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DECEMBER 2013

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C O N T E N T S

n Editor in chiefGianni Di Giovannin Editorial directorStefano Lucchinin Editorial committeePaul Betts, Fatih Birol, Bassam Fattouh, Guido Gentili,Gary Hart, James F. Hoge, Harold W. Kroto, AlessandroLanza, Lifan Li, Molly Moore, Edward Morse, Moisés Naím, Daniel Nocera, Joaquin NavarroValls, Mario Pirani, Carlo Rossella,Giulio Sapelli, Giuseppe Turanin Scientific committeeLelio Alfonso, Geminello Alvi, Antonio Galdo, Raffaella Leone,Marco Ravaglioli, Giuseppe Sammarco, Mario Sechi, Daniela Viglione, Enzo Viscusin Editorial teamCoordinator: Clara SannaLuisa Berti, Charlotte Bolask, EvitaComes, Rita Kirby, Simona Manna, Alessandra Mina, Serena Sabino, Giancarlo Strocchia n AuthorsGiuseppe Acconcia, Daniel Atzori,James Crabtree, Uri Dadush,Antônia Das Palmas, Yao Jin, James Hansen, Minxin Pei, John S. Jean, Nicolò Sartori, Grant Summer, Serena Van Dynen PhotographyAlamy, Corbis, Contrasto Reuters,Getty Images, Luz Panos, Marka,Sie Masterfile, Tipsn Editing and productionAgi, via Ostiense, 72 - 00154 Romatel. +39 06 51996254 -385fax + 39 06 51996286e-mail: info@abo.netwww.abo.net

@AboutOiln DesignCynthia Sgarallinon Graphic consultantSabrina Mossetton Graphics and layoutImPRINTing www.imprintingweb.comn PrinterIn Italy: Elcograf S.p.A. Via Mondadori, 15 - 37131 VeronaIn the U.S.: Fry Communications Inc.Mechanicsburg, PA In China: Reference Standard Limited - Beijingn Translated by: RR Donnelley

Sent to press on December 11, 2013

Selena Burgo Paper - Naural uncoatedwood-free paper, 100% recycled,chlorine and acid free.

Publisher eni spaChairman: Giuseppe RecchiChief executive officer: Paolo ScaroniBoard of Directors:Carlo Cesare Gatto, Alessandro Lorenzi, Paolo Marchioni, Roberto Petri,Alessandro Profumo, Mario Resca, Francesco TarantoPiazzale Enrico Mattei, 100144 Roma – www.eni.com

Only a few years ago, some sections ofthe scientific world wrestled with the ideathat we might be running out of oil —

an idea, if truth be told, that was hotly contested.Yet everyone was talking about “peak oil,” themoment when oil production capacity wouldreach its zenith, before entering an inexorabledecline. That moment was imminent and set tohave a massive, unquantifiable impact on hu-man life.Not so fast. Only a few years after peak oil hitits rhetorical peak, a new theory has emerged; one thathappens to suggest the opposite conclusion. Today’s big—and equally contentious—question among energy ex-perts is not “peak supply” but “peak demand,” wherebyglobal societies of the future (the very near future) needless and less oil to live and to do business, triggering asharp decline in demand for oil products. Peak demand, they say, results from recent technologi-cal developments, which, on the one hand, enable mas-sive savings on oil consumption (even now, new U.S.-builtcars are twice as efficient as those of just a few years ago),and, on the other, bring ever increasing quantities of al-ternative energy products to market (gas, above all, andrecently discovered shale gas in particular).More cautious exponents of this school of thought reck-on peak demand will arrive around 2025, while others bring that date forward to 2020 or even earlier. Whatev-er timetable one accepts, it’s clear that such a develop-

ment would have wide-ranging global reper-cussions for economics, trade, technology, andgeopolitics. It promises an entirely different castof winners (and losers) than “peak oil,” and it pres-ents an equally difficult strategic challenge tothose charged with protecting the future militaryand economic security of nations. The effects of introducing alternative energies—including economic adjustment, changinglifestyles and demographic transformations—would be felt on a global scale. Essentially, it

would be a step towards the end of the “Oil Age”. In part,this is because there are no more wells to drill, but alsobecause mankind has moved on, echoing Sheikh Yamani’saphorism, quoted by Paul Betts in this issue, that the StoneAge was by no means caused by a lack of stones.This outcome is by no means certain, but in line with Oil’scoverage of “peak oil” several years ago, it does warrantmore in-depth examination. So, without taking a stanceon what remains an open question—yet bearing in mindthe often-fleeting nature of theories on energy, as peak oiltaught us—we consulted some highly qualified experts andasked them to share their thoughts on the subject. Theresult is an array of opinions which, without claiming to beexhaustive, can certainly help us shed light on an issue thatencapsulates many of today’s biggest questions about theinternational energy scenario, whichever side of thefence you are sitting on. We leave it to you, our readers,to make up your own minds.

Difficult forecasts

by GIANNIDI GIOVANNI

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Eni quarterly Year VI - N. 24 December 2013Authorization from the Court of RomeNo. 19/2008 dated 01/21/2008

focusPEAK DEMAND IS NEAR

by Edward L. Morse

TWO SIDES OF THE SAME COINby Paul Betts

WILL SHALE GAS HAVE A ROLE IN FOREIGN POLICY?by Moisés Naím

Interview with AdamSieminski of the EIAPRICES AND TECHNOLOGYWILL BE KEYby Molly Moore

THE KINGDOM OF OILDIVERSIFIES THE MIXby Bassam Fattouh

UPS AND DOWNSby Uri Dadush

LET’S TALK ABOUTSUBSIDIESby James Crabtree

HARD OR SOFTLANDING?by Minxin Pei

NO END IN SIGHT FOR GROWTH IN DEMANDby Yao Jin

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21Interview with EsperançaBias, Mozambique’s Ministerof Mineral ResourcesTHE AFRICA OF GROWTHby Charlotte Bolask

Exclusive: a talk with José Maria Botelho de Vasconcelos, Angola’s Minister for OilBEYOND OILby Antônia Das Palmas

A Feature on Günther Oettinger, European EnergyCommissionerSECURITY, COMPETITIVENESS AND DECARBONIZATIONby Serena Van Dyne

Opinion: Matar Hamed Al Neyadi, Undersecretary of Energy of UAEDIVERSIFICATION IS KEYby John St. Jean

Point of view: Gérard Mestrallet, CEO of GDF SuezAN EYE TOWARD THE DEVELOPMENTby Grant Summer

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opinions columnsSociety FROM OWNERSHIP

TO SHARING: THE MOBILITYREVOLUTIONby Daniel Atzori

Economy THERE IS NO TURNING BACK FOR CAR MANUFACTURERSby Antonio Galdo

Dialogues INTERNATIONALSANCTIONS HAVE CONTROVERSIAL EFFECTS ON IRANIAN OIL MARKETby Giuseppe Acconcia

Centers of gravity“YESTERDAY’S FUEL” ANDTHREATS TO THE STABILITY OF PRODUCER COUNTRIES by Nicolò Sartori (IAI)

THE READERby Carlo Rossella

DataWHEN THE GAME IS WORTH THE CANDLEby James Hansen

Data THE APPARENT STABILITY OF OILedited by Eni’s Planning and Control Department

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INTERVIEW

omen in the energy world are still somethingof a rarity, especially when it comes to the topinstitutional and corporate jobs. It thereforecomes as a pleasant surprise that there is awoman at the head of a crucial governmentdepartment like the Ministry of NaturalResources in Mozambique – a country thataspires to turn the sector into a key driver ofdomestic growth. The work of EsperançaBias, who has been in the role since Febru-ary 2005, is typical of the government’s de-sire to use the economic profits from its nat-

ural gas and coal reserves to improve the living standards ofthe population. After all, as Bias herself points out several times

during our meeting, a country’s stability depends above allon civil and cultural growth.

Mozambique is considered a new leading countryon the African continent. Its reserves of naturalgas are among the richest both in sub-SaharanAfrica and in the world. What does it mean for youto be at the center of the international energyscenario?

It means that we have greater responsibility. Our main aimtoday is to make sure that all those resources, and the greatereconomic opportunities they engender, will benefit not onlythe Mozambican people but also the region. It means thatin our development plan, we need to think about how to use

by CHARLOTTEBOLASK

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The Africaof growth

Interview/Mozambique’s Minister of Mineral Resources, Esperança Bias

Africa as a whole is destined for a prosperous future, especially ifrevenues from recent mining activitiesare put towards improving the livingstandards of all citizens

M O Z A M B I Q U E

S O U T HA F R I C A

Z I M B A B W E

Z A M B I A MALAWI

T A N Z A N I A

TemanePande

MambaCoral

AgulhaProsperidade

GolfinhoOrca

Rovuma Basin

Mozambique Basin

MAPUTO

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the resources that we are discovering, domestically and interms of filling the gaps of our neighbor countries and eventhe world itself.

Since the initial discovery of one of thelargest gas fields in the world less than twoyears ago, Mozambique has continued to announce new discoveries, month aftermonth. How are you managing this process?How are other countries reacting to this newwealth, in terms of participation andinvestments in exploration blocks andinfrastructures?

The recent discoveries have brought new and stimulating chal-lenges for our country, in terms of a future of progress andgreater economic stability. We lack infrastructure right now,but I believe that when we monetize all the resources thatwe are discovering we will be able to fund a development pro-gram for new infrastructures, such as roads, telecommuni-cations, schools and health facilities. So there is good reasonto say that these resources are coming at the right time, be-cause now more than ever we are capable of putting them alltogether to help develop Mozambique.

The natural gas in your country has also arousedEast Asian interest. Might we see a new linkbetween Africa and Asia in future?

Mozambique is a friend of all countries in Asia, Europe andAmerica. For the purposes of this sector, Asia is definitely aninteresting market and we have every intention of continu-

Area: 799,380 km2

Capital: MaputoPopulation: 24,096,669Average population age: 16.8 years (men 16.2/women 17.5)Language: Portuguese (official), Makhuwa, Tsonga, Sena,

other Mozambican languagesNatural resources: coal, titanium, natural gas, tantalum, leadGovernment: Republic

MAIN ECONOMIC INDICATORSGDP (purchasing power parity): $26.7 billion (2012 estimate) GDP (official exchange rate): $14.6 billion (2012 estimate)GDP growth rate: 7.5 percent (2012 estimate)Unemployment rate: 17 percent (2007)Public debt: 34.6 percent of GDP (2012 estimate)Inflation: 2.1 percent

Oil Consumption: 18 million barrels per day (mb/d) Exports: 3,076 mb/d Imports: 17 mb/d

GasReserves: 75 billion cubic meters as at December 31Production: 3.36 billion cubic metersConsumption: 0.15 billion cubic metersExports: 3.20 billion cubic meters

Source: CIA World Factbook 2012; Eni World Oil and Gas Review 2012

Mozambique in numbers

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

production

Mozambique beginsto export natural gasto South Africavia pipeline

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GAS PRODUCTION AND CONSUMPTION

REGIONAL HDI COMPARISON

Source: U.S. Energy Information Administration

Source: UNDP (United Nations Development Programme)

Mozambique’s natural gas output matched domesticconsumption between 2000 and 2005, until newreserves were found and the country started to exportits resources to South Africa thanks to the constructionof new gas pipelines.

The Human Development Index (HDI) is a compositemeasure for assessing long-term progress in health,access to knowledge and a decent standard of living.Between 1990 and 2011, Mozambique’s HDI valueincreased from 0.200 to 0.322 (+61%).

2000 2005 2011 2000-2011Growth in average

Malawi 0.343 0.351 0.400 1.41

Swaziland 0.492 0.493 0.522 0.54

Tanzania 0.364 0.420 0.466 2.27

Zambia 0.371 0.394 0.430 1.37

Mozambique 0.245 0.285 0.322 2.49

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ing to work together. Asia is a continent that offers good pricesand it is our nearest market, so why not make the most of theopportunity? But if other countries or continents express aninterest in Mozambican gas, the door is always open.

As well as gas, Mozambique can also offeranother important resource – coal. What are your future plans for the sector?

We are drawing up the coal master plan alongside the gas mas-ter plan. These instruments will give us a clear vision of howto proceed with exploration and how we can use the resourceswe have available.The current paradox in Mozambique is that we are energyproducers, but less than 10 percent of the population has elec-tricity. We need to expand our capacity to supply electrici-ty, not only for Mozambican people, but for the entire re-gion. With all these resources, we have the opportunity tostart a process of industrialization in our country: we havecoal, we have iron ore and we have natural gas. At the sametime, we can improve other sectors such as agriculture throughfertilizer plants. And we also have iron ore processingplants. If we combine all these elements, plus the abundantsupply of water, we can say that Mozambique has the potentialto become an industrialized country in the near future.

Not just Mozambique, but all of Africa, is seeingsteady growth. According to InternationalMonetary Fund (IMF) forecasts, over the next five years, ten out of the 20 fastest growingeconomies will be in sub-Saharan Africa, two

in northern parts of the continent and none in western Africa. What does the future hold for these countries?

Africa as a continent has a lot of opportunities in differentareas, from agriculture and livestock to mining. I do believethat if we use this opportunity, all together, to open doors forinvestment – and if we have good legislation – we will suc-ceed and we will continue to grow in a sustainable way.

There are still very few women in the energysector. With a view to future growth, in Africa and for Africa, do you think women can play a greater role?

I really hope that happens, including in other areas of the econ-omy and society, in this country and across Africa. But we haveto continue to struggle, not only to be in positions of powerbut simply because we are women. We need to demonstratethat we have the capacity to occupy the roles we now have.I also think that with good education the next generations ofwomen can do better than today. I see no differences betweenmale and female visions of power, particularly in Mozambique.We are all working together for a national vision – not a maleor female one. There is only one vision: a future of progressand well-being for our entire country.

On www.abo.net, read other articles on the same topic by Daniel Atzori, Antonio Galdo, Moisés Naím.

ESPERANÇA BIAS Esperança Bias has been the Minister for MineralResources in Mozambiquesince February 2005.Previously, she was the DeputyMinister of Mineral Resources(from 2000).Minister Bias is providingstrong leadership inMozambique on mineralspolicy, particularly through her commitment to establish a national policy to regulate the social investments ofmining companies, to develop a strategy and policy of mineralresources, and to secure the social responsibility ofmining companies. The policyaims to maximize communitybenefits of mining, mandateinvestment in schools and otherinfrastructure, and resolveconcerns around resettlement.

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Beyond oilExclusive/Angola’s Minister of Petroleum Josè Maria Botelho de Vasconcelos

Angola, Africa’s second biggest oil producer, continues to fundexploration projects, but its goal is to diversify its economy andthereby bring an end to dependence on oil revenues

JOSÉ MARIA BOTELHO DE VASCONCELOSJosé Maria Botelho de Vasconcelos is Angola’s Minister of Petroleum. He has several decades of experience in the oilsector and in selling oil and derivatives, which has seen himwork in Belgium, France and Great Britain. He was appointedMinister of Petroleum for the first time in 1999, remaining in the role until 2002. Between 1999 and 2000, Vasconcelosalso served as chairman of the Committee of Energy Ministersof the Southern Africa Development Community (SADC). In 2002, he took on the role of Minister of Energy and Water in Angola. In October 2008, Vasconcelos was again appointedMinister of Petroleum and in 2009 held the rotatingpresidency of OPEC.

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EXCLUSIVE

ngola is Africa’s second biggest oil producer,with an output of 1.75 million barrels a day.In the last 10 years, since the end of the coun-try’s seven-year civil war in 2002, it has ex-perienced massive economic growth, reach-ing peaks of 20 percent, largely thanks to oil,which until just a few years ago accounted forhalf of GDP. Now, Angola is trying to free it-self from this dependence on oil revenues,which has left it vulnerable to fluctuations inoil prices. In 2009, oil prices dropped as a re-sult of the economic crisis, blowing a hole in

the country’s finances. If the theory of peak demand provedaccurate, Angola would be one of the world’s worst hit coun-tries. Oil discussed the issue with Josè Maria Botelho de Vas-

concelos, Angola’s Oil Minister, who also spoke about the coun-try’s energy future and its economy in general.

What do you think about the theory of peak oildemand?

I think it is a theory like many others. Over the years manytheories have been developed about the amount of oil on theearth. They used to say that there would be no more oil in30 or 50 years, but as we have seen, there is still more oil. More-over, global consumption has continued to rise, up to about90 million barrels a day. These theories are based on newsources of alternative energy. The point is that alternative en-ergy can only replace oil up to a certain point, particularly whenyou think about transport.

Why so?Because even if we look further into the future, the infra-structures to support these kinds of energy will never be ascost effective as the ones built over the last few decades for

by ANTÔNIA DAS PALMAS

A oil. We know that energy prices have a huge influence on theeconomy and very often energy types are not switched becausethe cost is high–it costs more. Even if these kinds of energiesare developed, they will be really expensive. So I think oil isstill a valid alternative. These are all just theories; the worldis always changing, as we know. Still, I think oil will have areally important role in the coming decades.

In 2009, Angola felt the effects of the globaleconomic crisis because of the drop in the priceof oil. If that happens again, will the country be ready?

Yes, of course. What we are doing is diversifying the econo-my to avoid it being dependent on the oil business. In recentyears the government has taken major steps in this direction

and we can see the results inthe proportion of GDP ac-counted for by oil. Until 5, 10years ago, oil generated about60 percent of GDP. Now weare at between 40 and 43 per-cent and the intention is to re-duce this percentage evenfurther to ensure that theother sectors of the economyhave a greater presence, whichwill protect the progress thecountry has made up to thispoint. We do not want oureconomy to depend on oil, di-amonds or natural resources.

Oil is still very importantfor the country at thistime. What are the resultsof the explorations anddiscoveries of recentyears?In the last 20 years, significantdiscoveries have been made inAngola that have transformedus, in terms of production,into an emerging country. Inthe 1990s, we were producing800,000 barrels per day, butnow we are producing 1.75million, partly thanks to off-shore discoveries, which ac-count for about 98 percent ofthe total in Angola. Beyondthat, current production has tobe tailored to future prospects.That is why explorations haveto continue at full speed to in-crease current production,

until we reach the goal of producing 2 million barrels per dayin 2015.

Have onshore explorations started as well?In terms of onshore, we have a number of camps in Cabin-da and in the province of Zaire [both in the north of the coun-try, at the border with the Democratic Republic of Congo –ed.] that are operational, but during the war it was not pos-sible to move ahead with exploration in the interior, eventhough we knew that there were resources that had never beenlooked at. In the last 10 years of peace, we have worked hardto clear these areas of mines and now the conditions are start-ing to be right for oil activities to be developed onshore as well.We selected 15 blocks in the Kwanza basin and the lower Con-go, and we are thinking about starting the process to sell li-censes at the start of next year.

Aside from these 15 blocks, will others be put upfor auction?

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Our strategy is to put blocks up for auction every two years.The last auction was held in 2011, and we have started theprocess to do another one in 2013, but we will only be ableto start operations in early 2014 – in the first quarter of thefollowing year. We are trying to reduce the time everythingtakes, so as to minimize the delay.

Have the current onshore explorations yieldedany results?

We have found some basins like the one in Kassange, towardsthe provinces of Malange and Lunda, in the northeast of thecountry. Then there is the Etoxa basin, near the border withNamibia, which is an extension of those basins. Sonangol isworking on it.

What are your expectations from the explorations? Are you optimistic?

Yes, because we have a few indications that give us reason tobe hopeful. In the Kwanza basin, for example, oil activities start-ed in the 1950s and, at the time, technologies were used thatdid not permit complete oil extraction. Now, based on pre-liminary data, we can say that there is still oil in that basin.However, we will continue to explore because the objectiveis to consolidate knowledge of our onshore reserves so we canwork out our oil potential.

In recent years Sonangol has acquired a range of interests in various foreign companies, not onlyin Europe but also in Asia. What are the group’sfuture plans?

The major change for the group is that it will evolve into areal holding company, an operational company that has busi-ness and business development at its heart. That is the mainway forward: Sonangol will be able to develop its activities bothinternally and externally, in a symbiosis that keeps energy –the company’s core business – at its center.

Sonangol also works with Eni. Angola is an open country and we can say that considering Eni’sstrategy in Angola, our relations with this company are satis-fying and positive. We have developed mutually beneficial re-lationships with all our partners and surely Eni is one of them.After years in which Eni was a partner aiming to become an

operator, finally this aspiration was realized with Block 15/06.

As well as oil, Angola is producing gas with the “Angola LNG” project.

Five cargoes of gas have been dispatched and we expect to ex-port about eight cargoes before the year is out. Then the in-stallation will be shut down for routine maintenance for about50 days, before being started up again. After that we hope tostart more regular production.

Do you think Angola LNG production canincrease?

According to the plan and the installed capacity, productioncould reach 5.2 million tons of natural gas per year. The ob-jective is to ensure that production is stable, but we need totake into consideration that this is a pioneering project be-cause we are producing associated natural gas in associationwith oil, which has its own special characteristics that have re-sulted in the plant suffering a few delays. An example is theincident with the probe that was supposed to install the gaspipeline across the river; that problem obviously set back con-struction of the pipeline. All these factors must be taken intoconsideration, but our objective is to make sure that the in-stallation runs at full capacity.

The government’s is also planning to build a refinery in Lobito city. What stage is that project at?

Works have begun and at the moment we are building the in-frastructure. According to the timeline for the works, the re-finery could be finished in 2017.

How much has already been invested and howmuch do you predict you will invest in future?

The forecast for building the infrastructure is a little over $1billion. However Sonangol is still looking over the process anddoing studies of all kinds: from financial analysis to engineeringstudies and designing the refinery’s structure. The project isbeing developed as we speak.

Angola has seen a great deal of growth in recentyears. How much has your role changed, in theregion and on the world stage?

LUANDA. A view of thewaterfront. In Angolaa reconstruction processis underway and alleconomic sectors havefelt the effects of thistransformation: roads,railways, houses andinfrastructuresfor the distribution of energy have been built.

D E M O C R A T I CR E P U B L I CO F T H E C O N G O

A N G O L A

ANGOLA - CABINDA

Lower Congo Basin

Kwanza Basin

CONGO

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EXCLUSIVE

Angola is a country that has gone through various meta-morphoses. The most important victory was peace in 2002and everyone can plainly see that the country has been com-pletely transformed since that date. There is a process of re-construction in progress and all economic sectors have felt thistransformation: road and rail transport, airports, and we havealso built dams, homes and infrastructure for distributing en-ergy. We are also seeing changes in the financial and bank-ing sector. There is a sense of dynamism and internal trans-formation in fact. However these are just starting points. Wehave to consider that are still significant levels of poverty inthe country. The objective is to create the conditions to re-duce poverty and cut out the inequalities between the vari-ous regions. The government has already identified these prob-lems and has designed programs and projects that go in thisdirection. We have already achieved some goals: until twomonths ago, Angola was one of the world’s least developedcountries and from next year will be classed among medium-developed countries. This is the result of the efforts that thegovernment is making in all sectors of the economy and showsthat our country can achieve high targets and be a leader interms of development in Africa.

Other than poverty, what are the challenges that Angola will have to face?

There are other sectors in which the country can improve–education for example. We need to create the conditions forour teachers to be able to train the workforce that our coun-try needs in order to develop. We must create a chain like theone that exists in more developed countries, to ensure that thecountry’s goals can be achieved. We have to improve healthconditions, training staff in the highest levels of public health.The health infrastructure is starting to appear; now we alsoneed qualified personnel.

What do you think the future holds for the country?

Current generations will have to work to pass the baton tothe new generation, while holding fast to the goal of ongo-ing development in the country. That is the ambition thatall Angolans have at this moment.

