For oil in particular, the IEA sees today's growth in North American production masking the consequences of the ongoing turmoil in the Middle East. In Iraq and other countries in the region, uncertainty is delaying investments that should be made now, if future supplies are to meet demand growth after US "tight oil" and other non-OPEC expansion has plateaued. And that point could come sooner than expected if drillers reduce US shale investments by 10% next year, as IEA anticipates, or if the significant governance problems of Brazil's oil sector, which were only hinted at, are not resolved soon.
The launch covered several other areas, as well, none of which escaped identified stresses of their own. Start with natural gas. IEA sees gas on its way eventually to become the "first fuel", consistent with the view of their "Golden Age of Gas" scenario of 2011. This will be driven in part by a large increase in LNG production from new sources such as East Africa, Russia and North America, along with growth from traditional LNG suppliers in North Africa and Australia. IEA expects increased competition from LNG with pipeline gas to improve energy security, especially in Europe, but not necessarily gas prices for end users. In fact, the high relative cost of LNG could impede the displacement of coal by gas in Asia.
The presentation also highlighted the significant challenges IEA expects in the electricity sector in the period to 2040, for which this year's WEO provides the first glimpse. A net expansion of global power generation by around 75% is more challenging than even that figure suggests, because it must accommodate the replacement of more than a third of today's generating capacity. As a result, only oil-fired generation will experience a net decline. IEA forecasts up to half of new capacity through 2040 coming from renewables, on a scale posing significant risks for power system reliability, especially in Europe.
Nuclear power, a major source of baseload low-carbon electricity, is an area of special focus in this year's report, along with Africa. The expected growth of nuclear energy over the next several decades occurs mainly in the developing world, while 38% of today's nuclear capacity--nearly 200 reactors--will be retired by 2040. Many of those retirements will occur in Europe, and the Chief Economist of the IEA, Fatih Birol, expressed concern about the policies and budgets supporting this decommissioning on an unprecedented scale.
By 2040 the balance of nuclear power capacity would have shifted from around 80% in OECD countries and 20% in today's developing countries, to roughly 50/50. While the report also draws attention to the growing policy problem of nuclear waste disposal, it identifies nuclear as "one of a limited number of options available at scale to reduce CO2 emissions."
The largest source of stress in the report appears to be the disconnect between the narrowing window for reducing greenhouse gas emissions to a level that climate models indicate would limit global warming to 2°C, and the higher emissions inherent in the IEA's central "New Policies" scenario. Meeting the 2° target would require increasing average annual investments in low-carbon energy, including energy efficiency, by a factor of four compared to 2013. At this week's G20 summit in Australia we heard that "red warning lights are once again flashing on the dashboard of the global economy." Could even the IEA's middle view of energy investments proceed if much of the world moved back into recession?
The presentation wasn't all gloomy, of course. Dr. Birol pointed out the competitive advantage that low energy costs confer on the US, and both he and IEA Executive Director Maria van der Hoevan saw the recent China/US emissions deal as a very positive development. (My own analysis concludes it would still allow China's emissions to grow dramatically before peaking.) They also conceded that lower oil prices would provide oil-importing countries with some timely "breathing space." And for the first time I heard that three out of four cars sold in the world are now covered by fuel economy regulations.
It also struck me that some of the negatives in the presentation might tend to cancel each other out. If the global oil industry, especially in the Middle East, fails to invest sufficiently in the next few years to ensure that supplies continue to grow in the 2020s, then the resulting higher oil prices should accelerate the transition to natural gas and renewables, while providing greater incentives for energy efficiency. That combination could reduce emissions sooner than IEA's main forecast indicates.
Last year's World Energy Outlook failed to anticipate the drop in oil prices; how many others likewise missed it? It featured some of the same big themes repeated this year, including the ongoing shift of the energy world's center of gravity to Asia and the scale of the global emissions challenge. On a more basic level, however, a comparison of the two documents suggests that the agency is still trying to understand the transformation of global energy markets by the parallel shale and renewable energy revolutions. They aren't alone in that, either.