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The just published WORLD ENERGY OUTLOOK 2013 by the Paris based International Energy Agency provides us with an authoritative assessment of trends and systemically significant developments in global energy.1 They serve as the basis for projections of where we will be in 2035 that are presented in three scenarios. Their forecasts highlight noteworthy changes in current patterns of supply and demand. Yet, the report envisages a relatively high degree of stability in aggregate balances and, therefore, in prices even as the mix of sources of energy undergoes a significant shift as does shares of demand among regions.
The major new factors in the energy equation are the following. On the supply side of the balance: a dramatic increase in the production of natural gas through the extensive application of hydraulic fracturing techniques – supplemented by expansion of production via conventional methods; non-OPEC supply plays the major role in meeting net oil demand growth this decade, but OPEC plays a far greater role after 2020; Iraq is the largest single source of oil production growth, followed by Brazil, Canada and Kazakhstan with the former’s coming on line soonest. The United States is the world’s largest oil producer for much of the period to 2035.
The IEA’s Central scenario sees aggregate supply rise from 89 mb/d in 2012 to 101 mb/d in 2035 following along a relatively smooth trajectory. Fossil fuels continue to dominate the power sector, although their share of generation declines from 68% in 2011 to 57%. “The share of renewables in total power generation rises from 20% in 2011 to 31%, as they supply nearly half of the growth in global electricity generation. Renewables overtake gas as the second-largest source of power generation in the next couple of years and approach coal as the leading source” by the end of the period.2 They meet around 40% of the growth in primary energy demand. “Nearly half of the net increase in electricity generation comes from renewables. “3
On the demand side, the cardinal features are these: global energy trade is re-oriented from the Atlantic basin to the Asia-Pacific region with China’s relative percentage declining relative to India and Southeast Asia with India becoming the largest importer of coal by the early 2020s; newly industrialized and emerging countries account for more than 90% of net energy demand growth to 2035; the United States will achieve near energy self-sufficiency by the end of the period;.a drop in Europe’s share of energy consumption; and a steep rise in the Middle East’s imports of natural gas. In terms of technology: refinements in techniques for generating power from renewable sources, for unconventional exploitation of natural gas and petroleum, and for deep-sea drilling; major infrastructure investments to facilitate a large expansion of liquefied natural gas (LNG) commerce.
The possible impact of political factors is given little attention and not not figure in the Central scenario’s projections.
Political Scene Changers
A feature of the Outlook’s supply prognosis is the expected dramatic increase in the contributions from Iraq and Brazil. Intervening political developments could result in production shortfalls, though. Iraq has yet to achieve the stability and governmental order that are absolute necessities for the country to reach its potential – or even come close to it. The raging Sunni insurgency against the Shi’ite led administration of al-Maliki shows no signs of abating. That is due in good part to the unwillingness of the ruling coalition to offer acceptable terms of a sectarian conciliation by implementing promises to open employment opportunities for former members of the Ba’ath Party and more recent activists in the American sponsored movement sha’wa movement of Sunni tribes who suppressed al-Qaeda linked militants in 2006-2008.
Tensions have been heightened by the sectarian civil war in neighboring Syria – itself cause and reinforced effect of the mounting antagonism across the region between Islam’s rival denominations. That makes peace in Iraq hostage to events outside its borders, including how Iran exerts its regional influence. Moreover, the close links between Iraq’s Shi’ite dominated government and Iran in all spheres caste the former as a protagonist in the region’s sectarian conflict. In addition, the Kurdish region in the northern part of the country increasingly acts as a sovereign state with the strong dedication to making de jure what now is de facto. It has entered into contracts for extraction and distribution from its substantial oil fields with several multinational energy companies, e.g. At the same time, Ebril leaders are collaborating with Turkey for the expansion of the pipeline that runs through Turkey to the oil hub of Ceyhan on the Mediterranean coast. This last has occurred despite the simmering conflict between Istanbul and the Kurdish rebels who operate on both sides of the border between Turkey and Kurdistan. These unsettled political conditions indicate strongly that wide confidence margins should be place around estimates of future production and exports from Iraq over the foreseeable future.
Brazil’s uncertainties stem from divisions within Brazilian society. The country’s economic growth has actually widened already large gaps between the wealthier social strata and most salaried workers, with millions of poor left destitute at the bottom of the pyramid. The resulting frustrations and frictions were the underlying cause of the massive protest movements that shook the country in the spring of 2013. They forced unprecedented concessions from the government of Dilma Rouseff who pledged both heavy expenditures to meet the protestors’ demands and structural political reforms. While there is only a slight danger prospect of a paralyzing conflict that could jeopardize governmental stability, there nonetheless is the possibility that further disruptions could hamper the economy and/or weaken the government’s ability to implement its ambitious development plans. Foremost among them are heavy investments in the deep water drilling projects that are the basis for optimistic forecasts of Brazil becoming the world’s number 2 oil exporter. Hence, the critical importance of maintaining political stability as the prerequisite for both governmental continuity and sustained investment.