Area: 1,246,700 km2

Capital: LuandaPopulation: 18,565,269Average population age: 17.7 years (men: 17.5 / women: 17.9)Language: Portuguese (official), Bantu and other African languagesNatural resources: oil, diamonds, iron ore, phosphates, copper,

feldspars, gold, bauxite, uraniumGovernment: republic; presidential, multi-party system

MAIN ECONOMIC INDICATORSGDP (purchasing power parity): $130.4 billion (2012 estimate) GDP (official exchange rate): $118.7 billion (2012 estimate)GDP growth rate: 8.4 percent (2012 estimate)Public debt: 16.2 percent of GDP (2012 estimate)Inflation: 10.3 percent

Oil Production: 1,854 mb/g Reserves: 10,470 million barrels, as at December 31, 2012 Consumption: 127 mbd Imports: 80 mbd Exports: 1,709 mbd

GasProduction: 0.73 billion cubic meters Reserves: 275 billion cubic meters, as at December 31, 2012Consumption: 0.73 billion cubic meters

Source: CIA World Factbook 2013; Eni World Oil and Gas Review 2013

Angola in numbers

D E M O C R A T I CR E P U B L I CO F T H E C O N G O

A N G O L A

ANGOLACABINDA

Oil fields

Gas fields

Basins

Oil pipelines

Gas pipelines

Source: Eni

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1030

UnitedStates

480

Brazil Africa

Europe

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Security, competitiveness and decarbonization

Feature/Internal energy market must be implemented, says Energy Commissioner Günther Oettinger

In the long term, these goals are not mutually exclusive, but thetransition needs to be managed carefully. If successful, E.U. industriesand economies will benefit from a reliable and low-cost energy system

China and India driving growth

Primary energy demandin 2035 (MTOE). China will be the mainsource of growth indemand this decade, but will be overtaken by Indiafrom 2020 onwards.Source: IEA

440

Japan

A

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1540

MiddleEast

1050

SouthestAsia

1000

Eurasia

China1370

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FEATURE

urope’s dependence on imported hydrocar-bons threatens its energy security. One of themost vexing issues currently facing the Eu-ropean Commission, it is likely to becomeeven more challenging over time. Europe’s Commissioner for Energy, Gün-ther Oettinger, put it succinctly: “As demandincreases in other parts of the world, com-petition for resources will tighten and theE.U. may face new challenges in sourcing itsenergy supply.” Oil discussed this – and otherquestions – with Oettinger, who underlined

the importance of diversifying sources of supply, promotingnew interconnections within the European energy market

and learning how to manage domestic demand more effec-tively.

Energy security is one of the main challenges that Europe will have to face in the coming years.Is it ready?

Europe’s high dependence on fossil fuel imports, and risingdemand for energy elsewhere, clearly pose challenges. In ad-dition to this, comes our dependency on gas imports. To increase energy security in the field of gas, we are diver-sifying our supply routes, both within the Internal Energy Mar-ket, and in terms of our external energy corridors. New gaspipelines such as the Trans-Adriatic Pipeline and Tanap willallow us to get gas directly from Azerbaidjan and other coun-

by SERENAVAN DYNE

E11

GÜNTHER OETTINGER Günther Oettinger is theEuropean Commissioner for Energy in the Barroso IICommission, having taken up the role in 2010. He was amember of the State Parliamentin Baden-Württemberg,Germany, from 1984 to 2010 and from 2005 served as itsMinister President. From 1991 to 2005, he was also leader of the Christian DemocraticUnion (CDU) parliamentary partyand also chaired its federalcommittee for media policies.

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tries in the Caspian region. This is the very first time in his-tory that we have received gas directly from this region. Incase of gas transit disruptions, such as those experienced inthe 2009 Russia-Ukraine gas dispute, we will be much bet-ter equipped than in the past. Many member states are also looking to increase their optionsthrough the use of shale gas and renewables. The latter, in par-ticular, comes with a new challenge for security of supply, inthe form of fluctuating generation that depends on weatherconditions. The EU is helping to integrate alternative ener-gy sources such as wind and solar into our energy networkson a large scale through the deployment of Smart Grids, for

which large investments in transmission and distribution gridswill be required.

What policies are needed to reduce Europe’sdependence on oil and gas imports?

First, energy dependence on fuel imports can be reducedthrough the increased use of alternative energy sources, andthe EU is committed to getting 20 percent of its energy fromrenewable sources by 2020. Member states such as Germanyand Sweden have already invested heavily in wind and solarpower. Unconventional gas production may also provide uswith opportunities to increase indigenous production.

DEPENDENCE ANDALTERNATIVE SOURCESTo reduce its dependenceon fuel imports, the E.U.has committed to getting20 percent of its energyfrom renewable sourcesby 2020. Member statessuch as Germany andSweden have alreadyinvested heavily in windand solar power.

Who has the energy to compete?

2035

Reductionfrom 2013

Japan EuropeanUnion

China Japan EuropeanUnion

China

Electricity Natural gas

USA

5x

4x

3x

2xThe gap between whatEuropean, Chinese andJapanese companies payfor electricity and gas,and what their U.S.counterparts pay, is set to hold firm overthe next 20 years. Source: IEA

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FEATURE

Second, new interconnections within the European energymarket are important. Increased cross-border energy exchangeswill foster interdependence between Member States, as wellas lower prices, thereby reducing our need for costly energyimports. Finally, we cannot effectively reduce our dependence on oiland gas imports if we do not better manage our demand forit. Energy efficiency is at the core of our work, and we pro-mote this, for example, through legislation on the energy ef-ficiency of buildings, and on the design and the labeling ofelectrical products.

Another factor that makes Europe lesscompetitive is the very high price of gascompared to the prices we are seeing in the United States – thanks in part to the shalerevolution – and in Asia. How can we overcomethis difference?

Our companies are indeed paying several times more than theirAmerican counterparts. It is a massive challenge for our in-dustry to stay competitive. We have to make sure that rela-tively high energy prices do not chase away energy intensivecompanies that provide much needed jobs, skills and wealthin the European economy. Solutions in the near term depend

It is important to promote newinterconnectionsin the Europeanenergy market.Increased cross-borderenergyexchanges will foster interdependencebetween E.U.member states,as well as lowerprices, therebyreducing ourneed for costlyenergy imports

European Union

36%TODA

Y

10% 7% 7% 3% 2%

-10%

-3%

+2%+3%+1%

+2%

United States Japan China Middle East India

Winners and losers

The United States andemerging economies willenjoy a growing share of the market in exportsof energy-intensivegoods, while the E.U. and Japan will see a sharp decline.Source: IEA

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on the successful implementation of the internal energy mar-ket, more efficient pricing through gas-to-gas competition andpolicies to increase energy efficiency.Looking towards the longer term, we need to develop newand more efficient energy technologies. Horizon 2020 is a re-search and innovation programme with a funding of at least€70 billion - by far the EU’s largest to date - and a substan-tial proportion of this will help EU industry develop the tech-nologies to be competitive in a low carbon economy. The European Commission is looking at the whole questionof energy prices in Europe, and why they are so high. NextFebruary the European Council will discuss whether furtheractions need to be taken in this regard.

Hydrocarbon demand is falling in Europe and in Organization for Economic Co-operationand Development (OECD) countries in general.Meanwhile emerging countries are seeing growth,which is expected to intensify in the comingyears. What scenarios do this this new globalequilibrium point towards?

The balance in global oil and gas demand is changing rap-idly. We are seeing demand rising fast in developing coun-tries, while needs in the EU will probably come down as a re-sult of our energy policies. Nevertheless, even with our low-carbon policies, the EU will continue to be a major oil andgas consumer and importer beyond 2030. There is a prom-ising future for natural gas in our decarbonization plans, par-ticularly if Carbon Capture and Storage (CCS) can be suc-cessfully applied. But all hydrocarbon industries need to di-versify in the future. As demand increases in other parts of the world, competitionfor resources will tighten and the EU may face new challengesin sourcing its energy supply. To be prepared, we therefore

need to further develop our infrastructure, and build strongpartnerships with key energy suppliers. The EU also needsto speak with one voice, and engage others by continuing tolead international dialogues on climate change and energy ef-ficiency.

Europe has made a commitment to cut CO2

emissions drastically. What does the Roadmap to 2050 have in store in this area? How will the re-emergence of coal have an impact on this goal?

The re-emergence of coal in Europe is indeed a challenge toour carbon reduction objectives. But the Roadmap 2050 alsoclearly says that the CO2 goals can be achieved under differ-ent scenarios, even if the fossil fuels will continue to be an in-tegral part of the EU’s energy mix in the decades to come. Itneeds then to be combined with CCS. 3 out of 5 EU’s de-carbonization scenarios contain fossil fuels with CCS a partof the energy mix in 2050.

Will the E.U. be able to cut greenhouse gasemissions by 80 percent by 2050 but still remaincompetitive?

The EU cannot do this alone, but only in the context of a ro-bust international climate agreement. We have no choice but to decouple economic growth fromincreased fossil fuel consumption. In the long-term, the goalsof cutting emissions and having competitive industries are notmutually exclusive, but clearly there is a need for a carefullymanaged transition towards decarbonization, and this a keyrationale underpinning our 2020 and 2030 strategies. If wecan achieve the rightfully ambitious targets we have set, EUindustries and economies will undoubtedly benefit from a re-liable and low-cost energy system, and ultimately the EU willbe more competitive.

What progress has been made in terms ofachieving the objectives for 2020 and what areyour views for what needs to be done in 2030?

For the 2020 targets, projections suggest that the greenhousegas reduction target of 20 percent compared to 1990 levelswill be achieved by the EU level as a whole. However, a num-ber of member states still have a lot of work to do in orderto achieve their national targets. While all member states havecommitted to detailed action plans to achieve the 20 percentrenewable energy consumption target, the economic crisis andvarious barriers to renewable energy development havehampered progress, and many member states will require fur-ther measures. Energy efficiency remains our biggest challenge, and moreneeds to be done in this area, even after the full implemen-tation of the Energy Efficiency Directive. The EU is also mak-ing good progress towards the completion of the internal en-ergy market and diversification of energy supply.With 2030 in mind, EU energy policy must ensure progresstowards three objectives: competitiveness, security of supplyand environmental sustainability. Higher shares of renewablesand a more energy efficient economy will contribute to all theseobjectives, but we cannot ensure a competitive and secure en-ergy system solely through these means. The 2030 frameworkmust be defined in a way that safeguards affordability of en-ergy and competitiveness of our industry, while at the sametime make sure that we are on track to meet long term cli-mate objectives.

NEW ENERGYCORRIDORSAthens, February 13,2013. Former GreekForeign Minister DimitrisAvramopoulos (C), former Italian EconomicDevelopment MinisterCorrado Passera (L) andformer Albanian DeputyPrime Minister EdmondHaxhinasto after signingan agreement that sealstheir support for a naturalgas pipeline project tocross their territories.The intergovernmentalagreement is a conditionto build the Trans-AdriaticPipeline (TAP), a projectto link Azerbaijan’s giantShah Deniz II field towestern Europe.

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OPINION

Opinion/According to Matar Hamed Al Neyadi, Undersecretary for Energy of the United Arab Emirates, innovation is the way forward

The United Arab Emirates is poised to launch an energy development planinvolving an increase in both nuclearand renewable power generation. The country is investing $25 billion over the next five years on exploringnew gas fields

Diversification is key

MATAR HAMED AL NEYADI Matar Hamed Al Neyadi hasbeen the Undersecretary of the United Arab EmiratesEnergy Ministry since January2012. Since 1998, Al Neyadihas acted as a legal advisor for the UAE’s armed forces and the Permanent Committeefor Borders, representing his country in numerouscommittees and legalconferences within the GulfCooperation Council, in theArab world and internationally.Al Neyadi has also served asSecretary-general of the BorderAffairs Council.

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he prevailing idea that the Arab peninsula goeshand-in-hand with oil extraction may well beset for a change. The UAE’s latest programsto develop its energy sources are marked bya far greater degree of diversification. Naturally, we took this as our starting pointwhen we interviewed the country’s Under-secretary for Energy, Matar Hamed Al Neya-di, at the World Energy Congress in SouthKorea.

Diversification is the buzz word in theworld of energy nowadays. How is the U.A.E.facing this new and pressing challenge?

Diversifying our energy mix is the first pillar of our energypolicy. Our country is following a path of innovation in theenergy sector. To meet immediate demand, we are usingmore natural gas to generate electricity, because of its cleanand efficient burning properties. We will spend $25 billion over the next five years on ex-ploring new gas fields using the latest technology to developnon-associated gas at onshore old oilfields. We are sealinglong-term arrangements with Qatar to import gas via the

Dolphin Energy pipeline, which will help the U.A.E. tomeet around 30 percent of its local demand for natural gas.

What is the right mix of energy sources for yourcountry?

We are mainly working on three elements: natural gas, nu-clear energy and renewables. We are not using any diesel orbiodiesel to generate electricity, because in our opinion thisis not really economical and, moreover, it is bad for the en-vironment.

How are you going to expand your liquefied naturalgas (LNG) activities?

Our first LNG plant is in Dubai. It has been in operationsince 2010, with a total capacity of 4.5 million tons per year.That one is a floating terminal. We are working towards con-structing a second LNG terminal on the eastern coast of theU.A.E., with a capacity of 9 million tons per year. As I saidbefore, in our country we consider gas to be a fundamentalenergy source: it is efficient, economical and environmentallyfriendly.

Does the plan to diversify your energy sources

by JOHNST. JEAN

T

17

OPINION

also involve developing the nuclear sector? In terms of nuclear power, in December 2009 we awarded a$20 billion contract to the Korea Electric Power Corpora-tion to construct four nuclear reactors. They will be completed by 2020 and will cover about 25 per-cent of the U.A.E.’s demand for electricity. At the same time,however, the U.A.E. was the first country in the MiddleEast to announce renewable energy targets, which will see 2.5GW of new renewable energy capacity by 2030. We expectthese targets to be met with solar and waste-to-energy re-sources. As a major first step, Masdar commissioned Shams1 in March this year – the largest concentrated solar powerplant in the world.

The sustainability of energy sources is a verysensitive topic in your country. How do you intendto pursue greater respect for the environment?

We are committed to increasing the environmental sustain-ability of energy sources, while also trying to provide greateraccess to electricity for the entire population of the UnitedArab Emirates. The U.A.E. has the region’s first mandatory green buildingcodes, which will bring down energy and water consumption

by more than 33 percent in new buildings. More and moreappliances will soon fall under the regulation. We are alsorunning a large number of pilot schemes in order to developadditional policies in the next few years. These include mon-itoring water and energy consumption through wirelesssmart meters, consumption testing and time-of-day basedelectricity pricing to offer lower rates for less electricity us-age, and the establishment of state-funded energy servicecompanies.

The term “transition” is at the heart of currentdebate in the energy industry. What does thisconcept mean for your country?

This is a term that is being used mainly in Europe; it is notused in our part of the world. We prefer to talk about thechallenges facing our country, because they are unique anddifferent from one country to another. It all depends on cli-mate and location. To overcome these challenges, I think it is really importantto use dialogue and to learn from each other’s experience.This helps each country to face any kind of challenge, bothin terms of generation and consumption.

Source: Eni World Oil and Gas Review 2013

Source: Ministry of Energy of the United Arab Emirates

Reserves: 97,800 million barrels, as at December 31, 2012 Production: 3,539 thousand barrels per day

Reserves: 6,090 billion cubic meters, as at December 31, 2012Production: 51.51 billion cubic meters

A new nuclear pathThe United Arab Emirates expects,by 2020, to produce 25 percentof its own energy from nuclear powerplants. Four plants with an overall capacity of 5,600 megawatts are currently being built

The “renewable” EmiratesUnder the scope of the Global Carbon Agenda the government of the United Arab Emirates planned to reduce CO2 emissionsby 30 percent by 2030. In the same period, government plans expect renewable energyto cover approximately 7 percent of overall energy productionwith a forecast capacity of more than 35,000 megawatts

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GÉRARD MESTRALLETGérard Mestrallet is Chairmanand CEO of GDF SUEZ. Hejoined Compagnie Financièrede SUEZ in 1984 as a projectmanager. In 1986, he wasappointed Executive Vice-President for industrial affairs.In 1991, Mr. Mestrallet wasappointed Executive Directorand Chairman of theManagement Committee ofSociété Générale de Belgique.In 1995, he becameChairman and Chief ExecutiveOfficer of Compagnie de SUEZ, then, in 1997,Chairman of the ManagementBoard of SUEZ Lyonnaise desEaux. On May 4, 2001, GérardMestrallet was appointedChairman and CEO of SUEZ,and later Chairman and CEOof GDF SUEZ following themerger between SUEZ andGaz de France on July 22,2008. He is also President of the Association ParisEUROPLACE, Member of the International Council ofthe Mayor of Shanghai andChongqing, and Director ofTongji University (Shanghai).

19

POINT OF VIEW

he recent World Energy Congress (WEC) inKorea emphasized the importance of rebal-ancing the world’s energy mix. Right now, fos-sil sources still retain their dominant position.At the same time a greater number of analystsare saying that the next few decades could seeglobal oil demand start to fall as a result of aseries of factors, including the spread of al-ternative fuels such as gas and the crackdownon consumption in major consumer countrieslike China. In order to better understand therole of European operators in this new

framework, we asked for a forecast from Gerard Mestrallet,CEO of GDF Suez, one of the most important global play-ers in the energy sector.

If oil demand did fall, which energy sources doyou think would stand to make the biggest gains?

We share the IEA’s view that foresees a relative decline of oilin the world energy mix; however, in absolute value, it shouldcontinue to rise. Our anticipation is that gas will play a grow-ing share in energy mix, thanks to growing energy needs ofemerging countries, to significantly enhanced reserves and togrowing environmental concerns.Overall emerging countries are facing growing energy needsto fuel the growth of their rising economies. Energy demandis particularly critical in China, which accounts for one fifthof the world global energy consumption and which experi-ences a racing urbanization and industrialization. As a con-sequence, China’s 12th 5-year plan identifies gas as a key con-tributor to address this energy challenge, together with en-ergy efficiency and renewable energies.

by GRANTSUMMER

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An eye toward the development

Point of view/Gas will play a major role according to Gérard Mestrallet

The demand for energy may be near itspeak in the “mature” economies, whilefor the first time, emerging countries’demand exceeds that of OECDmembers. Looking forward, GDF Suez’sCEO and Chairman sees renewables asthe next strategic target

WATCH OUT FORDEVELOPMENTFor GDF Suez, rapidlydeveloping countriesrepresent a strategic prioritygiven that over the next 20years 90 percent of demandfor energy will come from the non-OECD area.

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The United States is moving towards energyindependence thanks to increasingly intensiveshale gas and shale oil development, whiledemand for new energy among the Asian “Giants”grows ever higher. Where does Europe standbetween these two?

We know how much the US/American landscape has beenchanged by the intensive development of unconventional gasand oil. The USA has become the world’s leading natural gasproducer and will soon be an LNG exporter.This is remodeling the entire American energy sector witha shift to natural gas in the power sector but also in the trans-portation sector such as for heavy trucks and for rail. More-over, the phenomenon has affected the entire economy, byboosting America’s global competitiveness. At the sametime, technological progress is helping to reduce the envi-ronmental impact of exploitation in terms of less pollution anda smaller land footprint. In Asia, energy consumption goes hand-in-hand with fast eco-nomic growth. In the next twenty years, 90 percent of glob-al energy demand will come from non-OECD countries. Tomeet that increasing demand, all types of energy sources areneeded: coal, renewable, and of course natural gas. I would like to underline that our strategy at GDF SUEZ, asthe referent energy company of the emerging countries, is to-tally in line with this vision: fast-growing countries are ournumber one strategic priority. We want to develop solutionsthat correspond with their local resources and needs. Europe is faced with a quite different situation. Energy de-mand has been declining in Europe since 2008 after a 60-yeargrowth trend because of the crisis, but also thanks to the im-pact of energy efficient measures. Indeed, this region has beena trailblazer in terms of energy efficiency. GDF SUEZ, as aleading player of the energy transition in Europe, takes theongoing revolution into account by adjusting its thermal gen-eration portfolio to the market shift and by further focusingon the development of its energy efficiency activities and ofits renewable generation portfolio in Europe.

Is diversification – including in terms of renewablesources – the way forward for major energycompanies, or is this scenario still some way off?

According to an AIE forecast, 60 percent of the incrementalrenewable energy demand between 2010 and 2030 willcome from non-OECD countries. At GDF SUEZ, we havebeen early believers in a balanced energy mix in terms of bothgeography and technology. More than 80 percent of our gen-eration capacity has low CO2 emissions, with up to 15 percentin renewable. We are convinced, however, that different coun-tries must also take into account the availability of their do-mestic resources to define their energy mix. This has lead us,for instance, to a mix relying mainly on hydropower in Brazil,while on gas in GCC, both regions in which GDF SUEZ holdsleading positions.

Can we expect Europe’s big companies to adopta more synergistic strategy in future, bearing in mind the United States’ progress on theunconventional market?

I believe that major European utilities are heavily involved inproposing solutions to address strategic issues. The recent out-cry of the Magritte club, (12 CEOS of major European En-ergy companies among which ENI and GDF SUEZ), in whichis a fine illustration of how European energy companies canteam up not only to launch a common alarm but also to sub-mit adapted solutions regardless of their diverging interests.

The graph shows the parallel relationship between consumption of liquid fuels and worldGross Domestic Product (GDP) performance between 2001 and 2013, with projectedfigures to 2015. This is also valid for the line that marks the cost per barrel of oil.

The trend in consumption of liquid fuels for countries that do not belong to theOrganization for Economic Cooperation and Development (OECD) has, between 2001and 2013, constantly followed the fluctuations of global GDP.

In 2013, for the first time and led by China, demand for oil in countries not belongingto the OECD exceeded that of wealthier nations, increasing by at least 50 percentover the last 10 years and reaching 44.5 million barrels per day in April 2013,compared with 44.3 million barrels per day for OECD countries. This trend isexpected to continue in the future.

OECDNon-OECD

0

40

80

120

2011 Low oil price Reference High oil price

2040

mill

ion

barr

els

per d

ay

Source: EIA

OIL DEMAND AND PRICE OF OECD - NOT OECD

Non-OECD liquid fuels consumpton and GDP

Non-OECD GDP

2001

-4

-2

0

2

4

6

8

10

12

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Perc

enta

ge c

hang

e (y

ear-

on-y

ear)

Source: EIA

LIQUID FUELS CONSUMPTION AND NON-OECD GDP

World liquid fuels consuptionWorld GDP WTI crude oil prices

Perc

ent c

hang

e (y

ear-

on-y

ear)

dolla

rs/ba

rrel2001

-4

-2

0

2

4

6

0

50

100

150

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: EIA

LIQUID FUELS CONSUMPTION AND WORLD GDP

t the turn of the cen-tury, a wave of Malthu-sian pessimism per-vaded the oil sector:demand from Chinaand other emergingmarkets for oil wasexploding with theprospect of a coupleof billion people buy-ing cars and con-suming gasoline and

diesel fuel while oil supply appearedto be peaking. And no matter how

high prices had to climb, the thoughtwas that there was no deterrent togreater demand growth.But increasingly it appears that bothsides of that Malthusian equationwere wrong. The shale revolution ispointing to decades, if not centuries,of adequate oil supply – it’s abundanton the planet and technology isbringing it within reach at prices thatare below today’s $100 per barrel orhigher levels. What’s more, when itcomes to demand there are limits ona crowded planet to how many cars

21

QUENCHED?

by EDWARDL. MORSE

Increasing fuel efficiency standardsand the replacement of oil with natural gas in the transportsector will result in a potential fall in demand of 10 million barrels per day by 2025, eroding practicallyall potential growth in oil demand

A

Peak demand is near

The theory/According to Citi, the trend could reverse within the decade

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and trucks and diesel trains can be de-ployed. On top of that, the shale gasrevolution and the discovery of deepgas resources are dropping the priceof natural gas to levels that make itcompetitive with oil. For the first timein a century, oil’s monopoly in thetransportation sector is seriouslyjeopardized.The International Energy Agency hassignificantly downgraded prospectsfor oil demand growth in its latestWorld Energy Outlook 2013. The IEAis projecting that under its “newpolicies” scenario, oil demand shouldrise from 87.4-million b/d in 2012 to101.4-mm b/d in 2035, or by a mere14-million b/d over the next twenty-two years. That represents a sub-stantial drop in the relationship be-tween economic growth and oil de-mand growth over the previous twodecades. Most of the growth – 12-mmb/d of the total 14-mm b/d increase– is expected in the transportation sec-tor, where oil’s role has reignedsupreme.It may be the case that the IEA’s bravemove in dropping the likely growthrate of oil demand is too conservative.Indeed, recent trends point to apeaking of oil demand long beforethen, perhaps as early as the end of thecurrent decade, or by 2020-2025.

