Total Energy Consumption

A Breakthrough, Of Sorts

For the latter half of the bull run in energy prices, oil has traded in a $10 band either side of $70 a barrel, with the occasional spike above $80 a barrel. The reason? Supply has struggled to keep up with the other face of the energy market, demand.

Economic growth around the globe in developed and developing economies alike has kept the world hungry for more energy. Supply has barely kept up. Stocks are thin and any threat of interruption to supply sends oil futures traders scrambling to bid up the price. And oil seems to exist mainly in trouble spots such as the Middle East and eastern Nigeria, or in weather challenged locations such as the Gulf of Mexico or the North Sea.

All that has been true for the past four years. It has sent nations scurrying to secure supplies, the best example being China's expanding natural resources diplomacy in Africa.

The demand shows no sign of abating. The International Energy Agency (IEA) forecasts that energy demand between now and 2030 will increase by a half, an annual average increase of 1.6%. Two-thirds of the new demand will come from developing nations, with China accounting for 30%.

What is new is the focus on the environmental impact of consuming as much energy as we do in the way that we do. And that is what provides the hope that the world can modify its demand for energy, or at least its fossil-fuel energy demand, through efficiency and conservation.

What happened? The political impasse impeding progress was broken.

The climate change deal reached by leaders of the Asia-Pacific Economic Cooperation forum (APEC) at their summit in Sydney in early September--a gathering that included all the main players save for the European Union--coalesced regional support for what could be called the pro-growth camp backed by the Bush administration.

This approach puts technology, voluntary targets and energy efficiency at the heart of any global agreement on climate change in a way that would contain the growth of greenhouse gas admissions but still not curtail economic growth.

APEC leaders agreed to work towards a 25% reduction by 2030 in energy intensity, the amount of energy used to produce a dollar of gross domestic product. Developing countries prefer this measure to absolute cuts in carbon outputs because it puts the onus for action on the big polluters like the U.S. and China.

The Bush administration, which was first to push the idea, favors this approach, and China likes it too. They can continue to consume the energy they need for their economic growth; they just have to do so more efficiently, i.e., technology not hair shirts to the fore.

But it means that emissions will continue to rise with growth, just at a much slower rate. Before the APEC summit, Australia's Bureau of Agricultural and Resource Economics forecast that present patterns emissions from APEC nations would grow by 130% between now and 2050. Hitting the APEC energy-intensity target, plus some help from cleaner fuels like nuclear and renewables, could limit the rise to an estimated 15% by 2050.

But a global agreement around energy intensity goals would be at odds with the consensus reached by the leaders of the eight richest countries, the G8, at their summit in Heiligendamm earlier this year and the subsequent U.N. climate convention in Vienna to cut greenhouse gas emissions by 25% to 40% by 2020. Note not only the difference in goal from APEC, but the difference in date.

Two leaders, President George W. Bush, a late convert to the cause of climate change, and Russia's Vladimir Putin, were parties to both agreements, which only illustrate the political complexity of a topic (mostly) everyone agrees needs tackling but on which agreement on the how is as elusive as ever.

Similarly, the APEC, while it got Beijing to agree to quantifiable targets--albeit non-binding ones, also puts China into the camp of framing a global climate change agreement in terms of improving energy intensity rather than reducing greenhouse gas emissions, while at the same time staying in the camp of those arguing that the U.S. should join the U.N.-sponsored talks on a successor to the Kyoto protocol on climate change-- which seeks to cut emissions.

China and other developing nations don't want to see progress towards Kyoto-2 die. Kyoto doesn't impose any firm targets on developing nations for reducing emissions. It also means money for them, through aid for clean technologies and to adapt to the social and economic impacts of climate change.

Whichever approach ends up being adopted, there is no escaping the fact that fossil-fuels will remain the dominant energy source for the next quarter of a century and probably beyond. Half the forecast increase in energy use will be accounted for by energy generation and 20% by transport. Almost all of that energy, the IEA says, will come from oil.

The world will be using more coal and more natural gas. The expansion of nuclear energy is constrained by the length of time it takes to build plants and get the regulatory approvals to be operate them. The use of biofuels and renewable alternatives such as wind and solar power will grow rapidly, but they have such a small base of use they will not replace significant quantities of fossil fuels any time soon--nor diminish the competition between countries to secure supplies.