by Irina Mironova
Global energy is constantly changing. Demand is driven by economic development, demographic growth as well as efficiency of energy use. Supply, in its turn, is affected by the development of technology, which drives down costs and makes new groups of sources available and economically viable. As a result, we witness changes in global energy production, consumption, and trade. A way to understand this change in global energy is by building forecasts. The Energy Outlook therefore is a tool for decision-making.
Each year, multiple energy outlooks are published; most often, they are geared towards the long-term (20-25 years). The following is a list of the most prominent:
- The International Energy Agency (IEA)
- The Organization of the Petroleum Exporting Countries (OPEC)
- The U.S. Energy Information Administration (U.S. EIA)
- The Energy Research Institute of the Russian Academy of Sciences (ERIRAS)
- The World Energy Council (WEC)
- International energy companies (e.g., BP, ExxonMobil, Shell, ENI, Statoil)
The outlooks are normally built on the organisation’s specific model assumptions as well as historical databases. Each outlook contains quantitative projections of energy consumption, supply, and carbon emissions, as well as qualitative descriptions of technology development.
The text below takes a closer look at the World Energy Outlook (WEO) by the IEA. The main task of this text is to provide a guide for the IEA’s WEO and associated publications and to answer some questions, which arose throughout the ENERPO seminars.
The roots of the World Energy Outlook prepared by the IEA
The International Energy Agency was created in 1974 in response to the oil crisis of 1973; it is an autonomous intergovernmental organisation within the OECD. The IEA acts as an energy policy advisor. The objectives are rooted in the notion of security of supply and include the creation of systems for coping with oil supply disruptions, promotion of rational energy policies, operating information system on the international oil market, improvement of supply and demand structure, and the integration of energy and environmental policies.
The first World Energy Outlook by the IEA was published in 1993 (the 1994 WEO is the second and the earliest document available at the IEA website) and clearly follows these objectives. The World Energy Outlook started as a three-year project in 1993-1996, focusing on analysis of regions as well as sectors of energy use. A new start was given in 1998 with Fatih Birol leading the project. He has remained in charge since and became IEA’s Executive Director in September 2015. Since 1998, the WEO has developed to incorporate a wider set of issues into the analysis, as well as study the prospects of the energy system.
Issues and trends
Past thematic chapters, insights and special reports have focused on the following issues, although this list is not exhaustive:
- Sub-Saharan Africa (2008); Africa energy outlook (2014)
- Middle East and North Africa insights (2005)
- Chapters on China and India (2007); Southeast Asia energy outlook (2013)
- Energy subsidies and getting the prices right (1999); Fossil fuel subsidies (2010)
- Biofuels and their potential impact for the transport sector (2006)
- The role of gas in the fuel mix (‘the Golden Age of Gas?’ – 2011, ‘Golden rules’ – 2012)
- Are conditions right for a nuclear revival? (2006); Nuclear power – retreat, revival, or renaissance? (2014)
- Energy poverty (2010)
- Redrawing the energy-climate map (2013)
- Investment (2003); World energy investment outlook (2014).
The following special topics were studied and published in 2015 either within the WEO-2015 or in parallel:
- Special Report on Energy and Climate Change
- Special Briefing for COP21
- Southeast Asia Energy Outlook 2015
- India Energy Outlook 2015
Many questions are analysed within the Outlook. These range from the perspectives of low oil price, competitiveness of renewables and energy efficiency and associated policies, to the potential for unconventional gas development in North America and beyond.
WEO uses a scenario approach – whereby it switches from simply showing the ‘Business as usual’ to incorporating policies and looking at the possible impact that these policies have on the development of energy systems, the economy and the environment. In 2005, the World Alternative Policy Scenario and the Deferred Investment Scenario were introduced. The Alternative Policy scenario was a milestone, because it demonstrated that policies have a significant impact. Subsequently, the 2006 issue stated that “the Reference Scenario trends are not set in stone”. The Alternative Policy Scenario of that year analysed how the global energy market could evolve, if countries adopted all of the energy security and CO2 emissions policies that were under consideration.
The 2009 edition introduced the 450 Scenario, which shows what changes need to take place in order for the global energy system to meet climate mitigation objectives. The IEA defines this as, “To avoid the most severe weather and sea-level rise and limit the temperature increase to about 2 degrees Celsius, the greenhouse-gas concentration needs to be stabilised at around 450 ppm CO2-equivalent but the year 2100.” The 450 Scenario assesses the implications for the energy sector in achieving this level.