FUEL EFFICIENCY AND THE RISE OF GASOne of the prime movers of the de-cline in oil demand has been steadygains in fuel efficiency, which has al-ready resulted in a peaking of pas-senger vehicle transportation fueldemand in all of the OECD, includ-ing the United States. The averagefleet fuel efficiency in the UnitedStates will rise from 23.5-miles pergallon today to 40-m/g in 2025.Even adding in growth in the vehiclefleet from 250 to 305-million vehiclesand assuming a modest penetration ofhybrid and electric cars would dropUS gasoline demand from over 9-mm

b/d today to about 5-mm b/d then.Add in a 30 percent penetration ofelectric vehicles and gasoline con-sumption would fall by more than 50percent.On a global basis we have taken theCiti automobile equity research team’sestimate of a 2.5 percent annual im-provement in fuel economy for newcars and trucks globally, and we alsotake their conservative estimate of to-tal fleet turnover of 20 years. By 2020this increased fuel efficiency global-ly would reduce projected global oildemand of 3.8-m b/d versus businessas usual. Fuel efficiency growth is being but-tressed by other global trends. In theOECD the aging of populations andother demographic trends result insignificantly lower automobile own-ership as well as significantly less driv-ing. Older drivers simply drive lessthan those under 35 and car use andownership are reduced in retirementyears. Overcrowding is also at work,which is one of the many reasons thatoutlook for Chinese demand growthhas been lowered by the IEA.But far and away the most important

factor in the peaking of oil demand isgrowth in natural gas as a trans-portation fuel, ending the more thancentury-long monopoly of oil in thetransportation fuel market. Several factors are at work in naturalgas’s accelerating substitution forgasoline and diesel in transporta-tion. The most important of these isthe de-linking of oil and natural gasprices resulting from the shale gas rev-olution that began in the US and is

already showing signs of spreading toArgentina, China, Colombia, Mexi-co, Russia, and even Saudi Arabia.With natural gas prices in the US cur-rently under $4 per MMBTU andpotentially rising to $5-6/MMBTU,the arbitrage toward natural gas andaway from oil is overwhelming. Atpresent in the US gasoline and dieselare trading at around $18/MMBTUon an equivalent basis. In Europe thecosts for liquid fuels are multiplied by

THE SHIFT TO A LOW EMISSIONS ECONOMY

The commitment,at global level, to reduce carbonemissions, caused by transportfuels will be one of the factorsthat will result in a fall in the

demand for oil.

88

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2012 2013 2014 2015 2016 2017 2018 2019 2020

Business As Usual

Mb/

d

After vehicle efficiency gains

After gas substitution

GLOBAL OIL DEMAND (2020)Source: CITI

The improvement in efficiency of vehicle fuels, at world level, willreduce global demand for oil by 3.8 million barrels/day compared with the business scenario as usual.

0.0

0.5

1.0

1.5

2.0

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2012 2013 2014 2015 2016 2017 2018 2019 2020

Shipping NGVs

Mb/

d

US Trucks Global Trucks (ex US)Power Gen PetchemOther

NATURAL GAS SUBSTITUTION FOR OILSource: CITI

The gradual replacement of oil with natural gas in the sectorsunder consideration will lead to a fall in global demandof 3.5 million barrels per day by 2020.

23

QUENCHED?

virtue of taxes imposed at the retaillevel.

ENVIRONMENTAL MATTERSAND ENERGY SECURITYBut other factors are at work as well.These other factors include bothenvironmental elements designed toreduce the emissions footprint ofoil-based transport fuels and alsoenergy security issues. For examplein China, attention has moved to useof methanol made by abundant na-tional coal supplies as opposed to oilfrom insecure imports. Additionally,China is at the forefront of develop-ing distribution of LNG for use inheavy-duty trucks and seeking waysto exploit its abundant shale gas re-sources to further developments ofnatural gas fuel use in vehicles.Citi Research’s study, “Energy 2020:Trucks, Trains and Automobiles”,carries out a detailed analysis of hownatural gas can penetrate three dif-ferent markets – on road vehicles, in-ternational marine, and rail, withprojections not just to 2020 but to2040. The study uses extremelyconservative assumptions on marketpenetration, without counting ongovernment policy intervention.

At present some 50-million b/d of oilconsumption is in transportation,and at a minimum the report con-cludes that by 2025 some 2.5-millionb/d of oil demand could be eroded bynatural gas. That would involve amere 17-BCF/d of natural gas use.The inroads could easily be doublethat, given the price incentives alone. Most of the projected penetration ofnatural gas is in the area of on-roadtransportation. At present there aresome 16 million natural gas poweredvehicles in the world (an insignificantnumber with the vehicle fleet cur-rently growing globally by about 85-million vehicles per annum). Most ofthese are in Asia with total natural gasconsumption of about 5.6-BCF/dfueling the fleet. A near trebling ofthis use to 14.9-BCF/d would displace2.3-m b/d of oil use, the bulk of itwould be in Asia (1.2-mm b/d) fol-lowed by North American (800-kb/d), South America (200-k b/d),and Europe (100-k b/d). On-land rail use is also seeing an ar-bitrage in favor of LNG use. And theglobal bunkers market is also beingchallenged at present due to envi-ronmental regulations eliminatingdischarge in or near ports and theseadd to the numbers.

TWO EXAMPLES OF CONVERSIONThe major difficulty confronted inprojecting natural gas use forward isthe speed with which conversiontakes place after a minimum volumeof a fleet is converted to natural gas.There are two critical examples offleet conversions in recent history.The first is the conversion of coalpowered rail locomotives to diesel be-tween 1935 and 1965; this took placein the US (where it was driven by eco-nomics) as well as in Europe andJapan (where it was driven by post-World War II reconstruction). It tookten years for diesel to reach 10 per-cent of total use, but in the following10 years fleet conversion rose from 10percent to 80 percent. The secondcase was the conversion of the UStrucking fleet from gasoline to diesel.Again, an S-curve approach pre-vailed and it took 10 years to growfrom around 25 percent of the fleetto 70 percent of the fleet.With these historical examples inmind we constructed another casethat might be more realistic than ourvery conservative base case and thisin case, which we also think is con-servative, we think a minimum of 3.2-million b/d of gasoline and diesel can

be lost to natural gas by 2025, but af-ter then conversion would acceleratefor the following decade.Adding together the fuel efficiencystandards and the conversion of trans-portation fuel use to natural gas, wesee a potential decline against businessas usual of as much as 10-million b/dby 2025, eroding practically all of thepotential growth in oil demand in theworld. It is on this basis that we be-lieve that peak oil demand might verywell be close at hand.

*The themes in this article are based on two Citireports: “Global Oil Demand Growth—The Endis Nigh” (26 March 2013), and “Energy 2020:Trucks, Trains & Automobiles: Start Your NaturalGas Engines” (June 2013).

Edward L. Morse is Managing Director and Global Head of Commodities Researchat Citigroup. He is a contributor to journalssuch as the Financial Times, the New YorkTimes, the Washington Post and ForeignAffairs. He worked in the U.S. governmentat the State Department.

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If oil prices keep increasing, economic growth could fail. If they fall too muchbefore the transition to renewables, then the subsequent decline in productionwill occur sooner than later with an inevitable decline in consumption

Debate/Peak oil vs. peak demand

Two sides of the same

here is a well-wornaphorism, first at-tributed years ago tothe then Saudi OilMinister Zaki Ya-mani, that has beenkicking around theoil industry fordecades: “The stoneage didn’t end be-cause we ran out ofstones.” In other

words, the oil age would not end be-cause the world ran out of oil butrather because it would move on tomore economically efficient tech-nologies and alternate resources.A whole string of other pundits and ex-perts have since used this aphorism,among them Al Gore, Bjorn Lom-borg, Steven Chu and Ron Bailey, tocounter one of the most recurrent andlong running intellectual theories as-sociated with the oil and gas industry:the concept of so-called Peak Oil. Theissue, especially in the US, has assumedthe shrill tones of religious fanaticism,with hard core prophets of Peak Oilwarning that the “end was near” andthat humanity would be thrown intomayhem not to say war, starvation andeconomic recession when the oil sup-plies that helped create the modernworld stop growing and irreversiblydeclined.

HUBBERT’S THEORYDaniel Yergin, a Pulitzer Prize win-ning author and chairman of Cam-

bridge Energy Research Associates,has traced the origins of this doomand gloom scenario all the way backto the 1880s, finding that it has madecomebacks at various times of eco-nomic and geopolitical stress eversince. The idea owes its origin and in-spiration to the famous US geologistMarion King Hubbert, who notedsome arcane aspects of geology re-lated to US oil reserves and then ap-plied them globally. Hubbert un-veiled his theory–immortalised as“Hubbert’s Peak”–in 1956 and de-clared US oil production would hit itspeak somewhere between 1965 and1970 and subsequently steadily de-cline.US oil production did hit a peak in1970 and began to decline – tem-porarily at least – and the world wasindeed shaken by the 1973 oil em-bargo. Hubbert seemed to be right.But as Yergin points out, Hubbert’stheory insisted that price did not mat-ter and that the basic economic lawsof supply and demand did not applyto the finite physical amount of oil inthe earth. Yet it seemed obvious toothers that if supply diminishes fasterthan demand, prices will rise (as theyhave) and induce more supply or al-ternatives (as they have also done).Hubbert’s disciples now seem to havebeen wrong on the geology too.They did not anticipate the revolu-tionary impact of combining direc-tional drilling and hydraulic fractur-ing to release vast amounts of hy-drocarbons - natural gas, crude oil,

and natural gas liquids – from De-vonian shale formations.Of course, it’s possible that techno-logical advancements and the law ofsupply and demand have only delayedthe inevitable, and oil Peakers con-tinue to insist that the supply peak willinevitably arrive at some time orother (the latest prediction is of a sig-nificant risk of a peak by 2020). Buta new challenge to their case has aris-en, offering a compelling and utopi-an message that the world is fastreaching a point of peak oil demandrather than supply with demand andconsumption peaking before the de-cline of supply and production. Par-aphrasing Peak Oil doomsters,“Global Oil Demand Growth – TheEnd Is Nigh” is the ironic title of a(add year) report by Citi bank ener-gy analysts that has sparked the lat-est controversy and led to a string ofreports, articles and heated exchangeson the internet aether.

IS THE END NIGH?The new theory argues the push tosubstitute gas for oil–accelerated bythe US shale revolution–and im-provements in fuel economy, not tomention the ramp-up in US ethane-based petrochemical capacity, alter-nate energy sources such as nuclear,wind and solar power, and a declineor at least a flattening of oil con-sumption in the older industrialisedcountries will all contribute to reducethe world’s thirst for oil, with demand

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by PAULBETTS

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coin

8,375

63987.12 66435.71 77720.93 63987,1287170.85

8,971 6,560 5,181 6,498

9,637 8,597 7,355 5,822 5,471

59156.36 70304.63 84520.32 89348.12

1970

19751980 1985

1990

1995

2000

20052010

2012

19801985

19901995

2000

20052010

2012

total oil supply (mbd)

US oil supply (mbd)

UNITED STATES AND GLOBAL OIL PRODUCTION Source: EIA

The green curve shows global oil production between 1980 and 2012, the red curve shows United Statesproduction since 1970. When U.S. oil production hit a peak in 1970 and began to decline – temporarily atleast – it seemed that Hubbert’s theory was being proved right.

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peaking at around 92mbd in a fewyears from the current level of around89mbd. Although this forecast ofpeaking demand at 92mbd goesagainst the conventional wisdom thatdemand for oil will keep growing (BPforecasts that it will grow to around104mbd by 2030), even if consump-tion keeps increasing, there will beplenty of oil around to satisfy this de-mand as a result of the new tech-nologies being used to extract crudefrom difficult sources such as the tarsands of Alberta to the shale forma-tions in North Dakota. The Inter-national Energy Agency forecasts inits latest report that “US shale willhelp meet most of the world’s new oilneeds in the next five years, even if de-mand rises from a pick-up in the glob-al economy.” So even without addingto the equation the possible declinein demand, concern about a loomingglobal hydrocarbon shortage is in-creasingly being replaced by focus onthe implications of a potential glob-

al hydrocarbon surplus.Does this therefore imply that we canall sit back and relax and sleep tightat night in the knowledge that thereis no genuine shortage of oil and fos-sil fuels? If and when such a shortageappears at some point in the distantfuture–after all oil resources by def-inition are finite–is it likely that oth-er better alternatives will have re-placed oil to cater for the bulk of theworld’s energy needs making thetransition from oil to alternativesvirtually automatic? The old stone age

aphorism will thenhave held true.Peak demand is an ap-pealing theory, but infact it offers little rea-son for complacency,for it is, is in fact, justanother way of definingpeak oil. The econom-ic logic is straightfor-ward. Falling produc-tion of conventional

so-called “cheap” oil and increasingreliance on oil extracted from ex-pensive new sources such as tar sands,tight oil, and deepwater wells not tomention Arctic drilling have ledprices rise to as much as $110 per bar-rel to make it viable. In turn, highprices are driving demand down. Ifprices drop too much as a result offalling demand, production fromthese new sources will dry up, but ifthey go too high they will crush theglobal economy.In any event, Peak oil has never been

about the world running out of oil. Itrefers to the production rate of oil. Inthe case of conventional oil produc-tion, most industry analysts concurthat the peak occurred in 2004/2005and that oil output has been on abumpy plateau ever since. Since2005, global oil production has fluc-tuated from a low of 82mbd in 2005and 2009 to a high of 87mbd in 2012.In the same way, world demand hasalso fluctuated up, flat or down and,according to Dr Robert Hirsch a lead-ing industry expert, it will almost cer-tainly have little impact on the dateof the onset of decline in world oilproduction.

THE HIRSCH REPORTDr Hirsch was responsible for pro-ducing an influential study for the USDepartment of Energy in 2005 enti-tled “Peaking of world oil production:impacts, mitigation and risk man-agement” which has since beendubbed the Hirsch Report. Hirsch ex-amined three scenarios: one where nosteps are taken to offset a peak untilthe peak occurs; one where steps tomitigate a crisis are taken 10 years be-fore the peak; and one where miti-gation is put into practice 20 years be-fore the peak. The report concludedthat mitigation – or taking steps toboth expand supply through the in-troduction of alternative liquid fuelsas well as decrease demand by in-creasing fuel efficiency – 20 years be-fore peak would help the world makea smooth transition to other fuels,minimising the economic and so-ciopolitical consequences when thepeak in oil production occurs.Hirsch acknowledges today that he,like a number of other advocates ofpeak oil, could be overly pessimisticin estimating a rapid decline in worldoil production. But he is firm in hisconviction that world oil productiondecline is inevitable. In a presentationearlier this year at a Peak Oil con-ference in Qatar attended by Gulfproducing states increasingly con-cerned by this issue, Hirsch arguedthat a small change in world oil pro-duction would have minimal impacton overall behaviour. The differencea million barrels per day productionincrease or decrease might have overa three year period on the date of theonset of world oil production declinewould be a matter of weeks. The im-plication is that a few million barrelsof US tight oil would have a minimalimpact on the onset of world oil de-cline.Declining oil production can also oc-cur in any given year for several rea-sons unrelated to peak production.These include OPEC productiondecisions, unplanned field stoppages,geopolitical events, changes in oil in-dustry investment strategies, and

The oil age will not endbecause the world runs out of oil, but rather because it willmove on to more economicallyefficient technologies andalternate resources

WALL STREET. If oil pricesshould suffer an excessive fall,

production from unconventionalsources would come to a halt.

If, on the other hand, theywere to increase out of all

proportion, this would causeirreparable damage

to the global economy.

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above all prices. The outgoing chiefexecutive of Shell, Peter Voser, for ex-ample recently said that his biggest re-gret was Shell’s $24bn bet in uncon-ventional oil and gas in North Amer-ica. In the Caspian, the flagshipKashagan field has now been nick-named “Kash-all-gone” as costs havetripled to $46bn taking the shine offthe Caspian for many western inter-national oil companies.

THE TIMING It is also arguable whether global con-sumption of oil will decline any daysoon. Demand will continue to bedictated by global economic growth,especially in the emerging regionswhich are offsetting flat or lower de-mand in the mature OECD area. The

world is moving towards greater fuelefficiency but this too will take muchlonger than the most optimistic pun-dits suggest given the scale, cost andtime it takes to convert the existingfleets of older cars and vans.The IEA notes a combination ofsustained high prices and energy

policies aimed atgreater end use effi-ciency and diversifica-tion in energy suppliesmight actually meanthat peak oil demandultimately occurs be-fore the resource base isanything like exhaust-ed. But one should alsonot forget that there isa basic difference be-tween reserves and pro-

duction. An abundance of reserves isall very well. The world, however,does not live on reserves. It lives onproduction which is the rate of re-serves drawdown and this is somewhatdependent on oil prices, which willhave to remain high to allow pro-duction from the deep offshore and

from tight shale rocks to compensatefor the decline in conventional oil thathas already happened. If oil priceskeep moving up, they will eventual-ly strangle economic growth. If theyfall too much before the eventual tran-sition to a renewable energy future ismade, the peak and subsequent de-cline in production will occur soon-er than later and inevitably induce adecline in consumption. Peak oilproduction and demand are all oneand the same problem.

An abundance of reserves is allvery well. The world, however,does not live on reserves buton production, which is therate of reserves drawdown,depending on oil prices

Paul Betts has worked for the FinancialTimes for the last 36 years, including 28 years as the paper’s foreigncorrespondent in Rome, Paris, New Yorkand Milan. He is currently based in London.

hat do the fall of theShah of Iran, the col-lapse of the SovietUnion, the Internet,China’s economic as-cent, Europe’s crashand the U.S. energyboom have in com-mon? No one saw themcoming. All theseevents changed the

world and no government, companyor expert anticipated them or their

many—and momentous—conse-quences. With this sobering observation inmind, the only prudent predictionabout the consequences of the Unit-ed States’ energy boom is that they aregoing to be as enormous and as sur-prising. Nonetheless, some reper-cussions of the U.S. energy resur-gence are already evident. Even if it never becomes a net ex-porter, the fact that the U.S., whichis the world’s largest oil consumer(and until a few years ago, it’s top im-

porter) is poised to become increas-ingly self-sufficient will create bothnew foreign policy options to itsgovernment as well as new sources ofgeopolitical instability.

WILL SHALE GAS EXTRACTEDFROM THE U.S. MIDWESTCHANGE THE MIDDLE EAST? The Middle East will be one of thefirst regions directly affected by Amer-ica’s new energy situation. WhileSaudi Arabia and other Middle East

producers will continue to be impor-tant players in the global energy mar-ket, their dominance, enjoyed formost of the past century, will nolonger be the central feature of thismarket. The implications of this trendare enormous, ranging from the mil-itary to the commercial and perhapseven the social. As the supply of oiland gas coming from a variety ofsources increases, prices will facedownward pressures. Middle Eastproducers are thus likely to face dwin-dling export revenues, which will

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by MOISÉSNAÍM

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U.S./The North American energy revolution and international relations

Will shale gas have a role in foreign policy?Rising instability in some oil-producing countries could mean unprecedentedchallenges for Washington. The future may see conflict over shale gas’senvironmental impact or disruption of the existing political order

naturally constrain what they can doat home and abroad. Fiscal adjustmentand other belt-tightening measuresthat have never been needed will be-come necessary. And, as we have seeneverywhere else, governments forcedto impose fiscal adjustment inevitablyface popular discontent. Domestic po-litical instability among Middle Eastoil exporters can in turn triggerchanges in their foreign policies,which may in turn trigger changes inU.S. policy. It is unclear, for example,what belt-adjusting measures will doto the financial support that Arab oilexporters give to militant groups andallies in Pakistan, Afghanistan,Malaysia and other countries withlarge Muslim populations. Or theconsequences for their behavior to-wards regional rivals like Iran, a coun-try poised to launch a major expansionof its own oil production if interna-tional sanctions are lifted. As the geopolitics of energy change,so will the web of international al-liances of oil-producing countries inthe Middle East. For example, it’s dis-tinctly possible that they may seekcloser alliances with Russia and dis-tance themselves from traditional al-lies like the United States. And aUnited States that is no longer crit-ically dependent on energy importsfrom the Middle East will be able to

recalibrate its role as the provider ofthe military umbrella that ensures thesafe passage in the sea lanes throughwhich middle eastern oil reachesglobal markets. Ensuring that theSuez Canal or the Strait of Ormuz areopen and safe to pass will continue tobe an American priority, although notas much as it was at the height of U.S.dependence on Middle Eastern oil. Analyst Nikolas K. Gvosdev arguesthat America’s newfound energy ca-pacity means that “a robust U.S. mil-itary presence abroad will no longerbe seen as essential for prosperity athome… the Carter Doctrine andthe Reagan Corollary, which committhe United States to defend thecountries of the Persian Gulf againstoutside aggression and internal sub-version because this region and its en-ergy resources are deemed invaluableto U.S. interests, [could] go the wayof other now-irrelevant U.S. for-eign policy doctrines.”The consequences of the shale gasrevolution on the Middle East are asvaried and enormous as they arehard to anticipate with precision.

TOWARDS A NORTH AMERICANENERGY BLOCK?Energy resources in North Americaare already massive and growing.

The U.S., Canada and Mexico haveabout 1.8 trillion barrels of probable,recoverable oil reserves and 346 tril-lion cubic feet of proven gas re-serves. Texas shale gas deposits arenow known to extend into Mexico,which holds the world’s fourth largestreserves of shale gas. All this will nat-urally boost that country’s role as anenergy player. These resources arecomplemented with significant coalreserves and a growing non-renew-able energy inventory that is makingNorth America essentially self-suffi-cient in energy. The International Energy Agency,IEA, calls such gains “revolutionary.”According to their 2013 MediumTerm Oil Market report, “The NorthAmerican hydrocarbon revolutioncontinues to dominate the supplyoutlook…. North American oil pro-duction will increase almost by 4 mil-lion barrels per day during the peri-od 2013-2018, more than half of theincrease predicted for non-OPECcountries.” In parallel, oil importsinto North America will diminishfrom about 6 million barrels perday in 2012 to some 3.5 millionbarrels per day in 2018, while intra-continental oil and gas movementswill intensify. All this points to the consolidation ofa self-contained North American

Energy Block. This will have majorgeopolitical impact just by virtue ofthe block’s decreasing dependence onhydrocarbons imports. If the regionbecomes a net hydrocarbons ex-porter, the impact would be muchgreater. These changes are bound to sparkmajor revisions of the foreign policyof the United States. A prime candi-date for such a revision is Mexico. U.S.policy towards its southern neighborhas always been driven by two key is-sues: immigration and drugs, and, toa lesser degree, trade (as a result ofNAFTA, the free trade agreement be-tween the U.S., Canada and Mexico).Moreover, Mexico’s planned reformsof its outdated energy policy suggestthat the country can regain the ener-gy luster it has gradually lost in the lastseveral decades. This, combined withthe changes in the energy outlook ofthe U.S. and Canada, will create a verydynamic “energy zone” that givesMexico a renewed importance in thecalculations of U.S. foreign policymakers.

