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Energy: Balancing Demand and Supply

Global Economic Prospects 2009: Commodities at the Crossroads

Oil barrels and cars

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Demand for energy depends critically on the pace at which energy efficiency continues to improve, especially in the transport sector. Over the next 20 years, the supply of extracted commodities — both oil and metals — is likely to remain ample. 

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If there was no improvement at all in energy efficiency, demand would rise by more than 120 percent by 2030, with developing countries accounting for most of that increase. However, energy efficiency has improved a great deal over the past 50 years — take, for example, vastly improved jet travel or automobile fuel efficiency — so there is cause for hope that this trend will continue.

In fact, technological change between 1970 and 2004 lowered energy demand by 50 percent from what it would have been otherwise. And fuel efficiency may double over the next few decades with promising new technologies.

If energy efficiency improves at about the same rate as it has done in the past, total demand for energy is likely to rise by about 55 percent by 2030, with 80 percent of the increase being generated by developing countries. That said, the rate of growth of energy demand is expected to ease with time, due to weaker population expansion and improved technologies, possibly decreasing from an average of 1.8 percent in the past 15 years to about 1.3 percent between 2015 and 2030. Slowing global growth and an anticipated decline in China’s use of metals per unit of GDP should also see the growth in demand for metals slow over the next 25 years.

On the supply side, there is little likelihood of running out of oil, metals or minerals any time in the foreseeable future, though these resources are ultimately exhaustible. In part, this is because new reserves continue to be found at about the same pace as old ones are consumed. Moreover, should supplies become scarce, market forces will reallocate demand to prevent resource exhaustion. Long before the world runs out of these products, prices will increase to the point where demand declines, and investment, production and consumption of alternatives (including renewable energy sources) takes up the slack.

Since the 1970s when worries of exhausting natural resources first surfaced, technological change has kept the cost of extraction in check, even as the quality of mines and wells has declined, allowing supply to keep pace with demand. For example, improved technology allowed offshore fields to be drilled profitably, with the result that nearly all of the increase in global oil production since 1978 has come from these fields — despite their higher exploitation costs.

Improvements in the way the final product is extracted from ore beds or wells have also helped maintain surprisingly stable ratios of reserves to output. Reserves of most extractive commodities have increased over time despite rising production. How the actual balancing of demand and supply in oil and metals finally plays out depends largely on policy choices and on further technological progress.
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Alternative Fuels for Cars

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Future efficiency gains in car technology will be critical in determining future demand for oil. Much of the increased demand for oil over the next 20 years is likely to be for private cars and trucks, mostly generated in developing countries.
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Green Car

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Hydrogen and electricity are emerging fuels for the transport sector, and flex-fuel cars as well as cars fully powered by ethanol are already commercially successful in Brazil and their use is expanding in the U.S. and Europe. Hybrid cars can increase fuel efficiency for city driving by 100 percent, while plug-in hybrids can reduce gas dependence even more. Hydrogen-fuel-cell and all-electric cars could eliminate that dependence completely, but to be competitive, battery technology needs to improve, as does the production and conversion of hydrogen into electricity.

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Policy choices

Simulations show that a more aggressive position on carbon emissions could moderate energy demand and fossil-fuel use further. For example, a $21 tax per ton of carbon dioxide could be expected to reduce demand for energy by 33 percent. Demand for coal would decline under such a scenario, giving way to more demand for natural gas and other low-carbon energies.

Rising concerns about the environmental consequences of economic activity, including those associated with climate change, may alter the regulatory environment in important ways. For example, policies could restrict the use of hydrocarbons, and of extraction and production techniques in other primary sectors. Policy needs to also support the creation and spread of new technologies such as durable and efficient solar cells in developing countries.
 

State-owned firms and output efficiency

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The rising share of oil reserves and global production controlled by state-owned firms is prompting concern about future supply. Concerns include:

  • cartel-like behavior
  • the efficiency and responsiveness of state-owned firms to economic incentives
  • the denial of access to multinational firms, which have historically been more efficient.
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Refinery

Performance of state-owned firms has been varied across the world. In Venezuela, oil production has declined 19 percent since 2000, while it is stagnant and now declining in Mexico. However, Brazil’s state-owned Petrobas has increased production by 45 percent. The firm has been encouraged to reinvest profits and hire foreign experts as needed.

To make state-owned firms more productive, policymakers should not burden these firms with high tax rates or policy mandates that limit the extent of their investment in new technologies and infrastructure.
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