The latest 2015 issue includes projections for the three core scenarios, which are differentiated primarily by their underlying assumptions about the evolution of energy-related government policies. These three core scenarios include the Current Policies Scenario (only those policies which have already been put into implementation), the New Policies Scenario (this scenario accounts for other relevant intentions that have been announced, even when the precise implementing measures have yet to be fully defined), the 450 Scenario outlined above. For a description of specific measures within each of the scenarios, see WEO 2015 pp. 662-672. The basis of these scenarios remain consistent year-to-year and account for factual new developments that either were introduced into implementation phase, or were announced since the time of publishing of the previous Outlook. The special scenario studied within WEO-2015 is the Low Oil Price Scenario, which ultimately concluded, that “The strains that the low price outcome would put on the fiscal balances of key producers make a Low Oil Price Scenario look increasingly unlikely the further it is extended out into the future”.
What about the oil price projections? Are they right or wrong?
To answer this question, I will simply quote the Outlooks of couple of decades back. In 1994, the Executive Director of the International Energy Agency Helga Steeg wrote in the preface to the World Energy Outlook: “It is important that possible future energy developments, and their environmental consequences, be taken into account to the greatest extent possible in the process of formulating energy policy and making investment decisions”. In 1995, Robert Priddle wrote: “It is the issues which arise that matter more than the specific numbers”.
I leave it up to the reader to decide whether these are just excuses to explain why the oil price (or any other number in the outlook) was guessed wrong.
What the WEO (and any other outlook) discusses is not the actual predictions of the factual price developments, but rather the balance prices, which reflect the balance of the fundamental factors of supply and demand. Equilibrium price is the point at which oil production (both conventional and unconventional, ‘cheap’ and ‘expensive’) satisfies demand. In other words, it is the price reflecting the intersection of the supply and demand curves. Most oil (more than 4 billion tons) can be obtained even at prices below 90 USD/bbl. This includes conventional oil and NGL, as well as US shale and tight oil plays and Canadian tar sands. However, “this four billion tons is clearly insufficient to cover the growing future demand for oil, forcing a move towards deposits that are more difficult and expensive to extract, in particular those that are found in ultra-deep-water offshore fields, and high viscosity oil”, according to the calculations made at the ERIRAS (Global and Russian Energy Outlook 2014, p. 45).
What if the factual price does not correspond to the balance price, calculated by institutions such as the IEA? This happens. The study by the ERIRAS (which calculates prospects for the balance price but not a factual future price) has shown that the correlation coefficient between equilibrium prices and factual oil prices has been at 0,918 during (i.e. high, or well-correlated) the period of 2000 to 2010. This means that during this period, the price has largely (but not always) reflected the balance between demand at the cost of recovery of oil used to cover that demand.
My second question to the reader is if the factual oil price does not correlate to the balance price at 100%, is that sufficient reason to stop studying balance prices altogether?
Why read the 700 pages (every year)?
Policies can make a difference. The WEO ultimately is a tool that can influence policies. Therefore, the WEO team makes a difference.
The most important role that these outlooks play is informing market players in making decisions. The energy industry operates on a long-term bases because of the longevity of energy equipment. Consequently, the level of consumption that we have today, as well as the specifics of the supply mix are a result of decisions made a couple of decades ago. One single target of all outlooks is to demonstrate the impact of today’s choices on tomorrow’s energy landscape.
Another reason to read the IEA’s Outlook is to see where the ‘most authoritative source in energy analysis’ wants to bring the global energy system, and what policy choices are chosen to meet those ends. Why does it differ each year? It happens precisely because of the changing nature of the energy system. The policy choices are rooted in today’s energy landscape and not yesterday’s.
An energy outlook is a tool for decision-making. When making your decisions, remember: the outlook is not designed to tell you the exact price of oil tomorrow or help you make decisions on whether to speculate on the paper oil market. Rather, if you’re an energy company, it helps in making decisions on whether to invest in new projects. For a ministry of energy or a ministry of social and economic development it help formulate strategies for fossil fuel subsidies. For students of energy it may guide you in your choice of research if you want your expertise to be in high demand in 10-15 years from now.
Of course, it’s up to you how to best utilize this tool.