MORE ENERGY SECURITY FOR EUROPEThe cornerstone of the U.S. foreignpolicy regarding European energy se-curity has been the promotion of gaspipelines from the Caspian and Cen-tral Asia regions to Europe, such asTANAP, TAP and Nabucco, in an ef-fort to minimize European depend-ence on Russian gas. These effortshave been positive but, in the best ofcases, expensive, time consumingand plagued by thorny political com-plications. Recently the U.S. 113thCongress has introduced bills aimedat facilitating access to U.S. liquefiednatural gas (LNG) to all members ofthe North Atlantic Treaty Organiza-tion (NATO). The U.S. hope is thatthis move will give Europe a greaterdegree of energy security by under-mining Russia’s energy choke onseveral European nations. In anycase, the decrease in oil imports by theU.S. is already freeing significantvolumes of hydrocarbons that are giv-ing Europe more options than hadonly a few years ago.

ACCESS TO TECHNOLOGY ANDTHE U.S. DEALINGS WITH CHINAShale gas accounts for almost 40percent of total natural gas produc-tion in the U.S. In China, which lacksleading edge technology, shale gasproduction represents less than 1percent. But China holds the largestresources of shale gas in the planet,with estimated reserves of about1,115 trillion cubic feet, almost twiceas large as U.S. reserves. Speeding upthe development of these resources isobviously a priority for China. Al-

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IT’S UP TO OILUnited States diplomacy will bestrongly influenced by the boomin production of hydrocarbonsthat the country is experiencing.The photo shows the Presidentof the United States BarackObama and the Secretaryof State John Kerry, during a recent visit to Boston.

though American shale gas technol-ogy is not controlled by the govern-ment and Chinese energy producerscan buy it directly from its privateowners, the U.S. government is un-likely to be a passive observer of thistechnology transfer process. Accessto U.S.-owned shale gas technologyis bound to be a lever that Washing-ton will use in its multiple interactionswith Beijing.

IS SHALE GAS THE FINAL NAILIN OPEC’S COFFIN?The important cut in U.S. oil importsfrom OPEC countries will erodethe geopolitical clout of the organi-zation. OPEC oil that no longergoes to the U.S. would have to bemarketed elsewhere, most likely in thespot market. The International En-ergy Agency estimates that global oilproduction capacity will grow to 102million barrels a day by 2017, a vol-ume well above demand forecasts of95.7 million barrels a day. Such an ex-cess production will tend to weakenoil prices in the medium term. The cartel’s ability to affect prices hadalready been dwindling, as had itspower to impose production disci-pline on its members—especiallythose whose economic needs makethem hungry for additional oil rev-enues. For years, OPEC has notbeen high on the list of America’sdiplomatic priorities. U.S. shale gasis likely to push OPEC even furtherdown that list.

PROTESTS IN PRODUCERCOUNTRIES? Oil producing countries with largepopulations or poorly managed na-tional finances are especially vulner-able to declining oil prices and loss ofmarkets. Some of these countries,such as Iran, Iraq, Libya andVenezuela, require oil prices to beover $100 per barrel to satisfy their fi-nancial needs. If prices fell below thatlevel, they could experience significantpolitical and social unrest. It’s quitepossible that America’s. increasing en-ergy self-sufficiency could triggerdangerous instability in these coun-tries; the United States ignores thispossibility at its own peril.

A MORE ASSERTIVE U.S. ROLE IN LATIN AMERICA Years of deemphasizing diplomatic ef-forts toward Latin America haveweakened U.S. presence in that re-gion, a void that in some countries hasbeen filled by populist, strident-anti-American leaders and by an un-precedented presence of China. U.S.technology in shale gas developmentand non-renewable sources of ener-gy can be instrumental in strength-

ening U.S. presence in countriessuch as Argentina, where significantshale gas resources exist, and in Cen-tral American and Caribbean na-tions that lack hydrocarbons re-sources. This has the potential toerode Venezuela’s (and, through it,Cuba’s) influence in those countries.

CONCLUSIONThe U.S. energy boom will notonly impact domestic political andeconomic conditions but will alsochange America’s foreign policy. Insome of the areas, discussed here,the policy shift will be quite dra-matic.While most of the impact islikely to be positive for the UnitedStates, the risks of increasing insta-bility in some oil producing coun-tries will also present unprecedent-ed challenges to Washington. Moreover, as shale gas explorationand production reach the substantiallevels now predicted, it seems almostinevitable that conflicts related to itsenvironmental impact or to its dis-ruption of existing political equilib-ria will arise. It is impossible to an-ticipate the exact nature, locationand timing of these conflicts. But whatis safe to assume is that the shale gasrevolution will spark surprisingchanges in the domestic politics andthe international relations of manycountries.

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Moisés Naím is a member of the editorialboard of OIL. He is a Senior Associate at the Carnegie Endowment in WashingtonDC, and recently published The End ofPower: From Boardrooms to Battlefieldsand Churches to States why Being in Charge isn’t What it Used to Be(Basic Books; 2013).

We are seeing theconsolidation of aNORTH AMERICANENERGY BLOCKcomprising theUnited States,Canada and Mexico,which will becomeless and lessdependent onhydrocarbons imports

Technology in shalegas development and non-renewablesources of energycan be instrumentalin strengthening U.S.PRESENCE INLATIN AMERICA

One of the regionsmore directlyaffected by a newenergy situation inthe United States isthe MIDDLE EAST,WHICH COULDFACE military,commercial andsocialCONSEQUENCES

The decrease in U.S.oil imports is freeingsignificant volumesof hydrocarbons,which couldMINIMIZEEUROPEANDEPENDENCE ON RUSSIAN GAS

Access to U.S.-ownedshale gas technologyis bound to be A LEVER THATWASHINGTONWILL USE in itsinteractions WITHBEIJING

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Ernest Moniz, U.S. Secretary of Energy

Nicolás Maduro, President of Venezuela

Abdullah bin Abdul Aziz, King of Saudi Arabia

Vladimir Putin, President of the Russian Federation

Xi Jinping, President of China

On www.abo.net, read otherarticles by the same author.

il demand is deter-mined by a numberof variables whosefuture paths are dif-ficult to predict.Prices and technolo-gy are the key fac-tors, but populationgrowth, economicperformance andconsumer behaviorare also essential el-

ements in any theory of energy con-sumption (and production) trends.That is why Adam Sieminsky, Ad-ministrator of the United States En-ergy Information Administration(EIA), the White House’s main en-ergy analyst, is ready to dismiss anytheories on peak oil demand or sup-ply out of hand. Just 30 years ago, no-body could have predicted the un-conventional resource revolution,which has transformed the global en-ergy landscape. Looking forward,it’s difficult to predict whether we’llsee a similar degree of technologicalinnovation, even if hydrocarbonprices stay relatively high.

Do you subscribe to thetheory of peak oil demand?

Did I ever subscribe to the theory ofpeak oil supply? And the answer tothat is no. And let me just explain thata little bit, then we’ll talk about de-mand. Peak oil supply was based on

three critical assumptions. The firstone was that you know what the re-source base is. And then the secondand third were that prices don’t mat-ter and technology doesn’t matter.And I was a firm believer in – pricesdo matter, technology does matterand that the resource base is de-pendent on prices and technology.And peak oil supply people will tellyou, “No, it’s not.” They know exactlyhow much oil is in the ground. I think what we’ve learned with shaleoil and gas, shale gas and tight oil, isthat we’re still learning how much isin the ground. So, now, so do I sub-scribe to peak demand? So, whatdrives demand? And do prices andtechnology matter to demand? Ab-solutely. And what else drives demandand population and the economyand behavior? So, I might subscribeto that theory if I knew what it was.If you want to simplify it and you wantto say, “Well, the theory of peak oildemand is that we will run out of de-mand before we run out of supply.”Tell me what this theory is.

Well, that’s the controversy,isn’t it? There are somewho say, “Well, okay, we’regoing to reach a pointwhere either we run out ofoil,” or “We reach a pointwhere, no, we’re not goingto ever reach the point

where it runs out, ourdemand will run out first.”

Right, I think probably in the popu-lar literature it’s that we’re going torun out of demand before we run outof supply. In some very simple sense,you might say “Well, of course. Weran out of demand for horseshoes be-fore we ran out of supply.”

What do you see as themost dramatic changes andtrends in energy productionin the coming decades?

On energy production, the most im-portant thing that’s happened in therecent past is the ability to produceboth gas and oil from continuous re-sources. It’s really source rock. And30 years ago, nobody thought thatthat would ever be possible, 20 years

ago George Mitchell thought maybehe could do a little bit of it, 10 yearsago it started to look really interest-ing, and 5 years ago it did get inter-esting in a big way.

And where do you see itgoing?

In our Annual Energy Outlook we’resaying that by 2040, half of the nat-ural gas produced in the U.S.–andthere’ll be more produced in 2040than now–is going to be comingfrom shale. On the oil side, what wesaid in the 2013 Annual Energy Out-look was that production of all oilthat’s being driven by shale at the mar-gin–tight oil–would go up early in thenext decade and then it would start tocome back down and would taperdown and level off.

by MOLLYMOORE

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Analysis/The views of Adam Sieminski,Administrator of the EIA

Prices and technologywill be keyThe next big advance is going to bedetermining, ahead of time, whichparts of a horizontal well are likelyto produce the most oil or the mostgas. The EIA expects energy use torise by 56 percent by 2040

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Our forecasts in the 2013 Annual En-ergy Outlook are already behind theshort-term energy outlook by a lot.The 2014 Annual Energy Outlook isgoing to have a lot more oil produc-tion in it. Why? Well because it’s al-ready been added to the short-termenergy outlook.

And why has it surged?Well it’s surging because–and nowwe’re back to prices and technology–oil prices have stayed very high, andthe technology continues to improve,and the combination of prices andtechnology and the application of thattechnology has dramatically grown oiloutput beyond what we thought waspossible. So we published the Annu-al Energy Outlook in December of2013, the reference case that wasbased on data that was really comingto us in the spring of 2012. And bythe first quarter 2013, we already hadsurpassed what we thought couldhappen in the short run, and so we ad-justed our short term numbers up-ward. And looking at what the industry isdoing and including our drilling pro-ductivity report, we can see first-handwhat’s going on and the answer–similar to natural gas–there are declinecurves. But if you drill enough newwells and if both the productivity ofthe wells and the productivity of the

rigs is continuing to improve, youmore than offset the declines, and pro-duction can rise, and production’s stillrising.

And is the productionlimitless?

Well, very few things are limitless.We do know that oil molecules arebigger than natural gas molecules, andsqueezing oil molecules through thefractures and the resource base isharder for oil than it is for gas. Rightnow, in the U.S., it looks like the oil-prone areas are not as prolific as thenatural gas-prone areas, but we’re stilllearning. And it looks to me, thelearning curve on oil is 5 years behindthe learning curve on natural gas. So,is the learning curve for oil going toimprove? Will the industry figure outways to deal with the molecular sizeissue, making bigger fractures? It’spossible that they could do that, inwhich case, the numbers could con-tinue to improve.

So what’s the next tight oil?What’s the next big, hugetechnological advance ordiscovery?

Well, I think that this is one that hasboth cost and environmental impli-cations that are very positive. I sus-pect that the next big advance is go-ing to be determining ahead of time

which parts of a horizontal well arelikely to produce the most oil or themost gas. And then rather than frac-turing the entire horizontal portionof the wellbore, which is what in-dustry is doing now. If you were tosay–make up some numbers–if therewere 10 stages across a mile-long lat-eral, so that would be 500 feet, let’sjust say, in a stage. It may be that halfof those stages are producing 90percent of the oil or the gas. So itwould be really quite interesting if theindustry could identify through seis-mic and other measuring technology,which of those stages to frack. Thenyou’d only frack 5 of them instead of10. You’d leave the other 5 un-fracked, and that would mean you’dbe using less water, less chemicals.The truck’s there 10 times, you onlyneed them there 5 times. And yourcosts have gone down, and theamount of flow back water has beencut in half, and the amount of chem-icals you’re using has been cut in half,and the amount of production rela-tive to the cost of getting at it has beendramatically improved. That’s whatI think’s going to happen next.

And what do you think aregoing to be the mostdramatic changes in thecoming years in energyconsumption and demand

By 2040, half of U.S.-produced natural gas will be shale gas

ADAM SIEMINSKI Adam Sieminski isAdministrator of the U.S. EnergyInformation Administration(EIA), which is responsible for collecting, analyzing anddisseminating independentenergy information to promotesound policy-making, efficientmarkets and publicunderstanding of energy and itsinteraction with the economyand the environment. Sieminskiwas named agency head in2012. He previously served assenior director for energy andenvironment on the staff of theNational Security Council, chiefenergy economist for DeutscheBank and served as presidentof the National Association ofPetroleum Investment Analysts.

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from the consumer side of the market?

The biggest change is the one we’reseeing already occurring, and that isthat demand growth for energy ingeneral is coming in the developingcountries, not the developed world.So it’s not the OECD countrieswhere energy demand is growing. Infact, the odds are pretty good that en-ergy demand in the developed worldis going to be at best flat, probably go-ing down as population isn’t growingnearly as fast, or might even beshrinking in some of those countries,and technology of consumption likeauto fuel efficiency standards is kick-ing in, and population growth andeconomic growth is still driving de-mand growth in places like Asia andthe Middle East. In the Middle East,many energy fuels are being subsi-dized, oil certainly is, so the percapita consumption is rising, andthe population is rising, and thatadds to a lot of growth.

What do you think that doesto the overall globalbalance? Is the growththere so much higher thatit’s going to outweigh thediminution in use in thedeveloping world?

Well, in our International EnergyOutlook, which we published thissummer, we still have overall energydemand rising out to 2040, and thenumber is: GDP is rising globally at3.6 percent per year, energy use un-der that economic assumption is upby 56 percent between 2010 and2040, and of that 56 percent, abouthalf of it is in 2 countries - just Chi-na and India. So with energy up 56percent, then obviously the growth isoffsetting efficiency gains producedin the OECD.

And what do you see interms of energy productionin places like China andIndia? Can the efforts intight oil here translate?

Well China has a lot of resources.China has oil production, but in thelast decade, China’s imports of oil ex-ceeded its production of oil. They’reproducing–call it roughly 4 millionbarrels a day. But they’re now con-suming 11 million barrels a day, anddemand for oil in China is still con-tinuing to go up, so the demand ingeneral in Asia is rising significantlyfaster than production is rising. There’s a little bit of that actually hap-pening in the Middle East, that thepercentage growth in demand is sur-passing the percentage growth insupply growth in the Middle East.EIA has not come to this conclusion,but there are a few people who’ve ac-tually sat around with a certain set ofassumptions. Saudi growth in energy

consumption and petroleum has beenso strong that what they have left overto export could potentially shrink.

So how do you see thatchanging geopolitics?

Well, growth in oil production in theU.S. is already having an impact ongeopolitics. The U.S. is now produc-ing more than we’re importing for oil.And, in fact, EIA has written, that’s aninternal cross for us, and if you justlook at it externally, we are also nowimporting less oil than China is im-porting, so China’s net imports for oilare now higher than U.S. oil im-ports. It’s another cross that’s inter-esting to look at in terms of its impli-cations. The U.S. is already a net ex-porter of coal. We will be, in the EIA’sprojections, a net exporter of naturalgas sometime around 2020. We are anet exporter of petroleum products likegasoline and diesel and so on. The onlything that we’re not a net exporter of

right now is crude oil. 2020 – that’s still6 years away for being a net exporterof natural gas, but the trends are inplace in terms of LNG export facili-ties that are already under construction. So could we be a net exporter of oilin general? Or could the U.S. gen-erate enough crude oil productiongrowth to offset it? That depends ona combination of things. You can’t dothat calculation just on the productionside alone, you have to look at what’shappening on the demand side.What’s the demand for petroleumproducts, and where is that going tocome from? But in one of our sidecases, which we call the no- or low-imports case, the U.S. potentiallycould become a net exporter of pe-troleum in general sometime after2030. What would be required wouldbe extended policies on demand, sothe improvements in auto fuel effi-ciency have to continue. You needsubstitution of natural gas for gaso-

line and diesel fuel, particularly fordiesel fuel in the long-haul truckingfleet and the diesel electric locomo-tive fleet. So you substitute LNG inthere and that means you have less de-mand for diesel. You put that case to-gether, so continuing auto fuel effi-ciency, substitution of LNG intotraditional diesel fuel markets, you putsome gains for natural gas into theheating oil markets in the Northeast,using Marcellus natural gas, for ex-ample. Combine all of that with ahigh-resource case for finding moreshale oil and shale gas, and the U.S.could potentially be a net exporter ofoil sometime after 2030.

Do wind and solar play anyrole?

Both in the U.S. and globally, yes. Re-newable energy and nuclear powerglobally–that’s looking at this thingacross the world–are the fastest-growing energy sources. So they’re

The United States will become a net exporter of natural gas around 2020

each going up by about 2.5 percentper year globally. In the U.S., re-newables, including solar and wind,are also, I think, the fastest-growingof any of the individual fuels. Natu-ral gas comes in pretty well, bothglobally and in the U.S. One of theinteresting things is, on an interna-tional basis, coal is growing faster thanpetroleum consumption all the wayout to roughly 2030 before it starts toslow down. The reason for that is coaluse for electricity generation in Chi-na and India is expected to continueto rise pretty strongly.

Ten years ago would youhave believed you’d beseeing the U.S. becoming a net exporter?

No, not in a million years would Ihave thought that the U.S. could po-tentially be a net exporter of oil. The

U.S. has always been an exporter, weexport to Canada, and we export toMexico. But would we be a net ex-porter? This leads back to one of theinteresting aspects of this whole phe-nomenon. A lot of the thinking aboutgeopolitics and energy policy goesback to the 1970s and 1980s when theframework was: demand only goes upand supply only goes down. So, sup-ply is harder and harder to find anddemand just rises without ever paus-ing. And that framework, at least inthe U.S., has been turned on itshead. So now what we’re getting inthe U.S. is supply looks very robust,and demand is beginning to taper off.

Is the greatest contributorto that overall, technology?Just technologies youwouldn’t have imagined 5 or 10 years ago?

I think on the production side, it’s thetechnology of drilling and seismictechnology and production technol-ogy has just been dramatically, dra-matically improved. On the demandside, it’s a combination of competingforces, let’s say. On the one hand, im-proving efficiency in consumption.Among the most notable is the autofuel efficiency gains. I think that youcan also say that things like combus-tion efficiency for natural gas homeheating has dramatically improved. But on the other side, you have ur-banization, especially in the develop-ing world. Urbanization in Chinaand India and Latin America hasproduced rising incomes and theneed for and desire of a huge portionof the world’s population for energy,for lighting. There are still morethan a billion people in the world whodon’t have electricity. They’re going

to get electricity, that’s going to hap-pen. Where’s that electricity going tocome from? How’s it going to be sup-plied? How can it be done econom-ically? How can it be done from an en-vironmentally sound standpoint? Howcan it be done for those countrieswithout compromising their own na-tional security issues? It’s somethingthat’s going to occupy policymakersfor a good period of time. So that urbanization and populationgrowth is going to continue and wehave demand for energy rising all theway through 2040. If you just look atwhat the UN has been saying, pop-ulation continues to go up into 2050,-60, -70. It’s not until the end of thiscentury that most of the populationmodels begin to show flattening andmaybe decline.

Where does that leave the countries like India and China? Because herethey are trying to catch upto where the U.S. was a fewdecades ago, but thepopulations areexponentially so muchbigger than they were in the U.S., that even if theyuse a lot of the technology,are you looking at a hugeimbalance out for the next40 or 50 years?

You hardly ever get imbalances. Youdon’t get shortages. You get changesin prices, and then changes in pricesdrive changes in behavior. Thechanges in behavior are that if gaso-line prices go up, people prefer small-er cars, or more efficient cars. And re-finers and producers look for ways tomake more gasoline to balance it out.The other thing that – EIA does notforecast changes or abrupt improve-ments in technology, we don’t fore-cast breakthroughs – but if you hada breakthrough in battery technolo-gy, you’d have a lot more electric ve-hicles. If you had a breakthrough indrilling technology, we might beable to lower the cost of drilling andget more fuel. If we had a break-through in how to capture carbondioxide from using energy and se-quester it, (he needs to finish sentencehere). The Secretary of Energy re-cently attendeda big meeting that was held on whatprogress was being made on carboncapture and sequestration. There issome progress being made. Southern Company has got a plantthat they’re working on that takes lig-nite, low-BTU coal, and turns itinto natural gas and hydrogen thatgoes into turbines to make electric-ity. Something like 60 percent of theCO2 is captured, and they’re going topipeline that to an oil field in the areaand use that for enhanced oil recov-ery. So far it’s been very expensive, but

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Renewable energies and nuclear power are growing at a rate of about 2.5 percent worldwide

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Chinese output is

around 4 millionbarrels per day, while consumption totals 11 million bpd

it’s one of the first of its kind, so it’sstill a learning experience in manyways. But if doing things like that ul-timately proves cost-effective, and I’msure that technology and the appli-cation of it is going to get better asyou do more of it, it becomes moreassembly line rather than one-off.That could dramatically changethings. China burns a tremendousamount of coal. A huge proportionof China’s total energy is coming fromcoal, and if scientists and engineerscan figure out ways to continue to usecoal without having adverse impactson climate and air quality, that wouldmake a breakthrough difference, adramatic difference. Should we saythat that’s not going to happen?That’s probably–the need for it tohappen–if necessity is the mother ofinvention, the necessity is here.

Who are the leaders in thetechnology race right nowfrom where you sit?

Well, in shale, it’s U.S. producers andservice companies and so on. On oth-er technologies, it’s probably spreadout a little bit more, with the Ger-mans having done a tremendousamount of work in getting solartechnology moving and wind, theChinese have been doing a tremen-dous amount of wind technologyand also, I think solar, too, in termsof the amount of solar panels beingproduced and wind turbines beingbuilt and sold.

And is your job getting moreand more difficult with all ofthese rapid improvements?

Well, what’s making our job harder isthat–what I said earlier–is a hugeproportion of the growth of energy de-mand is coming in the non-OECDcountries where the statistical collec-tion systems aren’t nearly as sophisti-cated as those in countries like theUnited States and Europe and Japan,and as a consequence, the trans-parency on data is not as good as itought to be. Some countries seem totreat energy statistics as state secrets,so getting more countries to believe indata transparency and the benefits as-sociated with that to everybody is, Ithink, going to be a continuing strug-gle, but I’m hopeful that we’re goingto move in that direction. The Inter-national Energy Forum is doing a lotof work in that area, in the JODI–Joint Organization Data Initiative–ef-fort and EIA is working with theIEA and others on that.

It must be an amazing timeto be sitting in your chairright now.

