A growing world would benefit from a move by its political and industry leaders beyond wishes expressed in terms of alternative sources of energy. This is not to say leaders should reject wind, sunlight, water movement, hydrogen, and other potential energy sources and carriers now considered exotic. To the contrary, the world needs energy from all sources. But problems arise when decision-makers think of specific energy forms as alternatives to others.
Developments this year bring subtle differences into sharp relief. With unexpectedly strong demand, the energy market in 2004 has nearly exhausted its normal surpluses. In its dominant segment, oil, the market usually carries surpluses in storage and in idle capacity to produce. This year's demand surge, however, pulled oil out of storage, elevated prices, and mobilized all but about 1 million b/d of unused production capacity. While pressures have eased recently, this latest demonstration of limits on oil deliverability deserves attention in a world with a growing appetite for energy.
Capacity expansion
Capacities aren't static, of course. The price increases that occur when conditions tighten enable and encourage producers to develop new capacity. That's happening now (OGJ, Sept. 6, 2004, p. 19). The market lesson of 2004 is that, with surpluses exhausted, future growth in demand for oil, and for all energy by association, will have to be met by new capacity, which requires investment.
Absent a global economic catastrophe, energy demand growth—and the need for new capacity and investment—will be steady and strong. The US Energy Information Administration projects that worldwide marketed energy consumption will increase by 54% during 2001-25. To meet that growth, supply from all energy sources must increase: natural gas by 2.2%/year, oil and renewable sources by 1.9%/year each, coal by 1.6%/year, and nuclear power by 0.6%/year. Of the 2025 energy market, in EIA's view, oil will command a 39% share, natural gas 25%, coal 22%, renewables including hydroelectric 8%, and nuclear 5%.
EIA's projection draws scorn from analysts insisting energy supply can't grow that much. Those analysts have various reasons for their pessimism, among them doubts that the worldwide oil resource will support 121 million b/d of production in 2025, as EIA projects. But EIA isn't betting on outcomes here; it's defining a challenge. It makes basic assumptions—including 3%/year average global economic growth, continuation of regulations in effect in 2003, and stability of the price relationships among energy sources—and shows where the trends point. The key message for world leaders is straightforward: Relatively moderate economic growth requires an energy market that expands at an unspectacular rate of 2%/year but that nevertheless reaches what some experts consider to be impossible size.
How, indeed, will a system now straining to deliver 420-425 quadrillion btu/year of energy come to be able to deliver 618 quads/year 21 years from now? No one knows. No one can know. More important questions are whether the investors who must risk capital on the necessary capacity expansions will have access to enough opportunities and whether those opportunities will be of sufficient size and quality. The answers depend greatly on political decisions.
Costly decisions
Political discussions about energy now focus too much on the unanswerable question and too little on the important ones. Lacking an impossibly specific roadmap for future energy supply, the official world feels tempted to provide its own. Governments, forgetting past mistakes, feel compelled to make energy choices best left to markets. They become obsessed by the environmental disadvantages of oil and gas, pay too little heed to economic and scale problems of officially preferred alternatives—all energy sources have disadvantages—and gravitate to poor and costly decisions.
Official action on energy needs to be less about form and more about supply. A government decision simply to promote what's now called alternative energy with research funding or tax breaks is a political choice, standard practice and usually harmless. Such a decision undertaken specifically to displace a form of energy, such as oil or coal, that offers clear economic and scale advantages takes things a step further and is, in the context of future needs, strategically foolish. The phrase "alternative energy" implies that kind of choice. It too easily narrows perspectives in energy decision-making. "Supplemental energy" would be better. The world needs both kinds.