BP sees underlying energy growth

Last week, British Petroleum Co. plc highlighted a decline in energy demand growth in 1997 (OGJ, June 22, 1998, Newsletter). Peter Davies, BP's chief economist, said 1997 was an unusual year for energy markets, with demand being hit particularly hard by warm weather, caused by El Niño, and latterly by Asia's financial crises. Yet Davies said three fundamental trends that have driven global energy markets for 10 years remained intact: growing reserves, increasing consumption, and a

June 29, 1998

3 min read

David Knott
London
[email protected]

Last week, British Petroleum Co. plc highlighted a decline in energy demand growth in 1997 (OGJ, June 22, 1998, Newsletter).

Peter Davies, BP's chief economist, said 1997 was an unusual year for energy markets, with demand being hit particularly hard by warm weather, caused by El Niño, and latterly by Asia's financial crises.

Yet Davies said three fundamental trends that have driven global energy markets for 10 years remained intact: growing reserves, increasing consumption, and a more complex trend called "supply push."

"Over the last 20 years," said Davies, "oil reserves additions have exceeded production by about 30%. For gas, this increment is even more substantial, with reserves addition exceeding production by a factor of three.

"A small caveat relates to the most recent data for oil: in the 1990s, the world reserves/production ratio has edged down slightly from a peak of 44.4 years at the start of 1990 to the current level of 40.9 years."

Nevertheless, said Davies, total proved oil reserves have continued to rise, reaching 1.0376 trillion bbl at the end of 1997. Energy consumption has risen 2.4%/year since 1987, and oil's share has remained steady at 42%.

Supply push

The energy industry responded to the huge energy demand growth of the 1980s by delivering what Davies named supply push.

"Supply push," said Davies, "is the increasing supply of all forms of primary energy at decreasing cost over the last decade. Supply, like consumption, has adapted to lower energy prices.

"However, rather than resulting in lower energy supply, as would be expected in most cases, the outcome has been exactly the opposite. The last decade has been one of abundant energy supplies.

"Potential depletion has been overwhelmed by technological advances, cost reduction, and increasing investment. The net result has been rising supplies of oil, gas, coal, and electricity from increasingly diversified sources at declining cost.

"Of course, energy demand has been increasing, but the supply push has been dominant. The evidence lies in the fact that the internationally traded prices of oil, gas, and coal have all been on declining trends, in real terms, over the last decade, even before the oil price declines of the last 6 months."

New force

Davies also identified a fourth force, which he reckons will become increasingly influential-the environment, and especially climate change.

"Last year," said Davies, "we suggested that the underlying trend rate of growth for all CO₂ emissions for the foreseeable future would be 2% a year. In 1997, the growth of emissions was only 1.3%, the sixth year of the decade where the rate of growth has been below trend."

But Davies sees the Kyoto treaty, if ratified, as a headache for the energy industry. At Kyoto, the industrialized countries plus Russia, Ukraine, and Eastern Europe, which together emit 60% of CO₂ worldwide, agreed to cut greenhouse gas emissions by 5.2% from their 1990 level by 2008.

"Already the bulk of these countries is well above their 1990 emissions," warned Davies. "Relative to 1990, total CO₂ emissions have risen 6.6%, or 409 million metric tons of carbon. The difficulty in attaining the target increases the longer the problem is left."