As the Word Energy Outlook summarizes the Brazilian situation, “Brazil’s oil production rises from 2.2 mb/d in 2012 to 4.1 mb/d in 2020 and to 6 mb/d in 2035, making it the world’s sixth-largest oil producer in 2035. This growth is heavily dependent on highly complex and capital-intensive deep water developments. A pivotal factor in shaping Brazil’s energy outlook will be the country’s success in maintaining high levels of investment, which average $90 billion per year.”5
The political threat that carries the greatest risk of major and sustained disruption of oil production/delivery is a war in the Persian Gulf. That possibility has receded in the wake of the interim nuclear accord reached with Iran. It brought a six month grace period during which the parties must agree on terms of a durable long-term resolution of the issue. Were they to fail, the sanctions on Iran will be tightened with an attendant risk of renewed confrontation. Moreover, resolution of other points of friction cannot be taken for granted – even if there are objective grounds for judging that the two countries have convergent interests in places like Afghanistan. Ayatollah Khameini made oblique allusion to those fraught elements in his public remarks on the accord. American officials, too, warned of premature conclusions that the era of antagonistic relations was definitively over. In short, the odds on a military conflict are markedly lowered but not to be entirely precluded in the still cloudy future.
Were hostilities to occur, the physical damage to production facilities and infrastructure likely would be considerable. - in Iran certainly, as well as possibly in Saudi Arabia and elsewhere in the Gulf. Moreover, the residual effect might well be low-grade strife, aggravating pre-existing civil conflicts in some cases, that weakens internal security throughout large parts of the region.
There is another hypothetical political development relating to Saudi Arabia that could have equally profound and more enduring consequences were it to materialize. It is an overthrow of the House of Saud by radical Salafist groups who dispute the Saudis claim to be legitimate custodians of Islam’s holy placed (Mecca and Medina). Al-Qaeda is the best known of them but there are others as well dedicated to imposing an even more austere, and purer, version of orthodox Islam. They indict the Saudis for multiple transgressions: The original seizure of the Holy Places by force; moral corruption; the blasphemous acts of welcoming American military forces on Arabian territory; and doing America’s bidding on issues ranging from Palestine to manipulation of oil prices to serve the interest of consumers in the West. The House of Saud view them as a mortal threat to their rule that is graver than Persia/Iran/Shi’ism or than secular political ideologies.
To date, Riyadh has been successful in keeping these forces at bay by deploying effective security measures; by spending lavishly to keep the populace’s support for their rule; and by actively promoting Saudi Arabia as the defender of the truth faith, funding madrassas and charities throughout the Islamic world, and allying themselves with the Wahhabi clerical establishment. Nonetheless, the Kingdom has had to deal with acts of terror and subversive cells attempting to insert themselves into sensitive state organs. In the event that a movement imbued with the same Salafist philosophy as the Taliban were to usurp power, they would move to restrict oil production and exports with the twin aims of boosting leverage with external parties and of imposing on the country a rigid, abstemious Islamic life style. The latter means that the need for revenues from oil exports would drop sharply. In addition, a fundamentalism regime in Arabia would forge ties with other like-minded elements elsewhere in the Sunni Gulf.
The one immediate expression of the House of Saud’s apprehension is the financial imperative of maintaining a reasonably high price for oil on international markets so as to generate the funds to cover domestic expenditures on social programs deemed vital to internal stability. They have set &90 per barrel as the minimum that they find satisfactory. In the future, they want to keep it at that level in constant dollars.
We should bear in mind that, in all of these politically keyed scenarios we are dealing with probabilities. There is no reasonable way to fix a number on the likelihood of adverse developments occurring or on measuring what they would mean for energy production and export capacity.
Economic Scene Changer
As the economic dimension, the development that carries the most serious consequences, and which might alter markedly the forecasts of equilibrated markets, is prolonged slowdown in the global economy. The long recession that has been experienced in Europe and North America since the financial crash of 2008 demonstrates that there is no assurance of the developed world’s ability to master macro-economic management. Indeed, the attachment to failed austerity grounded policies is a primary reason for the stagnation of the past five years that continues with no sign of giving way to robust growth. It the event that a Japan-like lost decade of minimal growth were to be repeated for a the largest slice of the world’s developed economy, the effects on aggregate energy demand would be substantial – shifting the terms of the demand-and-supply equation.
The reasons why this low growth scenario is credible include: a systemic inadequacy of demand expansion (particularly important, relative to supply) due to a continuing process of deleveraging, regressive fiscal policies, stagnation in the incomes of salaried workers, and static or declining populations with associated shifts in the age demographics.
Uncertainty also attaches to India’s economic prospects. The ‘fundamentals” support the assessment that the pace of growth over the next twenty years will remain high. There are features of the situation, though, that could result in a marked shortfall. The benefits of Indian development have been distributed on an exceptionally uneven basis. In addition to large numbers urban poor, some 400 – 500 million of the rural population live at a level acute poverty or destitution. A majority of them are still illiterate. This reality impinges on the country’s economic future in three respects. The demands on national resources to ameliorate these conditions are enormous. Human resources are not being fully utilized. Most serious, the potential for mounting social tensions engendering political challenges to the established order is considerable. India’s democracy and freedoms do provide pressure release mechanisms for venting these grievances. However, that also means an aggravation of the country’s turbulent electoral politics and weak coalition governments.
The credible forecast for the next twenty years presented by the IEA is one of macro stability in global energy markets even as rolling adjustments are made to significant innovations and shifts at both the supply and demand side of the equation. The biggest unknowns that carry the potential for significant disruption and/or skewing of this generally reassuring picture are political in nature. They, in turn, comprise two categories: those originating in the domestic conditions of the biggest producers; and those stemming from inter-state conflicts. This is very little that the United States, or the world community, can do about the former. As to the latter, a prudent foreign policy should be expected to pay close attention to the effects, direct and indirect, of war and strife in energy sensitive regions.
Michael Brenner is a Professor of International Affairs at the University of Pittsburgh.
1. World Energy Outlook 2013 International Energy Agency Paris: November 2013
2. Op.Cit. Executive Summary