Yes, it is–but I would imagine thatthere’s probably some truth to that nomatter what the date is that you puton it. Certainly watching this devel-opment in production in the U.S. hasbeen very, very interesting. By the way,EIA is not a policy organization, butwe have to inform policymakers. I like to think about this as three bigcircles in a Venn diagram. One circleis the economy, and another circle isthe environment, and another circleis energy security or national securi-ty. And for energy politics to reallywork, you’ve got to have somethinghappening in all three of those places,

you can’t just have one or two. You canhave a lot of production, but if youcan’t do it in an environmentally-sound way, that’s not going to work.You can think about energy securityand things that you would do becauseyou have energy security, but you haveto be cognizant of their environ-mental and economic costs. Andthose are the kinds of issues that pol-icymakers, I think, always strugglewith. That’s why it’s so hard to getagreements on these things becausemaking all three of those key criteriawork together is not often easy. EIA’sjob is to try to provide measurementon those issues, to try to provide somehelp to policymakers to figure outwhat are the underlying facts, sothat’s what we do. And doing that, I’vealways been excited by that kind ofthing.

Are there any particularissues that you think foretellanything important comingup in the next few years?

The improvements in renewable en-ergy in the U.S., efficiency improve-ments, and substitution of, in gener-al, lower carbon-intensive energyfor higher-carbon intensive energyhas resulted in the U.S. having a pret-ty good track record over the past 10years now, almost, on energy-relatedgreenhouse gas emissions. Thatcomes back to a combination ofthings, but the key things are thegrowth in renewables and the use ofnatural gas to generate electricity.

Of course, many scientistsand environmentalists

would say we need to go a lot further on those.

Right, well one of the things that wefound in our International EnergyOutlook was that with that growth inenergy consumption–and a lot of itbeing coal–that carbon dioxide emis-sions globally are going to continueto go up, and so there’s a huge needto look at that. Going beyond the is-sues of greenhouse gases and the im-pact on the climate, carbon dioxideemissions are a pretty good proxy forall kinds of air pollution issues. Look-ing at the growth in the developingworld, in particular China, now someof these cities are looking much likeU.S. cities in the late 1940s and ear-ly 1950s. The Chinese are going towant to have that fixed, and in gen-eral, I think that there are ways to dothat, and I suspect we’re going tomove in that direction.

On www.abo.net, read otherarticles by the same author.

Molly Moore is a senior vice president of Sanderson Strategies Group, a Washington, D.C., media strategies firm, and a former Washington Postforeign correspondent.

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While Saudi Arabia will have a number of alternative fuel options after 2020, theconsumption of liquid fuels in the power sectorwill continue to increase in the short to mediumterm, driven by growth in electricity demand and low energy prices

Saudi Arabia/Summer demand swings reach a million barrels per day

The Kingdom of oildiversifies the mix

uring the summermonths, Saudi Ara-bia experiences sharpincreases in oil de-mand. In 2011, theswing in demandfrom winter lows tosummer highs was750,000 b/d; a yearlater, it was close to1 million b/d. In2013, the rise was a

more modest 440,000 b/d betweenMay and July, with demand for gaso-line, diesel, fuel oil and crude burnreaching 2.67 million b/d in July. One of the key features in Saudi Ara-bia in the last decade has been therapid increase in electricity demanddriven by multiple factors such as rap-idly expanding population, robusteconomic growth, improvements instandards of living, harsh weatherconditions but also by a Saudi eco-nomic policy geared toward diversi-fication into energy intensive in-dustries and low energy pricing pol-icy. Between 2003 and 2012, elec-tricity sold (a proxy for electricity de-mand) increased from 128,629 mil-lion kWh to 240,288 million kWh,an increase of 78 percent. During thesame period, the peak load increasedfrom 31 GW in 2006 to 52 GW in2012 and is projected to increase to75 GW by 2020. The biggest con-sumer of electricity is the residentialsector where in 2012 it consumed al-most 50 percent of electricity gen-erated in the Kingdom with around70 percent of residential consumptionattributed to air-conditioning.

SUBSIDIZED PRICESSaudi consumers buy their electric-ity at highly subsidized prices, payingfrom 1.3 to 6.9 U.S. cents per kilo-watt-hour depending on the type ofend user, the consumption bracket,and the time of use. Recently, the gov-ernment has embarked on gradual re-form of electricity prices: where in2010 electricity prices were revisedupwards for the industrial, govern-ment and commercial sectors butnot for the residential sector. Despitethese increases, electricity prices in theKingdom remain very low, even byregional standards.The power sector in Saudi Arabia re-lies heavily on liquid fuels. In 2012,the shares of natural gas and crude oilfor the Saudi Electricity Company(SEC) (the largest utility in the coun-try that accounts for around 77 percent of installed capacity), stood at 40percent and 34 percent respectivelyfollowed by diesel (20 percent) andfuel oil (6 percent). The power sec-tor obtains the various fuels at afraction of prices in internationalmarkets as shown in Table 1 below.Despite the low cost paid for fuel, in

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by BASSAMFATTOUH

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2012 the average cost of a unit of elec-tricity in the Kingdom was higherthan the average price collected fromconsumers by SEC. Originally, nat-ural gas and/or combined cycle wereexpected to drive the capacity ex-pansion in power generation. How-ever, there was a change in policy in2006 when the government issued aRoyal Decree stating that the coun-try’s largest future power plants,which initially planned to rely on gas,would be fired by crude oil providedat a subsidized price. Therefore, thevolume of gas consumed in powergeneration is expected to remain un-changed or increase marginally, keep-ing its share of the fuel mix in pow-er generation relatively low. A bigswitch back to gas remains a possi-bility, but this shift will only materi-alize if large quantities of gas reservesare discovered and/or if Saudi Arabiastarts importing natural gas.

REGIONAL DEMAND ANDIMPLICATIONS FOR FUEL USE The SEC divides the country intofour regions: Central, Eastern, West-ern and Southern. While in the East-ern and Central regions natural gasis the dominant fuel for power gen-eration, it is not used in the other two.Since most of the gas is produced andprocessed in the Eastern province ofSaudi Arabia, the dominance of gas inthe power sector of that region shouldnot come as a surprise. This reflectsthe lack of adequate infrastructure ca-

pable of shifting natural gas from theproduction and processing centres(mainly in the Eastern region) to theWestern and Southern regions. In or-der to meet the surges in electricitydemand during summer time, thegovernment is forced to increase itsdirect crude burn, especially in themonths of July and August. Theswings in crude burning can be verylarge. In 2012 the size of the swing be-tween February and August was476,000 b/d with crude burningreaching 779,000 b/d in August lastyear. The latest available data indicatethat crude burn has reached 757,000b/d in July 2013.

SHORT-TERM OPTIONSIn the short term, Saudi Arabia hasfew options to deal with the challengeof reducing crude burn in the pow-er sector:• It can use fuel oil and diesel insteadof crude oil (often imported duringsummer); • It can accumulate oil stocks during

periods when demandis low and use thesestocks during �periodwhen demand is high;• It can increase the useof gas in power gener-ation to free morecrude oil for exports. The last option hasbeen strongly empha-sized by Saudi officials.Indeed, faced with rap-

id increase in gas demand by indus-try and the power sector, Saudi Aram-co has been under pressure to devel-op its natural gas reserves. In the ear-ly 2000s, the Kingdom focused its ef-forts on development of the EmptyQuarter. However, results were dis-appointing, and this has been replacedby the development of non-associat-ed gas fields as exploration results inthe Empty Quarter have proved to bedisappointing so far. This representsa change in the Kingdom’s gas strat-egy towards developing more com-plex, more challenging and morecostly non-associated gas reserves, yetin a low gas price environment. Cur-rently, the price of natural gas in Sau-di Arabia is one of the lowest in theregion ($0.75 per MMBTU) with theregion itself having the lowest pricesof natural gas in the world. In 2012, Saudi Arabia’s gas produc-tion (raw gas to gas plants) amount-ed to 10.72 bcf/d with a target of in-creasing production to 15.5 bcf/d by2015. Assuming that Saudi Aramcomeets its gas output target on time,

will this reduce the size of the upswingin oil demand during summer in thenext few years? The straightforwardanswer to this question is ‘only a lit-tle’. First, the increase in gas pro-duction will not be able to meet therapid increase in gas demand by theindustrial and the power sector, evenif targets are met. Second, the maingas discoveries are located in theGulf and thus can feed into the pow-er plants in the Eastern and Centralregions, where natural gas is alreadya large component of the fuel mix. Ex-tra gas could replace oil in some pow-er plants in these regions, but only upto a certain point, as there are tech-nical barriers substitution in plantsthat use crude. Furthermore, due tothe infrastructure constraints notedabove, these new fields can’t feed intothe power plants in the Western andSouthern regions that need themmost. Until large quantities of gas arefound, the Saudi government is un-likely to build the required infra-structure, especially as much of theproduced gas can be utilised withinthe Eastern region.One potential source of gas supply topower plants in gas-starved regionsis the Midyan field on the NorthernRed Sea. There are already plans todevelop new gas discoveries in this re-gion for power generation in thenorthwestern part of Saudi Arabia,which currently uses oil and diesel.But the amount of gas is too small tochange the dynamics in any signifi-cant way. The other option is to rely on fuel oiland diesel, which are often importedduring summer. To help meet the rap-id increase in domestic demand, Sau-di Arabia has invested heavily in ex-panding its refining capacity. SaudiAramco is pushing ahead with threenew refineries each of which isplanned to have a capacity of 400,000b/d. When these refineries comeonline between 2013 and 2016, thiswould give Saudi Aramco more flex-ibility to use more fuel oil and dieselin power generation reducing the re-liance on direct crude burn. Thus, although Saudi Arabia maymake a conscious effort to limit theupswing in domestic crude burn,various oil products, be they diesel orfuel oil, will remain key in meeting thecountry’s power demand needs for theforeseeable future.

MEDIUM-TERM OPTIONS ARE MORE FLEXIBLECurrently, Saudi Arabia is pursuing athree-track strategy: change the en-ergy mix in the power sector, improveefficiency of electricity generation andreduce demand at the consumer endby improving energy efficiency. Sau-di Arabia is also pressing ahead withits ambitious plans to develop nuclear

The government is unlikely to change its domestic pricesfor oil and gas products anytime soon and without a comprehensive reform of the electricity sector

In Saudi Arabia, the prices paid by electricity producers – expressed in dollars per million British Thermal Units (BTU) – were far lower thaninternational prices in 2012.

The price gap

Fuel Price Paid by Power Producers International Price

Heavy Fuel Oil 0.43 15.43

Natural Gas 0.75 9.04

Diesel 0.67 21.76

Crude Oil 0.73 19.26

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power to meet rising electricity de-mand and save oil for export. TheKingdom has plans to build 16 nu-clear reactors over the next 20 years,spending an estimated $7 billion oneach plant to provide one-fifth of thecountry’s electricity for industrialand residential use and for desalini-sation of seawater. The governmenthas also plans to generate some elec-tricity from solar and is also consid-ering wind, waste and geothermal en-ergy sources as it seeks to reduce re-liance on oil and gas. The Kingdomhas a $109bn investment plan tocreate a solar industry that would gen-erate a third of the country's elec-tricity by 2032.Saudi Arabia may also consider im-porting LNG, which would providethe Kingdom with the much-neededflexibility without heavy investmentin gas processing plants and pipelineinfrastructure (although the Kingdomwill have to invest in regasification ca-pacity). This however poses chal-lenges, as this will create a largewedge between the price of gas soldin the domestic market and the priceof gas imported from internationalmarkets. There is also scope to improve effi-ciency in power generation. The ef-

ficiency of the Saudi power sectorcompared to other parts of theworld is quite low and falls well be-low the world’s average implying thatthere is a scope for large improve-ments in efficiency in the power sec-tor. The Kingdom has already put inplace a programme to phase out oldpower plants and introduce more ef-ficient ones. This could also alter do-mestic demand dynamics, thoughthere are doubts of whether this pro-gramme could be effectively imple-mented without a more rationalpricing policy.One route the Saudis are unlikely totake is that of adjusting the price ofnatural gas, petroleum products andelectricity prices to reflect the truecost of these resources, which wouldhelp to rationalise demand and slowenergy demand growth. In light of theArab spring, the idea of price adjust-ments that would entail higher costsfor basic services such as water andelectricity as well as more general in-flation are simply not politically ap-pealing.

CONCLUSIONWhile Saudi Arabia has some optionsin the long term (post 2020), the con-sumption of liquid fuels in the pow-er sector will continue to present achallenge for policy makers in theshort to medium term. For the nextfew years, liquids consumption by thepower sector is expected to continueto increase at a rapid pace, driven bygrowth in electricity demand, low en-ergy and electricity prices, and by in-frastructure and technical constraintswhich will prevent higher penetrationof gas in the power sector. Conse-

quently, the swings inoil demand duringsummer time will per-sist and thus Saudi do-mestic demand willcontinue to be closelymonitored by marketsanalysts and will con-tinue to be one of thefactors affecting oilmarket balances andoil price behaviour, es-

pecially in some key months, when oilmarket fundamentals are perceived tobe tight and/or when the market ex-pects the call on Saudi Arabia to rise.

Saudi Arabia has a 109 billion dollars investment plan to create a solar industrythat would generate a third of the country’selectricity by 2032

In addition to his role as Director of the Oil and Middle East Programme,Bassam Fattouh is also Research Fellow at St Antony’s College, Oxford University;and Professor at the School of Oriental and African Studies.

KING FAHAD CAUSEWAY The border station between

Saudi Arabia and Bahrain and the King Fahad

Causeway, a system of bridgesand causeways connecting the

two countries, built between1981 and 1986.

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he sharp decline inthe prices of mostnon-energy com-modities over the lasttwo years representsa marked departurefrom the commodi-ties boom ushered inby the new millenni-um. This shift coin-cided with a large de-celeration in the

economies of emerging markets, rais-ing two questions: is the slowdown inemerging markets mainly to blame forthe decline in the price of non-oilcommodities, and will it persist? Sec-ond, will it eventually cause a declinein oil prices, which have so far shownremarkable resilience? These questions have the virtue of be-ing precise, but, as someone once said,prediction is difficult–especially aboutthe future. Emerging markets –whichI use as a short-hand for all develop-ing countries as defined by the WorldBank–are very unlikely to return tothe extraordinary 7 percent annualgrowth rates of the immediate pre-cri-sis period, but their fundamentals arestrong and they can still continue togrow at a fair clip (a potential GDPgrowth rate of 5-5.5 percent annual-ly) for many years to come. Thiswould provide support for demand ofall commodities, though not thesame intense demand impulse they

provided in the pre-crisis period.The recent slowdown in emergingmarkets has played a major role in therecent weakness of metals and min-erals, where China now accounts fora large share of demand. Food prices,on the other hand, are much less af-fected by the economic cycle, andtheir decline owes more to other fac-tors. Oil prices, expressed in realterms, could come under downwardpressure in coming years, but this willbe mainly because of increased oilsupplies and of secular and globalshifts in the use of oil rather than be-cause of slowing economic growth inemerging markets.

GROWTH IN EMERGINGMARKETS The extraordinary pre-crisis growthsurge in emerging markets over 2002-2007 clearly exceeded their potentialgrowth rates, and this was reflected inrising inflation, infrastructure bottle-necks and deteriorating current ac-count balances. Their advance wasonly briefly interrupted by the glob-al recession in 2008-2009, whenemerging markets showed remarkableresilience. Subsequently, expansionarymonetary policies in the advancedcountries coincided with improvedconfidence in emerging markets tocause the latter to experience large in-flows of capital, appreciated curren-

cies and another bout of rising infla-tion. Rising commodity prices werepartly a result of buoyant demand con-ditions in emerging markets, but alsohelped reinforce them. Over the lasttwo years, most developing countrieshave begun to decelerate, a result bothof supply constraints and of theirtightening monetary and fiscal poli-cies. The prospect of Fed “tapering”in the summer reinforced expectationsof a slowdown, and there are plentyof worries at present about overin-vestment in China, macroeconomicimbalances in India, Brazil and Turkey,deteriorating terms of trade of many

commodity exporters, and politicalrifts in several Arab countries.However, there has been no collapseof growth in emerging markets, whichare estimated by the World Bank tohave grown at an annualized rateclose to 6 percent in the third quar-ter of 2013. Looking forward, the fun-damentals underpinning growth ofemerging markets remain strong andare not likely to change quickly – rap-id growth of the labor force, high ratesof savings and investment, and theability to advanced apply technologiesfrom the advanced countries. Al-though a recovery in advanced coun-

by URIDADUSH

T

Impact/The slowdown in emergingcountries and commodity prices

Ups anddowns Although the balance of marketforces points to significant downwardpressure on oil prices in comingyears, prices are unlikely to stay very low for long. Other commodityprices, though, will decline

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tries will prompt a tightening ofmonetary policies, and some moder-ation of capital inflows, the net effecton emerging markets of a recovery intheir main export markets should bepositive, not negative. There is little,reason, therefore, not to expect growthin emerging markets to continue tooutpace that of advanced countries bya wide margin in the foreseeable fu-ture. The moderation of growth ofemerging markets has already ad-versely affect the growth of demandfor some commodities, but will alsomake it more likely that demand willbe sustained in the medium-term.

THE DECLINE IN THE PRICES OF METALS AND AGRICULTURALCOMMODITIESEmerging markets have come torepresent a large part of the demandfor commodities, and, as advancedcountries stagnated, the lion’s shareof new demand. The most strikingcase is the demand for metals inChina, which now accounts for 45percent of global metal consumptioncompared to a small fraction just ageneration ago. The short-term cor-relation between variation in metalsprices and industrial productiongrowth in emerging markets is very

high, even after controlling for oth-er factors such as inflation and ex-change rate trends, supporting thecase that the recent emerging marketslowdown dampened the price ofsome commodities. However, with the exception of agri-culture, commodity prices remainnear record levels in real terms andhigh commodity prices over the pastdecade have also spurred a major ex-pansion of supply: between 2000 and2013, capital expenditures by majorfirms in the metal and oil markets in-creased fivefold. High prices have alsoincreased recoverable reserves of

THE AUTHOR. UriDadush is a seniorassociate in Carnegie’sInternational EconomicsProgram. Before joiningCarnegie, Dadush waspresident and CEO

of the Economist Intelligence Unit and Business International, part of the Economist Group and a consultantwith McKinsey and Company in Europe.He served as the World Bank’s directorof international trade and director of economic policy. He also servedconcurrently as the director of the bank’s world economy group.

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most metals, such as copper. More-over, the persistent recession in Eu-rope and slow recovery in the US andJapan also help account for the recentweakness of commodity prices. Arecent IMF analysis finds that U.S. in-dustrial production still has a big ef-fect on a wide range of commodityprices, and attributes these outcomesto the long-lasting effect of shocks ineconomic activity in the U.S., aswell as larger spillover effects onglobal economic activity through fi-nancial markets. The slowdown in emerging marketsappears to have had a much smallerrole on food prices than on those formetal. In the short-term, food pricesare much less sensitive to the macro-economic cycle and more sensitive toweather factors as well as to supplyfactors (for example, acreage undercultivation) which tend to respondpositively to high prices in previousyears. As with all commodities, fi-nancial markets can play both a biganticipatory and amplifying role inprice behavior. Over time, food pricestend to reflect mainly trends in pop-ulation and long-term incomegrowth, as well as the evolution ofyields. Moreover, John Baffes, a com-modity market analyst at the WorldBank, has shown that energy pricesplay a crucial role in determining foodprices, because of the high energy in-tensity of agriculture, which is 4-5times greater than in manufacturing.Biofuel policies (which divert pro-duction capacity from food) also playa key role in determining food prices.The Food and Agricultural Organi-zation recently noted that globalfood prices had fallen to their lowestlevel in three years, and that this wasdue mostly to a steep fall in the costof grains, with weather-related factorsaccounting for record crops expect-ed in the U.S. this year, and in the costof sugar, where declining ethanolprices are providing Brazil—theworld’s largest sugar producer and ex-porter—an incentive to use sugarcanefor sugar rather than biofuel pro-duction.

OIL PRICES AND THE EMERGING MARKETSSince emerging markets already ac-count for half of world oil demand, upfrom 30 percent just ten years ago,their growth will continue to play animportant role in shaping the funda-mentals affecting oil prices both in theshort and long term. Most forecastscall for moderate growth in oil de-mand over the next decade, about 1.5percent a year, which is less than halfthe potential growth rate of worldGDP and only a little above worldpopulation growth. Nearly all thisgrowth of demand will occur inemerging markets.

However, important as they are, itwould be misleading to attribute adominant role to economic growth inemerging markets in determiningoil prices, as other very important fac-tors are at play both in the short andlong run. In the short-term, the re-covery of advanced countries – espe-cially in the debt-afflicted Eurozone– will add to their extremely depressedoil demand. The wild cards of supplydisruptions in Libya, Iraq, sanctions-constrained Iran, the Syrian con-flict, and the rifts in Egypt, will alsoplay a big role. In the medium term, most of thesefluctuations are likely to play a sec-ondary role. While, as already dis-cussed, the medium term growthrate of emerging markets remains fa-vorable to oil demand, other factorsare negative: increased oil and natu-ral gas production in the UnitedStates due to new technologies (hor-

izontal drilling and fracking); likelysubstitution of oil by natural gas in thetransport sector; reduced oil use intransportation as cars become morefuel efficient and improvements in thebattery life and cost which makeelectric vehicles more attractive mayalso play a role. It is also likely that thepreoccupation with climate changeand with the budgetary implicationsof energy subsidies in many devel-oping countries will encourage re-forms that could eventually make adent in oil consumption. Most important, the InternationalEnergy Agency predicts that in-creased conventional and unconven-tional production in Brazil, the Caspi-an Sea, West Africa, North America,and other non-OPEC oil producerswill likely more than offset falling pro-duction across mature oil-exportingeconomies over the next five to tenyears. Next year alone, non-OPEC oil

producers will lift the global oil sup-ply by the most they have done sincethe 1970s, producing 1.7 million ad-ditional barrels a day; the agency char-acterized this growth as appearing tobe “less like a one-off than a preview.”Such large increases in supply dwarfany shift in demand that could resultfrom plausible variations in the annualgrowth rate of emerging markets. Last but not least, much will dependon swing suppliers and their need toachieve a revenue target. Saudi Ara-bia, OPEC’s largest member andleader by default, has pledged toabundantly supply the global market;however, it considers an oil price be-tween $100-110/barrel to be fair,even though that price is about dou-ble its 2000-2009 average and is an es-timated $20-25/barrel higher than theprice the country needs to cover itsspending requirements. Thus, al-though the balance of market forcespoints to significant downward pres-sure on oil prices in coming years, onecan expect the decline to be moder-ated by cartel behavior., In any event,prices are unlikely to stay very low forlong as the marginal cost of many newoil supplies is estimated to be in the$70-90 per barrel range, with themarginal cost of oil from Canadian tarsands, still the most important newsource of supply, estimated at $80 perbarrel.

CONCLUSION Given the extraordinary volatility ofcommodity prices, any forward lookis speculative, and interpretation ofpast trends is problematic given thecomplex array of forces affectingthem. Nevertheless, one can say withconfidence that very rapid growth ofemerging markets played a significantrole in the historic surge of manycommodity prices over the last decadeor so, and the same can be said of thesubsequent slowdown. Emergingmarkets are likely to continue togrow much faster than advancedcountries and thus to provide supportfor the demand for commodities formany years to come, though they willnot generate the same large upwardimpetus as before the crisis. Howev-er, with the possible exception of met-als, economic growth in emergingmarkets is not the dominant force incommodity prices it is sometimesmade out to be. On balance, the manyother factors pointed to in this note–especially new investments and thetechnology-driven growth of supply–serve to counter the view that com-modity prices can resume their rise oreven sustain current levels.

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1992

1994

1996

1998

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2010

0 0,00

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9,00

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350

Commodity pricesre

al c

omm

odity

pric

e in

dex GDP grow

th (annual %)

Emerging markets

Source: UNCTAD, World Bank

GROWTH IN EMERGING MARKETS

The increase in the price of commodities has been caused, in part, by demand in emerging markets, but it has also, in turn, helped to strengthen them.

