Richard Jones, deputy director of the International Energy Agency
For decades, the International Energy Agency (IEA) and the U.S. Department of Energy have been presenting “business as usual” scenarios and, for decades, the predictions, which effectively create an oil price “reality” mindset, have never materialized. So might it be with the IEA’s latest reference 2009 case where China keeps OPEC (the Organization of the Petroleum Exporting Countries) in riches for the next three decades.
Well articulated at the Baker Institute Energy Forum by Ambassador Richard H. Jones, deputy executive director of the IEA, the IEA 2009 report suggests oil demand will rise by 1 percent per year on average from 85 million barrels a day (b/d) in 2008 to 105 million b/d in 2030. Roughly 93 percent of this increase in oil use will come from the developing world, with China alone accounting for 40 percent of the increase. (Click here for links to a webcast and slides from Jones’ presentation.) The rise in oil demand will come despite an expected continued fall in oil use in the industrialized West in the coming years. To meet the overall expansion in demand, OPEC would have to increase production to 54 million b/d by 2030 (up from around 29 million b/d currently), according to the IEA business as usual reference case — a level that seems out of line with historical OPEC production peaks and geopolitical circumstances.
But what if China, unlike the United States, institutes a serious comprehensive strategic energy policy? U.S. analysts have pooh-poohed Beijing’s promise leading up to the Copenhagen climate convention to lower the carbon intensity of its economy by 40 to 45 percent in 2020 compared with 2005 levels, saying the voluntary pledge is in line with a business as usual forecast. Europe had been pressing China to accept a promise to make a 50 percent gain in its energy efficiency. So far, Beijing is resisting.
But sometimes the market has ways of implementing things that politicians cannot. Should the Chinese people and Chinese industry start paying close to the real international price for oil, instead of the subsidized price they are used to historically, the impact on Chinese demand trends could be huge. China has been easing fuel subsidies since 2007 and says privately it intends to eliminate them altogether over time. The G-20 has also pledged as a group to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption.”
So far, political progress on this item is expected to be slow and is certainly not going to make it to the table at Copenhagen.
Still, Baker Institute analysis shows that were the Chinese economy to respond to the 2007-2008 oil price shock in much the same way the U.S. economy reacted to the 1979 oil price crisis, the path for Chinese oil use across sectors might be dramatically altered. Instead of rising by upwards of 7 to 8 million b/d as currently expected, China’s oil use could moderate by half, with about 4.5 million b/d of demand never materializing. Should China’s forays into electric and natural gas vehicles take off, the impact could be even larger, shaving substantially the rate of growth in global oil demand in the years to come.
Amy Myers Jaffe is the Baker Institute Wallace S. Wilson Fellow in Energy Studies and director of the Energy Forum.