and keep the
brains. As a result, hundreds of millions of people are being
lifted out of poverty and middle classes are growing rapidly.

Until recently, the Chinese economy grew faster than China’s
energy consumption. Between 1990 and today, the average
Chinese person doubled his income while increasing his energy
consumption only 15%.

But now both China and India are entering the energy-intensive
phase of their development. It’s when people buy their first
television, motorcycle, or car and start consuming much more
transport fuel and electricity than they used to. It’s the phase
where industrial expansion takes root.

To give you an idea of the speed of development: after 60 years
of prosperity, today there are 46 million cars in Germany. In
China today there are 40 million cars, that is 3 for every 100
people. By 2020, the forecast is that China will have 150 million
cars. Fuelling these cars will require an additional 2-3 million
barrels of oil per day, equivalent to the current demand of South
Korea.

If China follows the development path of South Korea, China’s
energy consumption will be double that of today by 2020. Some
estimates have China consuming 16% of the world’s primary
energy by 2020.

The trend is clear: more people, more wealth, more energy.

This brings me to my second truth: the decline of “easy oil”.
[Easy oil refers to conventional oil and gas that are relatively
easy to extract.]

At exactly the moment that demand for energy is surging, more
and more of the world’s conventional oil fields are going into
decline. Hence, the growth rate of supplies of “easy oil” will
struggle to keep up with growing energy demand.

The problem is not the availability of resources as such. Overall,
measured in barrels of oil equivalent, the International Energy
Agency believes there could be roughly 10 trillion barrels of
conventional oil and gas in place, and at least as much
unconventional oil and gas. That makes for at least 20 trillion
barrels of oil equivalent – equal to about 400 years of global oil
and gas consumption in 2006 theoretically.

In practice, only 5-10 trillion barrels can be recovered with
existing technology. Many of the world’s future resources are
located in the arctic or offshore under deep water. And much of
it is in oil shales and oil sands that are more difficult and
therefore more costly to recover.

The IEA believes 20 trillion, or 20,000 billion, dollars need to be
invested in the energy sector in the period 2005-2030 to secure
sufficient supplies.

Apart from the availability of capital and resources, what matters
is the rate at which they can be found, produced, refined and
transported. The world now produces roughly 135 million
barrels of oil equivalent a day of oil and natural gas. We can
raise that number, but we’ll have to do that much faster than we
used to and even then we cannot push up production levels
indefinitely .

The third hard truth concerns the rise of greenhouse gas
emissions.

As the IEA points out, growth of CO2 emissions could outpace
energy demand. In its reference scenario, the IEA has emissions
rising by 55% between 2005 and 2030. In a recent study by the
US Energy Information Association, CO2 emissions are
projected to rise even faster – by 59% between 2004 and 2030.

The reason for the surging growth in CO2 emissions is that in a
business-as-usual scenario much of the demand for energy will
be met by fossil fuels, including and especially coal. To be less
dependent on imports of oil and gas, countries will exploit their
domestic coal reserves. This is true for China and India, but also
for the United States, where over 50% of electricity is generated
with coal. And in the EU-27, around 36% of power is coal-fired.

But coal is at the dirty end of the fossil fuels scale. Looking at
CO2 emissions per unit of source energy – in combination with
typical conversion efficiencies – coal is more than twice as CO2-
intensive as natural gas per kWh of electricity. And coal is more
than twice as CO2-intensive as unconventional oil per liter of
liquid fuel.

Nevertheless, the energy security argument is an important one
for countries, and understandably so. Coal forms about 70% of
China’s current primary energy mix today. But to fuel its
growth, China will need to double the amount of coal used today
by 2030.

China is adding more than 50 gigawatt of new electricity
capacity every year, most of it coal. That is equivalent to adding
almost the current generation capacity of Great Britain every
year .

[Ed. But, when it comes to the impact of renewables ]

I believe it is possible to grow alternative energy from around 1
to 2% of primary energy today to around 30%. What would this
mean in practice? Well, for example, there are 30,000 wind
turbines in the world today. By the middle of the century there
may be a million wind turbines, and they will need to have a
much larger capacity than the ones we install today, from 2
megawatt to 5 megawatt.

So we have quite a task at hand in not just developing, but
implementing the necessary legislation, regulation and
technologies to boost renewable energy and capture emissions
from power stations .

Governments, not industry, decide the energy mix of their
societies. They determine how to balance energy security
against the economic, environmental and social interests, using
laws, taxes and incentives. There are broadly three sets of
standards and regulations that governments need to implement in
the coming decades to meet the energy challenge.

Firs of all, efficiency standards. In the transport sector, we will
likely see a gradual tightening of fuels standards and vehicle
efficiency standards. Similarly, I expect gradually tighter
efficiency standards in the building sector, where many gains can
be made through better insulation. To get a maximum response
from industry, harmonized, cross-border standards created for the
long term are better than a patchwork of different national
approaches .

Second, we need long-term clarity about cap-and-trade
mechanisms that put a price on carbon emissions across as many
borders as possible. We need an international market for carbon
emissions.

Third, if we price CO2 emissions, we should award credit for the
CO2 that is captured, and stored or re-used, as well as the
emissions prevented by investments in zero-carbon alternative
energy .

Three hard truths will create a dynamic of their own and three
sets of governments policies could help us manage the coming
turbulence.

I have learned to be an optimist. I believe the world can have
economic growth and energy security, and at the same time
manage emissions. Markets will indeed direct resources to the
best innovations and the most efficient practical solutions. But I
am also a realist. I know that the energy challenge can only be
met if we take timely and concerted action. And I know from
experience that markets can only move quickly if governments
act quickly.

---

Wall Street History returns next week. A look at 1987.

Brian Trumbore

---