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agriculture

real

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ity p

rices

, 200

5=10

0

metals energy

Source: World Bank

COMMODITY PRICES

The recent slowdown in emerging markets has led to the fall in pricesof some commodities. However, with the exception of the agriculturalindustry, prices, in real terms, remain close to record levels.

or those seeking ev-idence of a loomingpeak in global oil de-mand, India seemsthe last place to look.The poorest of theworld’s major emerg-ing markets, it alsohas one of the lowestrates of per capita oilconsumption. Yet de-spite a recent slow-

down, India’s economy is predicted togrow speedily over the coming twodecades, becoming the world’s thirdlargest around 2030. And with thatgrowth will come higher oil usage —much higher, in fact, a trend con-firmed in November, when the In-ternational Energy Agency predict-ed that India would overtake Chinato become the single largest source of

growth in global oil demand after2020.Indian policymakers therefore ex-pend plenty of effort fretting abouthow to beef up their meager oil sup-plies — either by boosting domesticproduction or bringing in greater for-eign imports — but very little antic-ipating a world in which global de-mand trends downwards. Even here,however, the picture is not quite asstraightforward as it might at first ap-pear — as became clear when politi-cians in New Delhi suddenly did be-gin to focus on curbing oil demand,during a curious episode in Augustthis year.

THE TRADE DEFICIT AND THE CURFEWThe backdrop was a moment of se-

vere economic crisis. Over the pre-ceding three months, India had beenbuffeted by its worst period of eco-nomic turmoil in two decades. Hintsby U.S. Federal Reserve chair BenBernanke’s that he might soon “taper”the institution’s emergency asset-buying program had spurred an ex-odus of capital from many emergingmarkets. India was particularly af-fected, with the rupee plunging to anall-time low against the U.S. dollar.New Delhi, gripped by rising panic,began to contemplate emergencymeasures. Underlying this anxiety there lay adeeper problem: a yawning currentaccount deficit, which in the finalquarter of 2012 soared to a record 6.7per cent of gross domestic product,placing extra pressure on the currency.Crude oil imports, which stood at

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by JAMESCRABTREE

India/The world’s largest source of oil demand growth after 2020

F

Let’s talk about subsidies

THE AUTHOR. JamesCrabtree is the head of the Financial Times’Mumbai bureau wherehe leads the paper’scoverage of corporateIndia, having previously

worked on the op-ed page asComment Editor. Before joining the FT,Mr Crabtree was Deputy Editor atProspect, Britain’s leading monthlymagazine of politics and ideas. Prior to returning to journalism, he workedas a policy advisor in the U.K. PrimeMinister’s Strategy Unit, and for variousthink tanks in Britain and America. He also spent a number of years livingin the U.S., initially as a FulbrightScholar at the Kennedy School of Government at Harvard University.

To narrow the gap between scant domestic supplies and rising imports,India’s government will have to rein in its sprawling system of energysubsidies, which costs it around $45bn each year

$144bn during the last financial year,were the largest element of that gap,while also making up more threequarters of the country’s $191bntrade deficit. So how might oil de-mand be brought down, at least tem-porarily? India’s oil ministry alighted,briefly, on an unusual solution: plac-ing petrol stations under curfew atnight. The idea had little logic — it wouldhave been an inconvenience, at best,forcing motorists to buy fuel duringdaylight hours — and was greetedwith derision by India’s media. Theresulting mixture of mockery and up-roar prompted the Prime Minister’soffice to distance itself from the no-tion, in turn forcing oil ministerVeerappa Moily to deny it had evenbeen under consideration. "It is notour idea,” he hurriedly told Indian re-porters. “No decision has been tak-en to keep petrol pumps dry duringany part of the day.” Even so, thepetrol pump curfew furor served adeeper purpose, by demonstratingthat, in the future, there are at leastsome circumstances in which Indiawill need to consider curbing its

fast-rising demand for oil, as well assimply seeking out more supplies.

THE NEW CHINA The scale of the country’s likely de-mand growth is clear from the IEA’slatest World Energy Outlook, re-leased in November. The report is

skeptical about the idea of a declinein overall global oil demand, sug-gesting it will tick up over the nexttwo decades, from 87 million barrelsper day in 2011 to just over 100 in2035. But it is clear that even if de-mand from OECD nations does in-

deed slow, emerging Asia will con-tinue to provide overwhelmingly themost important source of new growth— with India playing an especially sig-nificant role. “When we launched our report, oneof the findings I thought would bepicked up strongly by the press,which was not picked up much at all,

is that India is becom-ing the new China forthe global energy mar-ket,” says IEA chiefeconomist FatihBirol.“This changesmany of the long-heldtenets of the global en-ergy markets, whichhave often assumedthat China is the en-gine of growth. But,after 2020, which is re-ally very soon in terms

of how the energy market behaves, itis India that will be the main sourceof new oil demand.” Indian oil use will increase by around5 MBD between 2020 and 2035, asboth the country’s economy and pop-ulation keep growing rapidly; it will

overtake China, for instance, to be-come the world’s most populous na-tion by 2028, according to the UN.Yet demand from individual homeconsumers is likely to provide a rel-atively minor component of this in-crease, with transport and industrialuses providing the bulk of demandgrowth. On the former, India has strikinglylow levels of car ownership: just 18people in every 1,000 according todata from the World Bank. By com-parison, more than half the popula-tion have a car in most Europeancountries, while in China the rate isalready four times higher than itsAsian neighbor. India’s great auto-motive catch up, which some pro-jections suggest will see the countrybecome the world’s third largest pas-senger car market over the nextdecade or two, will translate into a sig-nificant source of rising oil demand. Industrial uses are also set to risequickly, especially if India successfullymanages to increase the current lowproportion of its economic outputthat comes from manufacturing in-dustries. “Industrial demand is alreadyincreasing,” says Deepak Mahurkar,head of oil and gas at consultants PwCin India. “But it is worth noting thatthis growth is not much to the likingof industry itself, who would like toavoid use liquid fuels, which aremore costly, and use alternatives in-stead, which are generally not avail-able.” These alternatives would ideallycome from domestically producedcoal or natural gas. But while India hasan abundance of both resources, amixture of regulatory delays and in-competent management has seendomestic supplies fail to keep pacewith growing demand. “The goodthings about India’s growth in oil de-mand is that at least you are able toimport this fuel,” Mr Mahurkar says.“There is nowhere in India where youhear that the fuel pumps have beenshut down, or a factory that can’t op-erate because of a lack of supply. If youhave the money, you can buy it.”

FOREIGN RELIANCEThe same cannot be said of domes-tic oil production, which India hasbeen attempting to increase in recentyears, with little success. Not to be putoff, the government earlier this yearset an objective of achieving total en-ergy independence by 2030, by wayof greater oil exploration at home andtapping unconventional energy re-sources, such as shale gas. “Our gov-ernment will make every effort to re-duce our nation’s dependence onimported oil,” oil minister VeerappaMoily said in March, noting that thecountry’s 73bn barrels of discoveredoil represented only about one third

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According to the IEA’s latest estimates, global subsidies for fossil fuel use will reach $544 billion in 2012, slightly up on 2011. The modest increase in international prices and consumption has been offset by significant progress on reining in subsidies. Subsidies for petroleum products represent morethan half the total.

People use energy because they need it and as thriftily as they can, so it is by no means clear that higherprices would actually result in lower consumption

$0

$20

$40

$60

$80Ir

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geria

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ine

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geria

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anPh

ilipp

ines

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h Af

rica

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rea,

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ublic

of

Oil

Gas

Electricity

Coal

billi

ons

of d

olla

rs

Source: World Energy Outlook 2012

FOSSIL FUEL SUBSIDIES

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QUENCHED?

of the country’s already identified re-sources. Even so, most industry projectionssuggest India’s reliance on foreign oilwill continue to grow; the IEA, for in-stance, says India will import 92 percent of its oil by 2035, up from justthree quarters last year, and barelymore than a third in 1990. “Increas-ing reliance on imported crude hasbeen a serious concern for Indian pol-icymakers,” the body noted in a 2012report on the country’s energy mar-ket, “both in terms of energy inse-curity and financial burden because ofexposure to the fluctuation of inter-national oil prices.” Fanciful talk of a domestic oil boomaside, India’s is more likely to respondto growing demand by instructing itsstate-backed oil companies to seekmore supplies abroad. The country’slargest explorer, ONGC, recentlyoutlined an ambitious new plan —known as “Perspective 2030”, andboasting a budget of approximately$180bn — to acquire overseas oil as-sets over the next two decades. Indi-an oil groups have typically foundthemselves outbid by more aggressiveChinese competitors in the hunt forsuch resources, but ONGC has of lateappeared more ambitious intent, forinstance by spending $2.5bn for a

stake in a large natural gas field inMozambique this June. Yet if India wants to narrow the gapbetween sluggish domestic suppliesand soaring imports, it has one moreobvious option: moderating the ex-tensive regime of energy subsidies,which sees its government spendaround $45bn each a year to shieldtheir citizens from changes in glob-al energy prices. “Most consumersweren’t hit by oil price increasesover the last few years, most of theburden was being taken by the oilcompanies and the central govern-ment exchequer,” says DeepakMahurkar of PwC. “But in India thisdoesn’t mean people splurge on en-ergy. They use it because they haveto, and they do so in a thrifty man-ner, so it isn’t clear that higher priceswill always result in lower usage.”

DEREGULATING FUEL PRICESEnergy experts are divided on this lastpoint: some, such as Mr Mahurkar,suggest a roll-back of subsidies will justforce poorer customers to spendmore of their income on essential fu-els, and cut back on non-essentialspending elsewhere. Others disagree,pointing to moves by India’s govern-ment earlier this year gradually to ease

subsidies on diesel fuel, which ac-counts for just under half of all oil de-mand, a process which may see theprice of the fuel fully deregulated bythe middle of 2014. This change in policy permitted oilcompanies to introduce regular in-cremental price increases for con-sumers which, in combination withthe wider effects of the country’seconomic slowdown, actually sawdiesel demand dip between June andAugust — a rare event in a countryused to steadily rising demand, and asign, according to some analysts, thatsubsidy reductions can persuade con-sumers to lower energy use. “If crudeprices keep high for long periodseventually governments must increaseprices, and then consumers do feel thepinch,” says Dayanand Mittal, an en-ergy expert at brokerage Ambit inMumbai. “Recently in India, higherprices have led to weaker demand, andthat could be a sign for the future.”The future of India’s subsidy regimetherefore has important implicationsboth for the extent of future demandin Asia’s third largest economy, and inturn the shape of global demand.“Most of the reduction in demandwould come in the OECD world,from greater advances in technology,better mileage per gallon, restric-

tions on urban driving, and so on,”says professor Nick Butler, director ofthe King’s Policy Institute in London.“In the non OECD world, the key is-sue is subsidies. If prices to con-sumers started to reflect the worldmarket price — or even to be used, asin the UK, as a source of tax revenue— then the growth in demand inplaces such as India could be lowerthan predicted.”

AN UNUSUAL STEPIn an attempt to reduce oil

demand, the Indian governmentmoved last August to impose a

night curfew on service stations.The resulting controversy and

protests forced the governmentto do an abrupt about-turn.

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If Beijing decides to tighten its monetary policy, the country’s slowingeconomic growth could dip well below the current rate of 7.5 percent,triggering a decline in coal and oil prices

China/Two scenarios and their impact on demand for commodities

Hard or soft landing?

s evidence of eco-nomic decelerationin China mounts,many are askingwhether the recentdecline in Chinesegrowth portendsworse things tocome. Such concernsare grounded in thefear that financialleveraging and over-

investment have made the Chineseeconomy more vulnerable to a col-lapse of growth if Chinese policy-mak-ers decide to tighten monetary poli-

cy. Even if one assumes the more op-timistic scenario of a gradual delever-aging coupled with structural re-forms, China’s growth could still fallwell below its current rate of 7.5percent per annum. Such a develop-ment would have far-reaching glob-al consequences, in particular forcommodity prices. China has an in-satiable appetite for crude oil (it is theworld’s largest importer of crude), ironore (it consumed 60 percent of theworld’s seaborne iron ore last year),and many other key commodities. Inthe event of a hard landing in China,commodity prices could collapse,

leading to a glut of supplies and theend of the decade-long boom in en-ergy and metals. Should Beijing en-gineer a slow and soft landing, its de-mand for commodities would likelydecrease more gradually. Global com-modity prices would likely fall, but ina more orderly fashion.

INVESTMENT BINGEThe most critical factor in deter-mining which scenario occurs is Chi-nese leaders’ ability to reduce in-vestment without triggering a collapseof growth. Investment powers theChinese economic engine these days:gross capital formation – at 48 percentof GDP – is the highest for a majoreconomy. Growth of investmentpeaked in 2009, when year-on-year in-crease of investments in fixed assets hit30.1 percent. Since then, investmentgrowth has tapered off, averaging 22percent per year. While China’s in-vestment binge since 2008 has sup-ported growth and boosted com-modity prices, the country has paid ahuge price. Its financial leverage hasreached a dangerously high level.Between 2007 and 2012, China’sdebt-to-GDP ratio rose 55 percent-age points. Historically, such rapid in-crease in financial leverage typicallyended with a crash. For example,between 1991 and 1996, Thailand’sdebt-to-GDP ratio increased by 66percentage points. In 1997, the coun-try’s banking sector imploded underthe weight of bad loans. In the fiveyears before the American subprimecrisis (2002-2007), this ratio shot upby 46 percentage points.However, even though the slight re-duction in the availability of credit hascooled off growth, China’s debt-to-GDP ratio continues to rise becausethe total amount of credit releasedboth through the formal bankingsector and the shadow banking systemshows no signs of abating. In fact, be-tween 2011 and 2013, the average rateof growth of credit is 20 percent ofGDP per year. This number worriesChina-watchers for two reasons.First, it indicates that Chinese growthtoday is supported almost entirely bycredit growth and, since GDP growthis decelerating even though creditgrowth has remained unchanged inthe last three years, credit-fueled in-vestment is delivering less GDPgrowth. Such a trajectory is not sus-tainable. Second, persistent creditgrowth of such magnitude has furtherelevated China’s financial leverage. Bythe end of 2013, the country’s debt-to-GDP ratio is expected to hit 230percent, the highest among emerging-market economies. Sovereign andconsumer debt will be 25 and 20 per-cent of GDP, respectively. In theChinese context, these two types ofdebt are low-risk. But the rest of the

debt, roughly 195 percent of GDP, isowned by two groups of high-risk bor-rowers: local governments and cor-porations (including real estate de-velopers). In the last five years, thesetwo groups have borrowed the bulk ofthe newly created credit to invest inspeculative real estate, excess manu-facturing capacities, and unnecessaryinfrastructure.

TWO INTER-RELATEDCHALLENGESIn this environment of an overlever-aged financial sector and slowinggrowth, China’s economic prospectswill depend on whether its leaders canmanage two inter-related challenges:financial deleveraging and structuralreform.If they handle these chal-lenges effectively, China will likely ex-perience a soft landing in the comingthree years. This process will start withgradual deleveraging to slow invest-ment growth, followed by re-capital-ization of the banking system, and sup-ported by structural reforms that willboost household consumption.Admittedly, deleveraging, by tight-ening credit and forcing borrowers topay down their debt, will have an in-stant negative impact on investmentactivities. China’s GDP growth will,in response, weaken further. The realestate sector, which attracts annual in-vestment equivalent to 10 percent ofChina’s GDP, would be hardest hit.China’s real estate bubble has re-mained intact mainly because of thecontinuing availability of credit, whichenables real estate developers to buildnew projects and roll over their loans.Should Beijing start deleveraging,investment in the real estate sectorcould fall precipitously. A 50-per-cent decline in real estate investment(equal to 5 percent of GDP) alone

47

QUENCHED?

by MINXINPEI

A

THE AUTHOR. Mr. Pei is a professor ofgovernment atClaremont McKennaCollege in Californiaand a non-residentsenior fellow of the

German Marshall Fund of the UnitedStates. His research focuses ondemocratization in developingcountries, economic reform andgovernance in China, and U.S.–Chinarelations. He is the author of FromReform to Revolution: The Demise ofCommunism in China and the SovietUnion (Harvard University Press, 1994)and China’s Trapped Transition: TheLimits of Developmental Autocracy(Harvard University Press, 2006).

could dent GDP growth by at leasttwo percentage points.The macroeconomic impact ofdeleveraging will not be restricted tothe real estate sector. Local govern-ments, which rely on the real estatesector for half of their revenues, willfeel a painful fiscal squeeze. Industriessupplying the real estate sector, suchas steel, aluminum, and cement, willsee their sales shrink as well. When allthe growth-dampening effects areadded up, China would be lucky tomaintain 3-4 percent of GDP growth.

But financial deleveraging alone willnot ensure a soft-landing. China willneed to recapitalize its banking sector.The total amount of non-performingloans in the banking sector is estimatedto be between at least 10-20 percentof GDP (about $800 billion to $1.6trillion). Assuming lenders can recoverhalf of these loans (an optimistic es-timate), China will need $400-800 bil-lion in fresh capital for its banks. IfBeijing has a well-conceived bankrecapitalization plan that uses fiscal in-jection and large write-offs to clean up

the banking sector quickly, Chinacan avoid repeating Japan’s mistake ofallowing zombie banks to paralyze thefinancial system and prolong stagna-tion.The last piece of the puzzle in a softlanding scenario is finding new in-ternal sources of growth. China willneed to redirect resources to itshouseholds to boost consumption.Official data show that householdconsumption in China in 2012 was at36 percent of GDP (the world’s av-erage is 60 percent). Although annu-al real consumption growth in Chinain the last five years was 9 percent, animpressive figure, there is a lot moreroom for growth. The key to raisinghousehold consumption is increasingpersonal income, which the Chinesegovernment can accomplish with taxcuts and providing more social serv-ices. If, for example, Beijing coversmore school fees and healthcare costsfor ordinary Chinese people, personalincome and consumption will effec-tively be raised.

THE HARD LANDING SCENARIOPessimists would argue that a softlanding scenario is daydreaming.They believe that because of theChinese government’s policy of main-taining growth at all cost, a hardlanding involving a chaotic process ofinvoluntary deleveraging and col-lapse of growth, is far more likely. In a hard landing, Beijing is expectedto continue its policy of supportinggrowth with credit. Unfortunately, thispolicy would provide at most two tothree more years of artificially highgrowth (around 7-8 percent), but atpotentially calamitous costs. If we usethe average trend of the last three yearsas our baseline (loan growth equal to20 percent of GDP in return for 8 per-cent of growth), Chinese debt-to-GDP ratio will rise to 250 percent atthe end of 2014, 270 percent by2015, and 290 percent by 2016. Sincemuch of the credit will be wasted onunproductive investments (speculativereal estate, excess industrial capacity,and unneeded infrastructure), thepercentage of non-performing loansin the banking sector will likely bestaggering. Deleveraging from such astratospheric level of indebtedness willbe far more difficult and disruptive.Even though it is impossible to pre-dict what will trigger a crisis leadingto a hard landing scenario, the un-raveling would most likely start in thefinancial sector. Because Chinesehigh-risk borrowers use cross collat-eralization (they guarantee each oth-er’s loans), the default of a smallnumber of borrowers (most likelymedium-sized real estate developersor local government financing vehi-cles) could generate cascading ef-fects. The resulting panic in the fi-

nancial sector could lead to disorder-ly deleveraging. By the time such a cri-sis hit (probably in 2015), the magni-tude of the problem, namely the sizeof the bad loans, could overwhelm theChinese central government, whichmight be forced to adopt more dras-tic but ill-advised measures to restorestability to the financial sector.In a hard landing scenario, even if thegovernment manages to stave off a fi-nancial panic, lending will likely dryup. After such an episode, Beijingwould no longer be able to pourgood money into the investmentsinkhole. Banks would be reluctant tomake new loans. The overall invest-ment rate could collapse. Real estateinvestment might evaporate alto-gether (this alone could make GDPgrowth fall by 4-5 percentage points).A Chinese hard landing, based on in-ternational experience, could usher ina prolonged period of low growth.One reason is that, since such a sce-nario assumes a much higher debt-to-GDP ratio, deleveraging will takelonger, thus depressing growth foryears. Another reason is that a hardlanding causes enormous economiccollateral damage. Healthy firmscould fall victim to widespread pes-simism and anemic demand. Loss ofconfidence could trigger capital flight.The list goes on.

GLOBAL COMMODITY PRICESObviously, no matter which scenariooccurs, global commodity prices willlikely fall. However, the impact of asoft landing would be significantly lessdevastating. In the event of a soft land-ing, commodity prices would retreatgradually, with varying levels of declineacross sectors. Prices of iron core, cop-per and coal (used in heavy industries)would fall much more than oil (usedprimarily for transportation). Foodprices would be marginally affected.Most importantly, the decline ofcommodity prices would likely betemporary and the market wouldfind a bottom as China completed itsmanaged deleveraging process (prob-ably three years) and revived growth.On the other hand, a hard landingwould cause an instant collapse ofcommodity prices across the board. Inthis scenario, credit-supported Chi-nese growth would keep commodityprices artificially high for two tothree years. However, when the cri-sis finally hit, panic could cause pricesto fall through the floor as confidencein China’s ability to weather the cri-sis plummeted. Nobody would knowwhere the bottom is, since the Chineseeconomy would be struggling to findits own footing amid chaotic financialdeleveraging. A prolonged bear mar-ket could thus follow a hard landingof the Chinese economy.

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Chinomics

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Source: World Bank

CREDIT DRIVES GROWTH

The graph shows changes in GDP and real interest rates in China.Chinese growth is currently underpinned almost entirely by risingcredit.

0

2

4

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10Oil consumptionOil imports

mb/

d

1995 2000 2005 2008 2009 2010 2011 2012

Source: World Oil and Gas Review 2013

OIL DEMAND

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The two graphs show oil and gas consumption and import trends.China is one of the world’s hungriest consumers of energy. Between2011 and 2012, the country’s oil imports increased by 5.3 percentand its gas imports rose by 31.2 percent. Tighter Chinese monetarypolicy would accentuate the slowdown in the country’s growth, with repercussions on hydrocarbon demand and therefore on prices.

Source: World Oil and Gas Review 2013

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Subsidies for electric vehicles and measures to combat greenhouse gas emissions will not be enough to slake

China’s thirst for oil. For crude demand to tail off, cars that run on alternative fuels must be more accessibly priced

China/Renewables output is surpassing the E.U., U.S. and Japan by 2035

No end in sight for growth

in demand

hina is now a morevoracious consumerof oil than even theUnited States, sayfigures released inSeptember by theU.S. government’sEnergy InformationAdministration, for-malizing a historicpassing of the torch.Indeed, China now

imports an average of 6.3 million bar-rels of oil per day (bpd), outstrippingthe current U.S. rate of 6.2 millionbpd. The trend seems unlikely to stopthere. In 1996, Chinese crude demandwas 5 percent of the global total butlast year it reached 11 percent. YetChina’s arrival at the top of the oil im-port tables comes at a time when theentire sector is preoccupied with aquestion: How long will the world’sthirst for oil last? Have we alreadyreached an upper limit on demand?Will we become less dependent on“black gold” as time goes on?The question stems from research re-leased in April by Citi introducing anew concept: peak oil demand. Citi’stheory takes two figures as its prem-ise, hypothesizing that if vehicle ef-ficiency improves by 2.5 percent peryear going forward, crude oil demandcould peak at 92 million barrels perday – not far off current levels. Thetheory, however, has many detractors,especially among those who believeemerging countries are still clamor-ing for fossil fuels because of the in-creasing number of cars hitting theroads of new mega-cities such asBeijing and Shanghai. Indeed thesituation in China is perhaps themost interesting: the last couple ofdecades have seen an exponentialrise in the number of cars on the high-ways of China’s major cities.

