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The outlook for energy

Exxon Mobil has released a major report in its Outlook for Energy series: A View to 2040. Taken together with a similar study from BP (BP Energy Outlook 2035), this presents a comprehensive view of how our use of a full range of energy sources will develop over the mid-term. Bearing in mind Nils Bohr’s cautionary comment – prediction is very difficult, particularly about the future – we should nevertheless take this view as the best assessment of the likely situation from an industry whose very existence might be threatened if is wrong.

One of the most important things is to compare this view with the core message of the IPCC that carbon dioxide emissions must be slashed drastically to avoid a potentially catastrophic rise in temperatures later this century. Equally important from the energy sector’s point of view is the message from some quarters that a significant proportion of the declared reserves of fossil fuels must be left in the ground if emissions targets are to be met. This means that companies such as Exxon in principle have unutilisable assets and are thus overvalued. This is a very serious prospect for any company.

There are plenty of groups making this very point (for example, ‘Carbon bubble’ threatens stock markets, say MPs). According to studies referred to in this report, some economists believe that between 60 and 80% of fossil fuel reserves must be left unburned if the target of keeping the rise in average temperatures below 2°C (agreed at the 2010 Cancun summit) is to be achieved. This would make a massive difference to the valuation of energy companies and have a serious knock-on effect across stock markets and pension funds.

Christiana Figueres, the head of the UNFCCC, is quoted as saying "Those corporations that continue to invest in new fossil fuel exploration, new fossil fuel exploitation, are really in flagrant breach of their fiduciary duty because the science is abundantly clear that this is something we can no longer do." Why then, have financial markets not reacted? Why are Exxon and BP issuing reports which are clearly at odds with the aspirations of the UNFCCC and yet not coming in for sustained media criticism?

If we look at the BP report, we see a graph of the so-called IEA 450 scenario (the path mapped out for emissions to keep atmospheric CO2 levels below 450ppm and so meet the 2° maximum temperature rise criterion, according to IPCC models) overlaid on the projected emissions split by OECD and non-OECD countries. The key point is that, to keep below the target figure, the world’s emissions should already have peaked and soon be on a downward path.

If this path was to be followed, emissions from energy use would be declining from about 30 billion tonnes of CO2 per year presently to around 20 by 2035. The actual projected figure is more like 40. The Exxon report sees climate change policy as being somewhat more successful, with emissions plateauing by 2030 and starting a rather modest decline. This puts energy-related emissions at about 35Gt carbon dioxide between 2035 and 2040. But this is still far removed from the drastic reductions proposed by the climate change community.

The other key fact shown by both studies is that total emissions are dominated by non-OECD countries, and mainly the Asia Pacific region. Europe and North America show modest reductions in emissions, but become increasingly irrelevant as the massive populations of China, India and other countries consume more energy in line with increasing prosperity.

Currently, the atmospheric concentration of carbon dioxide is about 400ppm, up from about 280ppm in pre-industrial times. The present annual increase is some 2ppm. This is still accelerating but, if we conservatively estimate this as the projected annual rise, then by 2040 the atmosphere will contain over the 450ppm target and this level will continue to grow for the foreseeable future. If the BP figures are to be believed, then that target will be breached even earlier.

But let’s look at some other aspects of energy use. Exxon predict that the global economy will have grown by 130% by 2040, with a 35% greater demand for energy. This shows the same trend as has been evident for many years: that, as economies grow, their energy efficiency improves.

As the global economy grows, so does per capita income. This is expected to increase by about 80% over the timeframe, benefitting in particular billions of the world’s poorer citizens. According to the International Energy Agency (IEA), 1.3 billion people have no access to electricity (and many of these will also be among the nearly 1 billion who are chronically malnourished), while 2.6 billion people use inefficient and polluting wood fires for cooking. Connecting people to energy grids and eliminating cooking fires are very worthwhile goals which improve the quality of life considerably.

As for the energy mix, 60% of energy is likely to come from oil and gas. Oil will remain the fuel of choice for transport (although its use will be tempered by increasingly efficient engines and the greater use of hybrid cars) as well as a feedstock for the chemical industry. Gas is seen as increasingly important, rivalling coal over this period. However, coal is expected still to be a large part of the electricity generating mix, which is not surprising when we consider how many new coal-burning stations are being built today.

Depending on your viewpoint, these projections will seem either pessimistic or realistic as regards climate policy. The fact that neither report has been called into serious question and that there has not been a large drop in the price of energy company shares suggests that they are in fact realistic, which many may find regrettable, but nevertheless has to be faced up to.

The fact is that emissions in coming decades will be dominated by the emerging economies, which are bound by no international targets. European efforts to reduce emissions, however well-meaning, cannot change that fact. Peak Oil seems to be a mirage, at least for now, and the exploitation of shale reserves makes it an even more distant prospect. Coal is cheap and plentiful and gas becoming increasingly so. Only radical new energy generating technologies are going to change the choices being made. 

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