Pots of ink are expended when China’s turbine makers catch new gusts or the star of its solar manufacturers brightens or dims. By contrast, the old-fashioned business of damming rivers to produce power generates curiously little press (the Three Gorges Dam aside). Yet in China, as globally, dull old hydro still leaves solar and wind in its wake. It makes up about a fifth of China’s generating capacity, compared with less than 5% for solar and wind combined.
Dam-building is an area where environmentalists can claim a rare degree of success; the need to relocate people slowed hydropower’s progress during the previous five-year plan (2006-10). China’s hydro capacity nonetheless grew by over 80%, from 117 gigawatts (gw) in 2005 to over 210 gw in 2010. Officials are reportedly targeting 284 gw of conventional hydropower and 41 gw of pumped storage, or 325 gw in total, by 2015; the Economist Intelligence Unit thinks a gush of dam-building will take total hydro capacity to just under 300 gw by then. By 2020, however, we expect slower installations growth, to 332 gw. This will fall short of the government’s reported target of 380 gw (which it is rumoured may be raised to 430 gw), including 330 gw of conventional hydro and 50 gw of pumped storage.
China’s best-laid hydro plans are likely to go awry due to the difficulty of harnessing ever more inaccessible water resources. Growing concerns about the environmental costs of dam-building, and local-level opposition to human relocation caused by hydro projects, will also have an impact. Such factors, together with stiff domestic competition, will push Chinese hydro companies on overseas adventures. They are already proceeding with vigour: International Rivers, a non-governmental organisation, has traced the involvement of Sinohydro, the world’s biggest hydropower firm, in 195 (sometimes controversial) dam projects in 60 countries.
With tensions rising between the US and Iran over Tehran’s nuclear programme, attention is turning to the Strait of Hormuz, a vital oil tanker thoroughfare. Markets fear that the narrow stretch of water between the Persian Gulf and Gulf of Oman could be shut to tanker traffic, either due to retaliation by Iran in response to a blanket embargo on its oil exports or as a result of a military conflagration pitting Iran against the US and/or Israel.
Either scenario would rile global energy markets. Around 20% of the world’s traded oil passes through the Strait, so any closure—even for a few days—would push up prices significantly. And it’s not just oil: the Strait is also an important export outlet for liquid natural gas (LNG), with Qatar, the world’s largest LNG supplier, shipping 25% of the world’s LNG through the passage in 2010.
According to the International Energy Agency, just over 15.5m b/d of crude oil and 1.3m b/d of oil products flowed through the Strait of Hormuz between January and October 2011. Around three-quarters of this crude was directed to markets in Asia-Pacific, highlighting the region’s significant dependence on Middle East oil supply compared with North America and Europe. Japan has historically been dependent on Middle East oil, and the two rising economic powers of Asia, China and India, rely heavily on the region for crude oil supply as well.
The nature of the oil market is such that a closure of the Strait would impact on oil-consuming economies globally. However, should there be a series of events that causes the Strait to be closed to outgoing oil tanker traffic, the graph above shows that Asia in particular will suffer collateral damage.
The EIU's Energy Briefing provides ten-year forecasts and daily news analysis for the world's most important energy markets, along with a database developed in association with the International Energy Agency.
The year 2013 will be a landmark one for the global oil market. That is when oil consumption from outside the OECD will exceed that of OECD economies for the first time ever, reflecting the locus of energy consumption patterns shifting east. According to EIU forecasts, in 2013 the OECD will consume 45.45m b/d of crude oil, while the rest of the world will consume 46.84m b/d. Between 2009 and 2013, oil demand is set to increase by 7m b/d in non-OECD countries and decrease by 200,000 b/d in the OECD.
China, of course, will be the main driver of non-OECD demand growth, with its oil consumption hitting the 10m b/d mark in 2012 and reaching 10.8m b/d in 2013. In 2013, nearly 25% of global oil demand will come from non-OECD Asian economies, where oil consumption will exceed that in the US. As the Asian region is resource poor when it comes to oil, its import needs will dramatically increase, providing a new opportunity for OPEC producers in the Middle East whose market share in the US, the world’s largest market, is declining. Demand for oil is also growing in the Middle East, however, which will leave fewer barrels available for export.
The EIU's Energy Briefing provides ten-year forecasts and daily news analysis for the world's most important energy markets, along with a database developed in association with the International Energy Agency.