ELECTRIC CAR SUBSIDIESWould an increase in electric-pow-ered cars or hybrid motors bring adrop in oil demand in China? Sever-al indicators from recent monthssuggest this is unlikely to happen. Thelatest round of state subsidies for elec-tric cars, dating back to September2013, offered ¥60,000 Yuan for buy-ing an electric car and ¥50,000 for abus. The aim of the program, its back-ers explained, is to “accelerate the de-velopment of vehicles fueled by ‘newenergy sources’, promote energy ef-ficiency and reduce atmospheric pol-lution.” Yet the new vehicles have notproved particularly popular in China.However, figures alone are notenough to explain this complex andcontinuously evolving phenomenon.The forecasts of big agencies andthink tanks “cannot take into ac-count those slow but importantchanges that happen beneath the

surface,” argues Fereidoon Sioshan-si, an analyst with Menlo Energy Eco-nomics, one of the first to set out itsstall on peak oil demand. “Agenciesuse past figures to extrapolate futurepredictions, but energy trends dependon numerous factors, including prices,government policies, standards andconsumer habits, which change as theyears go by, especially when facedwith problems like environmentalpollution, which is a big issue inChina,” Sioshansi said. A number ofconditions will have to be met if Citi’sprediction is to come true. “The

most fundamental factor is cost, thenthe existence of highly energy-effi-cient cars, and then the existence ofmass public transport,” Sioshansi ex-plained.Even though nearly 20 million elec-tric scooters (which are allowed in bi-cycle lanes in big cities like Beijing)are sold each year in China, the elec-tric car is still not seen as a conven-ient option. At least, not by those whocannot afford a second car, reckons LiShufu, chairman of Geely, the carmaker that bought Swedish brandVolvo in 2010, who is also skeptical

about the launch in Beijing of ashowroom by Tesla, the leading man-ufacturer of luxury electric cars. It canhardly be said then, that China isrushing to adopt the electric car.The prohibitive costs exclude themiddle class and sales figures seem tobear out Li Shufu’s claim: of the 18million vehicles registered last year,only 22,000 were electric cars. Thelack of charging stations for electriccars is another factor discouraging po-tential buyers, with only 168 in theentire country.

MEASURES TO COMBATPOLLUTING EMISSIONSThe Chinese government has longbeen committed to implementingenergy efficiency plans, but Beijing’sproblem is containing polluting emis-sions. And there is no convincing so-lution on the horizon. In June, theChinese government approved theNational Standard Five – its own ver-sion of Euro 5 – which will come intoforce in 2017. The new standard,which limits sulfur emissions to 10ppm per cubic meter, means that therefining sector will have to producecleaner fuels and car manufacturerswill have to build more efficient en-gines if the new standards are goingto be met. From 2015, cars produced

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Africa

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Europe, Japan and United States

China India, Latin America, ASEAN and Africa

Hydro WindSolar PV Other renewable

THE RENEWABLES BOOM Source: IEA

The graph shows increasing renewable electricity generation between2011 and 2035 across the world. China alone will record growth inexcess of Europe, Japan and the United States.

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in China must be able to travel100km on 6.9 liters of gasoline. Carsregistered after 2020 will have to beeven more efficient, covering thesame distance with only five liters offuel. However, the country’s de-pendence on coal is the main targetfor anti-emissions measures. “Crudeoil demand will be influenced bythe performance of the economy,” ex-plains Xiaolai Zhou, CEO of SZEnergy Intelligence, a Chinese con-sulting group. “China is also review-ing its energy consumption to reducethe use of coal because of the envi-

ronmental problems – a move thatwill result in an increase in con-sumption of natural gas and oil,” hesaid.International Energy Agency (IEA)forecasts, which predict that Beijingwill become increasingly dependenton crude imports, seem to confirmthis viewpoint, while also pointing to-wards massive development of re-newable resources. According to thelatest edition of the IEA’s World En-ergy Outlook, China is set to becomethe leading market for Middle East-ern crude and, by 2035, will produce

more renewable energy than the Eu-ropean Union, the United Statesand Japan put together. Yet the ap-petite for oil will not be diminished.Global oil demand is still destined toincrease and should break through the100 million bpd barrier by 2035.One of the problems facing Beijing iscontrolling retail prices of refinedproducts. In order to follow marketfluctuations more closely and avoidconsumer protests, in March theNational Development and ReformCommission (NDRC) modified themechanism for setting fuel prices, al-lowing the price to be changed every10 days instead of the 22 in use un-

til early 2013. The move has alreadyborne fruit, with lower pump pricesfor gasoline and diesel.

UNCONVENTIONAL SOURCESUnconventional energy sources suchas shale gas (China is the world’s lead-ing country in terms of reserves) orshale oil could dampen the country’sardor for imported crude. In De-cember 2013, the government held itsthird auction for the rights to tapfields of these resources, which are stillunderdeveloped given their potential.But while U.S. oil demand has beenfalling steadily since 2005 – as hasbeen claimed by The Economist, aBritish weekly newspaper – next yearChina could see oil consumptionrise 13 percent. China’s state energygiants are also turning their focus to-wards exploring other sources, such

as Brazilian offshore crude and Cana-dian tar sands, which have long beenin the crosshairs of the country’s oilcorporations. “I think China will cutits dependence on oil and move to-wards greater energy diversification,”Xiaolai Zhou went on. “Developinga variety of energy reserves is huge-ly dependent on China’s technolog-ical and economic growth. If Chinamakes progress on nuclear energy andshale gas, oil dependence could be re-duced over the coming decades,” headded. The future of the crude oil market, atleast in China, will also have to takeaccount of two other factors that will

affect prices in theshort term: the roles ofrefining and of gas. Ina speech to ColumbiaUniversity’s Center onGlobal Energy Police,Antoine Halff, head ofthe IEA’s Oil Industryand Markets division,explained both phe-nomena. Halff spokeof a “major transfor-mation” in the refiningsector, which is moving

away from smaller refineries and is in-stead developing a global reach, whilealso taking a far greater role in Chi-na. The increasing role of refining inthe oil industry has also been ac-companied by the Chinese authori-ties’ ongoing commitment to movetowards cleaner energy sources, likegas, in an attempt to relieve thecountry’s big cities of pollution, whichis increasingly seen as an emergency.This, says Antonie Halff, could “re-ally make a difference” to forecasts onthe future of the crude market. How-ever, he reckons it would be unlike-ly that gas would replace oil as a fuelsource. For China, peak oil demandis still some way off.

The Chinese government hasbeencommitted to implementingenergy efficiency, but Beijing’sproblem is containing pollutingemissions in order to limit theimpact on the population

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15

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2005 2010 2011 2015 2020

~24% p.a.

~8% p.a.

THE NO. 1 SINGLE-COUNTRY CAR MARKETSource: McKinsey GOG analysis; McKinsey Insights China; team analysis

China became the largest single-country market in 2010, and isexpected to maintain strong growth momentum. China will even exceed North America (16.8 mn) and Europe (19.9 mn) in 2020.

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Rest of the world China North America Europe

THE ENGINE OF GROWTH

Source: McKinsey GOG analysis; McKinsey Insights China; team analysis

New car sales in China are forecast to contribute about 35 percent of the world’s car-market growth between 2011 and 2020 (100% = about 33 million units).

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by DANIELATZORI

From ownership to sharing: The mobility revolution

watchSOCIETY

Daniel Atzori has been a SeniorResearcher at the Fondazione EniEnrico Mattei (FEEM) and he iscurrently Editorial TeamCoordinator of the magazinePapers of Dialogue. Atzori earnedhis PhD in Government andInternational Affairs from theUniversity of Durham (UK).

The increase of fuelefficiency and theadoption of

alternative energies seem to be contributing to a reduction in oilconsumption, known as“peak oil demand.” But wemay be witnessing abroader paradigm shift,which is, at the same time,social, cultural, economicand technological: itinvolves a move from carownership to car sharing,which is related to a widermove from the notion of ownership to that of sharing. This is havingremarkable consequenceson mobility as a whole,with a resulting impact onurban environments. Thecombined effect of thesetransformations could be,therefore, a decrease in the consumption of oil. Car culture, based on the ownership of agasoline-powered privateautomobile, stronglymarked the 20th century.

Countless movies, songs,books and ads celebratedthe four wheels as a meanstowards individual freedomand personalemancipation–and evenlove. But today this modelappears to be eroding inboth Europe and theUnited States. Thedevelopment of alternativeslike bike and car sharingare revolutionizing urbanmobility, in the processreducing car ownershipand lowering trafficcongestion and pollution.Both the economic crisisand the digital revolutionare playing a part in thistransformation.

Young people haveless money to spendon new cars, and carownership is viewedless and less as a riteof passage

The primary status symbolsamong young people today

are not hot rods or luxuryvehicles but up-to-datemobile devices. Not merelystatus symbols, theycontribute powerfully to theongoing mobility revolution.Carpooling, carsharing and ridesharing are not newconcepts, but a plethora ofnew smartphones apps makethem easier and far moreefficient than ever. Theconsulting firm Frost &Sullivan expects 15 million car sharing members in NorthAmerica by 2020, up from 1 million in Europe and NorthAmerica combined in 2011. Rental car companies, likeAvis, which recently boughtZipcar, are making the most of this transformation. And carmanufacturers have alsogotten into the game: Bmw’sDriveNow, Daimler’ Car2Go,Renault’s Twizy Way andVolkswagen’s Quicar are likelyto play an important role in thefuture of car sharing business. Emerging economies stillshow a marked increase in car use. But car sharing

is beginning to take hold inChina. The city of Hangzhou,which was already operating a bike sharing scheme,recently launched thecountry’s first commercial car sharing service.Some analysts point out thatthe revolution we arewitnessing is part of a globalshift, ignited by Internet, fromthe notion of ownership to that of sharing. Indeed,concepts such as sharingeconomy, access economyand collaborativeconsumption are growinglybeing discussed; they allseem to point to theovercoming of our currentmodel of development,towards a different one basedon sharing assets andresources. This ongoingmobility revolution overlapswith the way digitalization istransforming work patterns,for example, as videoconferencing has becomemore common andconvenient it has madebusiness travel lessnecessary. And of course, ourwork is less and less bound to the office. The very idea of workplace is changing, and the concept of workinghours may vary significantly,considering the remarkableamount of time we spendonline. In the future, the mostsignificant divide may not bebetween wake and sleep, norbetween working time andfree time, but between beingonline and offline.

The multifacetedinteraction between newtechnologies, such assmartphones, and newforms of mobility, isalready forging the urbanenvironments of the 21st

century

So-called “smart cities” areplaces where original ways

of working and interactingincrease productivity,efficiency and quality of life, as well as lowering carbonfootprint. There are countlesspioneering projects in thisregard. For example, a fewyears ago Cisco Systemslaunched in the Netherlandsthe concept of “smart workcenters,” flexible andinterconnected workstationsclose to residentialcommunities. Cloud datastorage allows these newwork environments to be fullyintegrated offices, allowingcompanies to reduce some of their costs without laying offworkers. Together withworking at home, the spreadof these smart workplacescould considerably reducelong commutes and,consequently, oilconsumption. Commuting is, indeed, not only a waste of time, money and energy,but also a major source ofstress, anger and frustration.A recent study by Dr BenjaminNewman, Assistant Professorat University of Connecticut,entitled The “Daily Grind”:Work, Commuting, and TheirImpact on PoliticalParticipation, even establishesa link between hours spent in transit and lack of civicengagement. Smarter workingenvironments could mean lessstress, more productivity andmore time to spend withfamily and to devote to fitnessand hobbies, but could alsopromote the development of a more active and consciouscitizenship – or netizenship. On a global level, these issuesare growingly being discussedin the public sphere. Thetransition from car culture to new forms of mobility ishappening because of theunleashing of new energies, of which the most important is human creativity. The shapeof things to come is far from clear: but original and visionary solutions couldcontribute to make our planeta better world. Or at least thisis the hope.

Among young people the real status symbols are the latest tablets and smartphones.

protective of nationalinterests–has long providednationwide incentives forelectric and hybrid cars.How? By giving out checksworth 6,300 euro to peoplewho buy an electric car, or 3,300 euro topurchasers of hybridvehicles, plus bonuses forconverting cars to liquefiedpetroleum gas (LPG). TheFrench government is alsobacking key policies inParis, including thosesupporting car sharingschemes featuring electricvehicles. These schemeshave been a target forinvestment by Bretonfinancier Vincent Bolloré,who just recently wentpublic with his owncompany in this space.Overall then, even Europe–despite umpteen rethinksand uncertainties, and withall the unknowns of theunsustainable andanomalous political andinstitutional governance of the Union–seems readyfor thoroughgoing changein terms of vehicle efficiencyand making electric carsmore popular. Europe–though we must take it witha pinch of salt, given theongoing tensions betweenthe E.U.’s member states–seems to be signing off thesame hymn sheet, as if itwere a single state like the U.S. or Canada. There will doubtless bemany more installments ofthis particular saga. Yet onething is certain: the globalauto industry will not turnback, nor harbor the illusionof once again hitting therecord sales of the pre-recession era, when fuelcosts were reasonable and pollution did not scarecitizens; instead it will facean increasing need forparadigmatic, technologicaland systemic change if it isgoing to survive and thrive.Such change will bring it to a road that macro-economists call a “newmodel of development” andthat micro-citizens simplycall a “better quality of life”–and that is something wecan all get behind.

There is no turning back for car manufacturers

watchECONOMY

by ANTONIOGALDO

53

Electric and/oradvanced hybrid cars–I refer to them as

“auto non sprecare” [“donot waste cars”]–are thefuture of the worldwideauto industry. There is nolonger any doubt on thispoint, either amongmanufacturers or amonggovernments forced toprop up an industry that is still in severe crisis andshedding jobs. Certainly,market shares–especiallyfor the electric car–are stillvery low and there is nolack of uncertainty over the revenues they maygenerate. And whilechange is the natural wayof things, this does notmake it any less of a threatto entrenched industries,particularly in its initialphase.

Positive signs abound,from Canada toCalifornia and Europe

The Canadian governmenthas just set aside $18.2billion–an enormous figureeven for a country withsolid public finances–todevelop a researchprogram on electric andhybrid cars. The programwill run for the next fiveyears, but the Canadiangovernment’s decisionshows that the tippingpoint has already arrivedand that governments,when they make industrialpolicy and back research,need not waste time inendless, fruitless debate.The research program willtake place at McMasterUniversity, Hamilton, incollaboration with Chryslerand the Natural Sciencesand Engineering Council of Canada, which willcontribute $9.25 millionand $8.9 million,respectively. These are

significant sums of money,which will go towardsblending research, industry,innovation, developmentand improving energyefficiency. A second bellwether iswhat has been going on at Tesla, the small market-listed Californian companyrun by Elon Musk. Tesla ison a magnificent–perhapseven miraculous–run,having quadrupled itsshare value, overtakingFiat-Chrysler and reachinghalf the value of the giantGeneral Motors (which is in poor health after havingbeen bailed out by the U.S.Government). A case of financial speculation

perhaps? Partly–but onlypartly–Tesla really is a newAmerican industrialphenomenon: in 2013 it sold nearly 25,000 high-end electric cars; its firstmodel, a luxury hatchback,costs $70,000 in theUnited States. You mightargue that that is the topend of the market andtherefore still a long wayfrom the mid- to low-endsegment, where theelectric car will have to takeroot if it is really going tobecome established. In anycase, the course has beenset. Governments inEurope (as in Canada) areissuing rafts of policies andfunding to develop electric

and hybrid technology, in an attempt to make it accessible for allconsumers.

The vexed issue of public funding to improve automobileefficiency

Interests that can bedifficult to manage in abalanced and sensitive waycome into play here.Returning momentarily to Europe, where onceagain the Germans and the French are setting the tone in this sector, the good signs for thefuture are multiplying at quite a striking rate.The German car industry isat the cutting edge in termsof technology, innovationand new products, asshown by the sales figuresof Germany’s car-makinggiants, with one in threecars sold in Europebelonging to theVolkswagen, BMW andMercedes groups. Now,given that Germany has setitself the target of reducingaverage vehicle emissionsto 95 grams per kilometerby 2022, it is obvious thatBerlin will exert pressure onthe European Commissionto support the developmentof more efficient cars andthe use of alternative fuels.In Brussels, the Germangovernment will find thispolicy is warmly received,even in the cumbersomedecision-making center that is the EuropeanCommission’s Directorate-General for Energy, whichfrom January 1, 2014, willbe in the hands of France’sDominique Ristori, whoserved as deputy director-general from 2006 to 2010.The French government–whose industrial policy is known to be extremely

Car sharing and bike sharing change city travel.

Antonio Galdo recently publishedL’egoismo è finito (Einaudi) andruns the websitewww.nonsprecare.it

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by GIUSEPPEACCONCIA

Internationalsanctions havecontroversialeffects on Iranianoil market

watchDIALOGUES

The interim agreementsigned in Geneva on November 24

between Iraniannegotiators and the fivemembers of the UnitedNations Security Councilplus Germany (P5+1) couldbring an end to a decadeof nuclear disputes withIran. Many experts say thedeal marks a “historic” steptowards a comprehensivesolution on the Iran’snuclear program dispute. The agreement providesfor three phases to berolled out over thesubsequent six months.Iran will be allowed toenrich uranium up to 5percent, while convertingexisting 20 percenturanium into oxide and notextending the heavy-waterreactor in Arak. Inexchange Iran wouldobtain a partial relief frominternational sanctions,worth $7 billion, includinglimits placed on the autoindustry and petrochemicalexports.

Oil exports haveremained in good health despite toughersanctions

The international sanctionshave been intensified in the last months, despitethe Geneva agreement.The United Statesauthorities strengthenedthe penalties on Iranadding new companies–including energy, shippingand manufacturingenterprises –to the Tehrannuclear programme’s black list. As many expertshighlighted, the measureshave brought controversialeffects on Iranian oilmarket. “The internationalsanctions did not hurt the

Iranian politicalestablishment. Hence, foryears, ultraconservativesclose to former presidentMahmoud Ahmadinejaddid not want an agreementwith the P5+1”, said RaminJahanbegloo, Iranianintellectual and Professorof ethics at TorontoUniversity.However, Iran’s fuel oilexports remain healthydespite tougher sanctions.According to ThompsonReuters, Iran exportednearly 18 million barrels of fuel oil in the first quarterof this year with anincrease of nearly 12.5 per cent from the previous

period in 2012. Iranianofficials and intermediariesin the Gulf have adoptedcreative strategies to avoidthe sanctions (for exampleworking on ship-to-shiptransfers, at remote ports,or blending Iranian oil withother fuels). Thus theIranian first-quarter totalexports of fuel oil rose 74 per cent from the sameperiod in 2012.

Iranian authoritiesreact to economicdecline and currencycrisis

On the other hand, theinternational measures

have halved exports of Iranian crude. Tehran’sauthorities appreared to beconcerned about theeffects of the newrestrictions on their abilityto sell oil. The fears wereexacerbated by a lawapproved in February in the U.S. According to thebill, importers of Iranian oil,despite of being exemptfrom the sanctions, canrisk further penaltiessending the money used to buy it to Iran. The decline in exports of Iranian crude has beenconfirmed by theInternational EnergyAgency (IEA), (an

organization groupingmostly Western oil-importing countries).According to IEA, crudeexports fell to a millionbarrels a day by the end of 2012. As aconsequence, Iran isundergoing a currencycrisis. In recent months,rent prices havedramatically affected thehousing market. Moreover,sanctions hit car prices.Those are amongst 77goods, considered “luxuryproducts”, whoseimportation has beenblocked to cope with theshortage of hard currencycreated by Westernbanking sanctions. “Especially middle andupper class Iranians wouldbenefit from a suspensionof sanctions, while thepoorest will continue to besupported by the publicwelfare system. Plus, thesecurity forces (Sepah-ePasdaran) have not beenaffected by the sanctionsand continue to smugglehigh-tech andpharmaceutical products”,concluded ProfessorRiccardo Redaelli of Università Cattolica in Milan. The international sanctionshave controversial effectson Iranian oil market. The economic decline has encouraged Iran’smoderate president,Hassan Rouhani, tosupport an interim deal onthe nuclear program withthe P5+1. It is still problematic towork out to what extentthe sanctions will bedropped, as aconsequence of theGeneva temporaryagreement. However, a suspension of thesemeasures could havepositive effects on Iranianexports driving down oilprices.

New York, September 26, 2013. The Iranian President Hassan Rouhani with theSecretary General of the United Nations Ban Ki-moon. The economic decline that Iran issuffering from has encouraged the moderate Rohani to support a temporary agreementon the nuclear program with the five countries of the UN Security Council, plusGermany.

Giuseppe Acconcia is a journalistand researcher focusing on Iranand the Middle East. Since 2005he has lived in Iran, Egypt andSyria. He works for news outlets in Italy (Il Manifesto, Il Riformista,Radio 2, RaiNews), the U.K. (The Independent) and Egypt (Al Ahram). He is the author of La Primavera egiziana(Infinito edizioni, 2012).

for a power such as Russia,which is apprehensive aboutthe knock-on effects of anychange in the status quo of the world’s energy sector.The fretfulness of the Kremlinover the United States shalegas boom is but oneexample of this.As it stands, the situationfacing Russia seems lesscritical than that of NorthAfrica and the Middle East.Even so, a slowdown inglobal crude oil demandcould have a significantimpact on the country’seconomy, hampering growthand fueling populardiscontent with the rulingoligarchy, already underpressure since early 2012. The contagion could spreadtoo with various degrees ofintensity to the region aroundthe Caspian Sea, where the effects of a decline in oilrevenues could destabilizeproducer countries such asAzerbaijan and Kazakhstan.That said, both thesecountries’ regimes do seemto be less vulnerable than the Middle Easternexporters; Baku’s decision to diversify its economycould turn out to be crucial in keeping the Aliyev dynastysafe from the dissatisfactionand protests of theAzerbaijani people. Lastly, there is the greatIranian question. Massivesubsidies, economicstagnation and internationalsanctions have graduallysapped the Ayatollahs’regime. Despite thegovernment-orderedrepression of 2009, the aftermath of the GreenMovement’s protests led to the defeat of the ultra-conservatives in last June’selections. The new Iranianpresident, Hassan Rohani,who is a moderate reformer,not only faces the task of restoring the country’sinternational role but will alsohave to review its social and economic systems if the state is to deal with the new challenges posed by the possibility of peak oil demand.

“Yesterday’sFuel” and threatsto the stability of producercountries

watchCENTERS

OF GRAVITY

by NICOLÒSARTORI

55

Falling oil demandpresents significantchallenges to

geopolitical order. In EnergyOutlook 2013, theInternational Energy Agencypredicted that globaldemand for crude oil willcontinue to rise, driven bythe appetites of emergingeconomies and producercountries, offsetting fallingdemand in industrializedcountries and especially in Europe.Meanwhile, an August 2013article in The Economistcalled oil “Yesterday’s Fuel.”Indeed, according to theU.K. weekly, global oildemand has entered a longbut inexorable decline,triggered by the rise ofnatural gas as a globalcommodity andtechnological progress in the automotive sector. Much of the focus of thisdebate has been oneconomic andenvironmental effects, but if the predictions of “peak oildemand” theorists areborne out, the geopoliticalrepercussions could besignificant. A contraction inoil demand would likely havea major impact on thepolitical and socio-economicfabric of exporter countries,thus aggravating currentglobal security and stabilityconcerns.

