Against the tide: Energy – how will Europe fare?
Key energy suppliers are increasingly politically unstable and Europe faces a rise in prices, even though demand is falling.
The terrible calamity of the shooting down of the Malaysia Airlines passenger plane in mid-July and the growing conflict between Ukraine’s pro-west government and the Russian-backed separatist forces highlights the real risk of sharply rising energy prices for European consumers. Key suppliers of energy are becoming increasingly unstable politically. The upsurge of Sunni militia in Iraq threatens to fragment the Iraqi state into sectarian conflict. The conflict between Russian separatists and the Kiev government in Ukraine threatens the natural gas supply to Europe.
Even so, the odds are that global energy prices will not rise much over the next decade or so. Global energy demand grew at an accelerating rate between 1995 and 2005. But since then it has been gradually slowing. In Europe, energy demand is more than 8% below its 2006 peak. The fastest growth will be in the consumption of renewable energy, as it has been from 2010, outstripping nuclear and hydro in the next 20 years. The growth in demand for fossil fuels will be slower than any alternatives – another factor likely to keep a lid on fossil fuel prices.
Countries outside the OECD account for the majority (51%) of global oil consumption and emerging economies accounted for 80% of growth in 2013 and nearly 100% of growth over the past decade. OECD consumption declined by 0.4% last year, the seventh decrease in the past eight. In addition to improvements in fuel efficiency, there has been a secular decline in US gasoline consumption. Demand for energy in transport will fall in the OECD over the next few decades, with the largest rises in demand by source concentrated in emerging economies.
In the OECD, an aging baby-boomer population is leaving the workforce. There is a growing trend toward a portable workplace and the ability to work from home. Social media has provided powerful alternatives to face-to-face interaction requiring transportation. Young adults drive less and there is accelerating urban population growth, which reduces the per-capita dependence on gasoline.
There is also great potential for reducing energy intensity in the economies of China and India. Conservation measures include reducing transmission and distribution losses, using more energy-efficient appliances and stricter emission standards for vehicles.
There has been a revolution in global energy output in the last five years. It has been driven by what is called unconventional oil and gas extraction, shale fracking. The biggest proven reserves of shale oil and shale gas are found in the US, where its share of energy output has dramatically increased. In the US, fracking now accounts for 40% of domestic gas production and 30% of oil production. US crude production is rising for the first time since 1970. Production has rocketed back to near 9 million barrels a day, levels not seen since the mid-1980s. North America will contribute 50% of global oil output growth over the next five years. The US will achieve self-sufficiency and end its energy trade deficit.
|EU shale gas reserves|
|Source: Poyry Management Consultants|
However, there are risks. Shale extraction has also been subject to environmental resistance. The Netherlands and Germany have already suspended extraction; France and Bulgaria have a complete ban. Only Poland is in production, with 63 wells completed. There’s a huge variation in estimates of what’s there and what’s technically recoverable. The estimates for Poland vary by four to one and early drilling there has been beset by problems – partly due to over-regulation. If you believe some international agency estimates, Poland could hold 30% of total EU shale gas reserves; if you don’t, it’s less than 10%.
So, even though Europe could free itself from Russian energy sources in principle, in reality such an outcome is unlikely. Europe’s reliance on imports will increase even if new shale production is greater than currently forecast. That’s because neither Europe’s own shale production, nor US imports will come on line sufficiently and speedily enough.
If Europe could extract 15% of its proven reserves by 2050, it could lower its gas and electricity prices by 6% to 14%. But to bring about a complete change in the energy structure for Europe would cost $215 billion over the next four years and such investment is not in place. So European consumers will not benefit much from domestic shale production and will face higher energy prices than the US over the next decade or more.