BP’s Crystal Ball

by .
Originally published in Impact Investor

A short while ago – 1998 to be precise, when crude oil was trading at $10 a barrel – The Economist forecast that the price would drop to $5. It didn’t. A mere six years ago, July 2008, the price of a barrel settled at what remains its all-time peak, $145, and various analysts (me included, mea culpa) suggested that $200/barrel was in sight. It wasn’t. It’s back at around $60/barrel as I write.

That such a fundamental commodity, the leading influence on the global economy, experienced a price increase of 1,350% in a decade, followed by a 56% fall, without a similar decrease in supply or increase in demand is, for me, the best indication that the world went mad. As a result of this whiplashing in the price of a barrel of sticky black stuff, jobs are created and disappear, fortunes made and lost, lives enriched or ruined, wars planned and people killed. Viewed from Mars, the conclusion would inevitably be – this is no way to achieve a peaceful, stable world.

To describe these price swings as ‘volatile’ is a whopping understatement. Just about the only people to benefit from them were – are – oil traders and analysts, whose incomes depend on the price perpetually moving. If crude oil stayed at a fixed price, they would all flee to other jobs.

So when one of the world’s energy behemoths, BP, digs out its crystal ball – as it does annually, and did so this week – it very sensibly doesn’t talk dollars and cents. BP’s Energy Outlook 2035, which “updates our view of the likely path of global energy markets to 2035[i]”, instead tries to spot general trends in energy production and consumption, which are largely dependent on two things: population growth and increases in income.

By 2035 the world’s population will be nudging 9 billion, and an additional 1.6 billion people will require energy. By that date global gross domestic product (GDP) is “expected to be 75% higher than it is today” says BP. Put simply, more people will need more energy, and more of them will potentially be able to afford it. It therefore requires no great leap of imagination to project, as BP does, that primary energy consumption will rise by 37% between 2013 and 2035. That ought to be a recipe for higher energy prices…in the longer term, if the next 20 years counts as longer-term.

But in the immediate future, various technological innovations – the leading example of which is the shale revolution, especially in the US, but growing elsewhere, too – has altered the energy landscape, and helped fossil fuel energy prices to crash. As BP says, thanks to shale, “US oil production growth in 2014…was the largest in US history.” In 2015 North America will switch from being a net energy importer to a net exporter. Phew! Who saw that coming?

This astonishing turnaround will have a profound – if unpredictable – impact on the costs not just of all fossil fuels, but on the relative competitiveness of all forms of renewable energy and, in particular, on the start-up costs of innovative technologies aimed at combatting climate change, or improving energy efficiency. What price the electric car in this context? How much of a deterrent to future energy efficiency ideas might be posed by persistently lower-than-recently fossil fuel prices? And if China and India’s growth rates slow to an average 4%/year in BP’s ‘low growth’ scenario (as opposed to 5.5%/year in BP’s ‘base’ case) then the drop in global overall energy consumption would be remarkable, falling from 1.4%/year to 1%/year. World energy demand would then be 8.5% lower than in BP’s base case – a drop equivalent to “the total energy demand of the entire European Union in 2035”. What might be the price of a barrel of crude in that scenario?

Within this overall picture there are nuggets of hope. There is, for example, a remarkable decline in coal’s fortune. From being the fastest growing fossil fuel since 2000, at 3.8% a year, its consumption will slow radically out to 2035, to just 0.8% a year, due largely to the falling coal-based industrialisation in Asia. Meanwhile, the fastest fuel growth will be in renewables (including biofuels), at 6.3% a year, while nuclear and hydro-electric power will grow by 1.8% and 1.7% a year, respectively. This relative decline in the use of coal will help slow global CO2 emissions, but those emissions are still rising “too fast for comfort”, says BP.

Under BP’s low growth scenario, carbon emissions by 2035 would be 9% less than in its base growth case, which would be equivalent to 4 billion tonnes of CO2. That’s the good news. The bad is that this would still leave the emissions’ trajectory way above what the International Energy Agency considers necessary for avoiding serious climate change. So there is plenty of room for companies such as the Good Energy Group – which helps individuals and businesses to switch energy supplies to renewables – or ITM Power, which designs and manufactures hydrogen energy systems for energy storage and clean fuel, to grow and make a real difference.

Given such a mixed long-term outlook, BP’s conclusion, which is that “continuous change is the norm for energy markets”, seems to take us full circle – back to yet another massive understatement. In any case, by 2035, the world is still going to be in thrall to fossil fuels. The irony is that if we want to see CO2 emissions drop substantially (but perhaps not enough to avert serious climate change) then we all need to pray for economic growth to slow substantially. And that, for developing countries, will throw up its own problems.


This article originally appeared in Impact Investor.

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