The rentier statemodel could be underthreat

If peak oil demand iscombined with increasedproduction ofunconventional oil and gas,plus the growingcontribution of renewablesto the world’s energy mixand the introduction ofambitious energy efficiencypolicies, the end result could

have an explosive impact on the stability of a numberof exporter countries.Indeed, this cocktail offactors could precipitate a reduction in their exportvolumes, which might leadto a drop in crude prices if supply remains static or even if it increases.Since most exportercountries depend on oilsector revenues for theirinternal stability, such ascenario could mean thatthe redistributive policiesand socio-economicbenefits that have for yearsinsulated these regimesagainst political challengeswill suddenly becomeunsustainable. The longevityof the rentier state modelcould, therefore, be inserious jeopardy.

Effects on “ArabSpring” countriescould be dramatic

The Arab uprisings have, in fact, already struck asignificant blow to the modelof authoritarian stabilityestablished by the regimesof producer (and non-producer) countries in NorthAfrica and the Middle East.The anarchic state of Libyaand the civil war in Syria are emblematic of the failureof the political and socio-economic model that tookroot thanks to oil revenues.The uprisings in Bahrain andKuwait, whose political andinstitutional stability seemedalmost a given until theevents of 2011,demonstrate that no part of the region can beconsidered immune.Now, many of thesecountries are going througha difficult transition. On theone hand, you havepersistent calls for fairerredistribution of revenues

and socio-economicbenefits. On the other, youhave increaseed domesticdemand for primary energyand electricity, due to highpopulation growth rates,resulting in a significant dipin export capacity, andtherefore a drastic decline in oil revenues. Such a pattern, as well as a slowdown in globaldemand, might not onlysweep away the region’smost fragile regimes, butalso spread to rentier statessuch as Saudi Arabia, whicheven as the Arab Springsreached their peak, seemed

– at least to outsiders – tobe made of sterner stuff.

Russia’s future isunclear, Caspian Seacountries could alsobe at risk of contagion

Russia, the world’s biggesthydrocarbon exporter, couldalso find itself facingincreasing difficulties. Oil andnatural gas account foraround half of fiscal revenuesin Russia’s budget and in recent years have beenthe main (if not only) stimulusfor economic growth. That is a real source of insecurity

Nicolò Sartori is a researcher in the Security and DefenseDepartment at the Istituto AffariInternazionali [Institute of ForeignAffairs] in Rome, with a specialfocus on the evolution oftechnologies characteristic of the energy industry.

London, Berkeley Square, an electric car at acharging station. Technological progress applied to theautomotive industry is one of the causes of the fallin demand for oil.

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BOOKSThe future of renewables

Title: The Energy Of Nations. Risk Blindness And The Road To RenaissanceAuthor: Jeremy LeggettPublisher: RoutledgeInfo: September 2013, 272 pagesPrice: $31.95

Energy JusticeTitle: Energy justice in a changingclimate: social equity and low-carbonenergy Authors: Karen Bickerstaff, Gordon Walker, Harriet BulkeleyPublisher: Zed BooksInfo: October 2013, 232 pagesPrice: $35.95

South American mining Title: Subterranean Struggles. New Dynamics of Mining, Oil and Gasin Latin AmericaAuthors: Anthony Bebbington, Jeffrey BuryPublisher: University of Texas PressInfo: November 2013, 361 pagesPrice: $55.70

The scarcity of oil supplies, climate chan-ge and the financial crisis pose a seriousthreat to the economies of tomorrow. World

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Bickerstaff, Walker and Bulkeley offernew perspectives on the interactions between climate change,energy policy, equity and social justice, developing a critical agen-da for those who carry out research in these fields. Energy justiceis one of the major question marks hanging over sustainability,as well as an important goal for in the clean energy sector.

Bebbington and Bury provide the first de-tailed analysis of mining policy in Latin America over the past fewdecades. Here, a broad range of industry experts carefully exa-mine the socio-political, environmental and political consequencesof the extraction of non-renewable resources in South Ameri-ca, including from the point of view of local populations, whichoften fall victim to strife and conflict.

Rajiv Chandrasekaran, one of theworld’s leading experts on Afghan-Pakistan issues, had it right when hesaid: “The Dispensable Nation by

Vali Nasr is an indispensable book.” This bril-liant essay on American foreign policy, writ-ten by the former right-hand man of the greatambassador Richard Holbrooke, specialadviser on Afghanistan and Pakistan from2009 to 2010, takes us into the secret worldof highly sensitive diplomacy and unveils howthe Obama administration has conducted itself across the area that extends from Kabul to Islamabad and Iran.Nasr, who lived and worked side by side withHolbrooke and Hillary Clinton, secretary ofstate during Obama’s first term, rounds uptheir collective frustrationwith a president and hisaides in the Pentagon andNational Security Agencywho focused solely on mili-tary operations at the ex-pense of the persuasiveforce of diplomacy. This, hesays, provoked frustration atFoggy Bottom.Obama had two heavy-weights of diplomacy andforeign policy at his dispos-al, but preferred to rely in-stead on the intelligenceand defense services. Andnow we understand the rea-sons for Obama’s exces-sive reliance on intelligence.It seemed to him to be eas-ier–as we have seen with theSnowden and Datagate rev-elations–to study the geopolitical map of theworld using the electronic spycraft of the Na-tional Security Agency, rather than throughdiplomacy. Hence the United States has seenits standing diminish, as the country hasshied away from an ambitious foreign poli-cy in southern Asia and the Middle East, andcontinued–in the same way as the preced-ing Republican administration under GeorgeW. Bush did–to spend billions of dollars go-ing down a road that has brought noprogress on democracy or development, butonly provoked discontent, if not disgust, withthe United States. According to Nasr, the Obama administra-tion, having won the White House, had achance to revive foreign policy, but the fearof a political backlash and the ever greater

and more dangerous specter of internationalterrorism convinced it to remain in step withthe Pentagon-Intelligence strategy pursuedby Bush. At the same time, Nasr explains,the United States’ true political and economiccompetitors–China and Russia–have man-aged to expand their political (and above alleconomic) influence in areas where theUnited States formerly held sway.Essentially, Nasr’s book makes plain all ofObama’s mistakes. He is seen as a “lameduck” in international politics and the mainprotagonist of “American foreign policy in re-treat”–as the book’s subtitle goes. Only therecent reprisal of dialogue with Iran has sig-naled a change in tack, but that is moredown to the good intentions of Iran’s new

President Hassan Rouhaniand U.S. Secretary of StateJohn Kerry than to Obama(despite the credit the WhiteHouse has claimed for theend of the cold war withIran). Born in Tehran in 1966, Nasrimmigrated to the UnitedStates as a child, alongsidehis father Hossein Nasr, anacademic, in flight from the1979 Revolution in Iran. Nasrspeaks Farsi and has con-ducted secret negotiationswith Iran; he knows Pakistan,Afghanistan, the Middle Eastand the Islamic Republic ofIran inside out. He is nowhead of one of the leading in-ternational think tanks onforeign policy and diploma-

cy, the Paul H. Nitze School of Advanced In-ternational Studies at Johns Hopkins Uni-versity, and is a Senior Fellow at the Brook-ings Institution.This book is a hymn to diplomacy: the onlyreal way to save American foreign policy indecline and once again make the U.S.–as inthe times of Truman–into an “indispensablenation.”

Title: The dispensable NationAuthor: Vali NasrPublisher: Doubleday; F First Edition editionInfo: 2013, 285 pagesPrice: $22.84

Carlo Rossella is a journalist and executive. He has been the head of La Stampa, Panorama, and TG1 and TG5 (the TV news programs). He is currently chairman of Medusa Film, the production company of Mediaset.

by CARLOROSSELLA

The dispensableNation

the reader

Ken Hickson exhorts the reader to “focuson renewables and energy efficiency to

curb the waste of resources.” The text is a real journey throughsustainability, articulated through stories and specific case stu-dies with a view to inspiring widespread involvement in meaningfulaction for a better future – in terms of energy, environment, ethicsand economics.

Title: Race For Sustainability: Energy,Economy, Environment And EthicsAuthor: Ken Hickson Publisher: World Scientific PublishingCompanyInfo: December 2013, 328 pagesPrice: : $48

The sustainability race

t may seem obviousthat it takes energy toproduce energy, butthe theme – thoughcritical – is often ig-nored in public de-bate. That may bebecause it sometimespoints out unpopulartruths.Since financial ana-lysts like cryptic ter-minology even more

than bureaucrats do, the “energycost of energy” even has its owncomplex acronym: “EROEI”. Theterm stands for “Energy Returned OnEnergy Invested” and is a kind of in-dex of economic efficiency.An index of, say, 5 would mean thatone unit of energy invested yields fiveunits for onward consumption. Wheninstead the EROEI is less than one,the cost of extracting the resource isgreater than its energy value. It’ssounds relatively straightfowward,but in fact the concept is more diffi-cult than it might first appear, sincethese values change over time, are af-fected by external factors like geog-raphy and even vary considerablyaccording to the particular axe beingground by the analyst making the cal-culation.The EROEI of early American oilproduction is commonly estimated tohave been around 100; that is, ittook roughly the energy equivalent ofone barrel of oil to extract a hundredbarrels.

Today oil is harder to get at and typical estimates of the efficiency of U.S.production place that value at around 20 to 1, a fifth of the historical measure

Worldwide oil production overall iscalculated to have an EROEI of 35.The exact values assigned mean lit-tle if they are calculated differently orrepresent different real-world situa-tions. Still, though the numbers pro-duced vary widely, the classificationsof resource efficiency they generateare strikingly similar.There is universal agreement that byfar the lowest “energy cost of ener-gy” is for hydroelectric power. Theresource is cheap, renewable (it de-pends on water falling from the sky)and has no carbon footprint to speak

of. Its EROEI ranges as high as 100.The picture is murkier at the bottomof the list, where several inefficienttechnologies fight for last place. Thetwo worst are commonly consideredto be biodiesel and corn (maize)ethanol – with the second oftentipped as the least efficient, costing asmuch energy to produce as it is thencapable of generating.If the best that can be said about cornethanol as a fuel is that it is barelyworth the trouble, why does anyonebother?The answer is of course politics: in theUnited States – the only place whereit is produced in volume – the agri-cultural lobby (which favors strong ce-real prices) found a common groundwith other forces seeking a “renew-able” way to break the country’s de-pendence on imported oil.A different dynamic influences pro-duction of hydroelectric power. Thisresource – clean, renewable andcheap – ought to be fashionable. Insome countries its use is actually de-clining. In the United States moredams are being dismantled than builtand the most important Americanplants are very old, dating from the1930s (Hoover Dam) and the 1940s(Grand Coulee).One objection to the construction ofhydroelectric capacity is that newreservoirs occupy land that must besubtracted from other uses. Thishowever hardly applies to the exist-ing installations being taken out ofservice.Perhaps the most important obstacle

arises from the way in which theseprojects must be financed. Thoughhighly efficient in use, they are veryexpensive to build. Capital costs areso great that larger installations typ-ically must be financed by govern-ments, meaning that the decision tobuild becomes primarily political –and politics may be conditioned byfactors that are only distantly relatedto energy efficiency.The middle ground of the EROEI hitparade is solidly occupied by hydro-carbon resources like oil and naturalgas. These familiar resources are stillan order of magnitude more efficientthan many proposed alternative tech-nologies.An exception is wind power, which,with an EROEI of around 20, beginsto approach the efficiency of hydro-carbons – part of the reason for thestrong expansion of the technology inrecent years.A less obvious surprise is the highEROEI of petroleum resources aftera century of intensive exploitation. Itwas once said of the Oklahoma“Teapot Dome” oil field that it wasenough to drive a pick into theground and crude oil would comebubbling up – a wild, if telling, ex-aggeration. Still, the depth of pro-ducing wells in those days was meas-ured in the hundreds of feet.A well recently drilled at Exxon’s“Sakhalin-1” site in Siberia reaches adepth of 7.7 miles vertically and ex-tends 7.1 miles horizontally out un-der the Arctic Ocean. Winter tem-peratures regularly fall below -35° F.

(-37° C.), making the working envi-ronment “complicated” to say theleast.The extended-reach drilling em-ployed at Sakhallin-1 sends the boreboth down and outward. To controlits direction, sensors in the drill traincollect data that is sent back to the sur-face with pressure pulses in thedrilling fluid. The bore route is pre-mapped using 3D seismic imagery tomodel rock conditions and to locatethe oil deposit. So much for puttingthe head of a pick into the ground!

The surprising energyefficiency of petroleumextraction over time has beenmaintained, even in the face of difficult drilling conditions,by dramatic and continuingadvances in the technologiesemployed

A final point arising from a glance atthe EROEI rankings is that the high-est value – hydroelectric power – is fora fully mature technology capable oftransforming 90 percent of the po-tential energy of the water behind adam into electricity – a stupendous ac-complishment that leaves room foronly minor, incremental improve-ments.Even atomic power – well up in theranking – is, once you get beyond thequantum physics at least, a well-un-derstood technology, if lumbered bythe unresolved problem of what to dowith nuclear waste.The greatest room for efficiencygains lies instead lower on the scale,beginning with the hydrocarbonsand ranging – perhaps – all the waydown to corn ethanol, which has noplace to go but up.

by JAMESHANSEN

IWhen the game is worth the candleHydroelectric power tops the list, while the greatest margin forimprovement lies at the bottom end of the index with the less efficienttechnologies – from hydrocarbons all the way down to corn ethanol

The surprising truths about Energy Returned On Energy Invested (EROEI)

HYDROCOAL

WORLD OIL PRODUCTIONOIL IMPORTS 1990OIL AND GAS 1970

OIL PRODUCTIONWIND

OIL IMPORTS 2005OIL AND GAS 2005OIL IMPORTS 2007

NUCLEARNATURAL GAS 2005

OIL DISCOVERIESPHOTOVOLTAIC

SHALE OILETHANOL SUGARCANE

BITUMEN TAR SANDSSOLAR FLAT PLATESOLAR COLLECTOR

ETHANOL CORNBIODIESEL

0 20 40 60 80 100

Source: Murphy & Hall (2010) Ann NY Acad Sci 1185:102-118

THE U.S. EROEI INDEX

Hydrocarbons fall in the middle of the EROEI league table.Hydroelectric power and coal offer a better return on investment.

DATADATADATATADATADATADA

57

James Hansen provides financial reportingand international relations consulting to major Italian companies. He came to Italy as the U.S. Vice-Consul in charge of economic affairs at the U.S. ConsulateGeneral in Naples. He became acorrespondent for various leading foreignpress organizations, including the International Herald Tribune. Then he was appointed spokesman for Carlo De Benedetti, SilvioBerlusconiand, finally, head of the press office of Telecom Italy.

58

The apparent stability of oilMARKET TRENDS

Oil demand

DATADATADATATADATADATADA

Oil prices continue to be driven by conflicting forces as we headtowards the end of 2013. Geopolitical events are fueling pricerises, while persistent uncertainties about the evolution of the

global economy are pulling them down. The net result is that prices will end the year as they started it, at around $110/barrel.The markets are keeping a close eye on economic indicators and in particular on signs of improvement in the United States and China(the world’s two biggest oil consumers) as well as the recent recoveryof demand in Europe, which is just now emerging from the recession. Prices are being kept high by the various crises within OPEC (andespecially in Iran, Libya and Iraq) that are eroding market availability.Meanwhile, the boom in North American production remains confinedto the domestic market because of the ban on exporting U.S. crude.In November, a fresh round of negotiations between Iran and theUnited Nations resulted in an agreement which allows temporary (six months) relief from sanctions, in exchange for promises from the country about scaling back its nuclear program. Therefore, Tehranis set to receive $4.2 billion in oil sales in the coming months, eventhough a full recovery in production seems unlikely in the short term.Supply also remains tight because of Libya, where since the summer

The third quarter of 2013 saw year-on-year global oil demandgrowth of 1.4 mb/d (against Q3 2012), reaching 91.8 mb/d – an increase on Q2 2013 year-on-year figures (+1.2 mb/d).

Organization for Economic Co-operation and Development (OECD)countries did surprisingly well, halting the trend of structural declinethanks to positive contributions from Europe and America.For the first time since late 2010, Europe recorded rising consumption(+0.2 mb/d against Q3 2012), having emerged from the recession in the second quarter of this year. The OECD Americas area also saw a rise in consumption (+0.1 mb/d) due to better than expectedeconomic growth, as the Bureau of Economic Analysis revised U.S.GDP growth in Q3 2013 from 2.8 percent to 3.6 percent. In particular,gasoline demand in the U.S. benefited from lower pump prices, whileconsumption of naphtha and liquefied petroleum gas (LPG) werebuoyed by the good performance of the petrochemicals sector, in turnfacilitated by the tight oil/shale gas boom.Only the OECD Asia area saw a decline in consumption (-0.2 mb/dagainst Q3 2012), due to a sharp decline in the use of crude and fueloil, which have been replaced in Japanese heating and electricitygeneration by coal – a cheaper source. Non-OECD oil demandcontinues to drive global demand, albeit less markedly than last year(1.3 mb/d in Q3 2013 against 1.6 mb/d in Q3 2012) because of moremoderate economic growth. In China, oil consumption – on the wanesince late 2012 – reflects the deterioration of the general economicbackdrop. In terms of oil products, though, there were conflictingtrends: fuel oil consumption was down, while naphtha and gasolineconsumption rose. The weak performance of fuel oil in China is tied to its replacement with gas across all sectors, including publictransport and haulage. On the other hand, the strength of naphthareflects good performance in the petrochemicals sector, while thegrowth in car registrations in the first 10 months of 2013 (+15 percentcompared to 2012) is boosting gasoline consumption.

num

ber

twen

ty-f

our

Price volatility has been low, but serious doubts remain over how fundamentals will develop

Annual consumption

Quarterly consumption

Mill

ion

barre

ls/d

ay

2005

2006

2007

2008

2009

2010

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

74.5 74.876.5 77.2 77.9

80.3

83.384.7

85.687.0

88.489.0

86.3

78.7

2012

2011

1Q 2

013

2Q 2

013

3Q 2

01370

80

90

85.5

72.470.5

90.190.6 91.8

90.8

90.0

by ENI’S PLANNING AND CONTROL DEPARTMENTScenarios, Long Term Strategic Options and Economic Evaluations

GLOBAL CONSUMPTION

FSU + non OECD Europe

China/India

OECD Europe OECDAsia/OceaniaOther Asia

Latin America AfricaMiddle East

OECD Americas

World

Mill

ion

barre

ls/d

ay

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

1995

19

96

1997

19

98

1999

20

00

2001

20

02

2003

20

04

2005

20

06

2007

20

08

2009

20

10

2011

20

12

1Q20

13

2Q20

13

3Q20

13

1.5

1.9

2.1

0.3

1.71.6

1.41.4

3.0 2.9

0.7 0.7 0.80.9

0.6

1.0 1.01.2

1.4

-0.7 -0.8

Source: Eni’s processing of International Energy Agency data; change vs the same period of the previous year

VARIATION IN GLOBAL CONSUMPTION BY AREA

exports have been constantly interrupted by strikes, protests andsieges, despite the recent reopening of several terminals. Furthermore,there have been recurrent export interruptions in Iraq, both in the northand in the south – the area of the country with the greatest potential.Given these production issues, OPEC’s main concern is still pricestability. In the meeting held in Vienna in early December, the carteldecided to keep the production ceiling unchanged at 30 million barrelsper day (mb/d). OPEC is aware that the expected rise in demand in 2014 will be more than satisfied by growing non-OPEC supply. Iranand Libya have declared that they will rejoin the market in the first halfof 2014, although these dates seem optimistic and will in any caserequire Saudi Arabia to put a hold on production. The productiondifficulties in the Middle East are having a strong impact especially on supply of sour crude, resulting in rising prices.On the American market, meanwhile, the tight oil boom continues to affect domestic crude prices. Louisiana Light Sweet (LLS), the GulfCoast benchmark, is following in the tracks of West Texas Intermediate(WTI), beating Brent prices and becoming increasingly disconnectedfrom international markets.

Oil prices

FSU Supply

Non OPEC (not including FSU) World

OPEC

-3,5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

1995

19

96

1997

19

98

1999

20

00

2001

20

02

2003

20

04

2005

20

06

2007

20

08

2009

20

10

2011

20

12

1Q20

13

2Q20

13

3Q20

13

1.51.9

2.5 2.62.9

3.2

1.0

-1.3

0.2-0.2

1.3 0.8

0.2

1.1 1.1

1.7

1.3

2.3

-0.3

0.6

-1.1

Mill

ion

barre

ls/d

ay

VARIATION IN GLOBAL SUPPLY BY AREA

DATADATADATADATADATADATADATA

59

Oil supply

Global oil supply in the third quarter of 2013 increased by more than 1 mb/d compared to the same period last year, nearly reaching 92mb/d. Again, non-OPEC countries were responsible for the increase,

while OPEC output continued to shrink. Non-OPEC growth hit levels not seensince the early 2000s, thanks to a further acceleration in U.S. tight oilproduction, which rose by 1.2 mb/d compared to the same quarter of 2012. In November, U.S. crude output came close to the record level of 8 mb/d – the highest since the late 1980s.Other non-OPEC areas seeing increases were the former U.S.S.R. area (+0.2mb/d), both in Russia and in other countries. OPEC output has fallen back for the third quarter in a row (-0.8 mb/d), as the production difficulties afflictingsome members of the cartel continue. After the unrest of the summer, Libya is still in crisis and in November production fell to 220,000 barrels per day(compared with a pre-crisis level of 1.6 mb/d) and exports slowed to just130,000 barrels per day. In Nigeria, sabotage, maintenance operations and declarations of force majeure are keeping production below 2 mb/d.Iraq’s exports have suffered further problems during the quarter. Aside fromcontinued sabotage in the north of the country (Kirkuk-Ceyhan), November sawthe emergence of logistical problems in the southern terminal in Basrah. Makingthe situation even more complicated, there are rumors that Basrah – Iraq’s mostproductive region – may follow in the footsteps of Kurdistan and make a bid for autonomy. The Iranian question remains in the eye of the storm. Theembargo in place since 2012 has eroded around 1 mb/d away from the marketover the last two years, meaning production has fallen to its lowest level in 25years (2.6 mb/d in Q3). Despite expectations over the agreement reached in late November between the country and the P5+1 (the five permanentmembers of the UN Security Council, plus Germany), it remains unlikely that thecountry’s market will be fully restored any time soon. For one thing, productioncapacity has already been seriously compromised by delays in major upstreamprojects. Even so, remarks by the Iranian oil minister on the sidelines of OPEC’slatest meeting struck an optimistic note: “Once the sanctions have been lifted,”he said, “we will reach 4 mb/d even if the price of oil falls to $20 per barrel.”

Monthly dataAnnual data

dollars/barrel

111.

3

111.

7

1.3

10.4

36.0

27.5

14.4

18.4

14.9

18.3

23.7

20.0

19.3

17.0

15.8

17.0

20.6

19.1

12.8

17.8

28.5

24.5

25.0

28.9

38.2

54.4

65.1

72.5

96.8

61.5

79.5

108.4

0

20

40

60

80

100

120

140

1970

1975

1980

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Source: IEA, spot price of Arabian Light (1970-1985); IEA, spot price of Brent (1986-1987); Platt’s, spot price of Brent Dated (from 1988)

BRENT PRICE

Annual supply

Quarterly supply

Mill

ion

barre

ls/d

ay

2005

2006

2007

2008

2009

2010

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

75.076.0

74.8

77.3 77.5

80.3

83.584.8 85.5 85.7

87.488.7

86.8

77.4

2012

2011

1Q 2

013

2Q 2

013

3Q 2

01370

80

90

85.7

72.570.7

90.691.4 91.9

91.3

90.9

GLOBAL SUPPLY

Source: Eni’s processing of International Energy Agency data; change vs the same period of the previous year

December 2013

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