The price of natural gas futures on the New York Mercantile Exchange (Nymex) this week fell to its lowest level in a decade, settling at a paltry US$2.322 per million British thermal units (MMBtu). Gas futures had peaked at nearly US$13.58/MMBtu in the summer of 2008, about the same time that crude oil futures on the Nymex hit a record high of US$147/bbl. But while the price of oil has made a healthy recovery since the 2009 recession, rising to more than US$100/bbl, gas prices have remained in the doldrums (see chart).
A combination of factors explains this. US gas production has been ramping up since 2005 as a result of the “shale gas revolution”, with shale gas now comprising about 25% of total US gas supply. With economic performance still poor, demand for gas has continued to suffer. The mild winter has also depressed consumption. In early January, prices fell below the US$3/MMBtu mark, and they have been in freefall ever since.
But the bear market has not stopped oil and gas firms from making some major acquisitions in the shale gas sector, with the more bullish long-term view in mind. Recent deals by Total and Sinopec, for example, are each worth more than US$2bn.
Should the gas glut last, and prices remain so low, the industry is also likely to push harder for LNG export capacity to be approved by US federal agencies, letting it take advantage of much higher prices elsewhere, such as in Asia. But the US Department of Energy has warned that this would push domestic prices back up again.
For the time being, however, natural gas market bears are prevailing.
The EIU's Energy Briefing provides ten-year forecasts and daily news analysis for the world's most important energy markets, along with a database developed in association with the International Energy Agency.
The US oil market has been changing quietly over the last half-decade or so. In 2005, US oil consumption peaked at 20.8m barrels/day (b/d), with the use of motor gasoline contributing nearly half of the total. Since then, each new year saw demand drop. According to the US Energy Information Administration, oil consumption dropped to 18.87m b/d in 2011 (a fall of 9% since 2005), and is forecast to only rise slightly to 19.01m b/d by 2013. Gasoline demand is now in the doldrums at just below 9m b/d, having peaked in 2007 at 9.29m b/d.
Why is this the case? Fuel prices have risen, sales of light trucks have slowed, and tighter fuel economy standards have been introduced. The recent recession also led Americans to drive and fly less than they were previously accustomed to. Demand for residual fuel oil, used for power generation and by heavy industry, is also slipping. Now, refineries are exporting oil products, especially gasoline and distillates (heating oil and diesel), to Latin America, where demand for oil products is growing.
Meanwhile, the Obama administration is discouraging a revival in transport fuel demand as part of its strategy to reduce oil consumption, and thus imports. Last year, the president announced an agreement with automakers to boost fuel economy to 54.5 miles per gallon (mpg) for cars and light-duty trucks by the 2025 model year, building on a previous agreement to increase fuel economy to 35.5 mpg, from 27.5 mpg, by 2016.
Until a few years ago, it seemed that the US’s love affair with petroleum would lead it down an irreversible path of increased dependency on oil imports. Now, signs suggest that Americans may be falling out of love with petroleum.
The EIU's Energy Briefing provides ten-year forecasts and daily news analysis for the world's most important energy markets, along with a database developed in association with the International Energy Agency.
Who would be a carbon trader? They are prey to both precarious multinational talks and crushing economic headwinds. And yet, in terms of volumes traded, it’s not a bad business to be in. Thomson Reuters Point Carbon reports that the global trade in emissions permits grew by 19% in 2011. But there is no ignoring sagging prices; the value of permits dropped dramatically in 2011, thanks largely to the European Union’s Emissions Trading Scheme (ETS), the mainstay of the global carbon market.
Besides weighty demand-side constraints—not least the euro zone’s economic woes—much of the blame for low prices lies with an oversupply of credits, which are set by quotas approved by the European Commission (EC). Around 60% of EU emissions permits are likely to be auctioned next year, strangling off the hitherto plentiful supply of free allowances. But given Europe’s struggles, the EC appears hesitant to radically raise the cost of polluting.
Those designing carbon trading schemes elsewhere—trading in California is due to start in 2013 and in 2015 in Australia—are mindful of Europe’s chequered history with pricing, Point Carbon notes. Hence, a fashion for imposing price floors and ceilings. This even extends to ETS participants: Britain’s government talks of setting a carbon-permit floor price as high as £70 by 2030.
Yet this is an inadequate fix for the political fissures undermining carbon markets. Many investors doubt governments’ resolve to follow through on lofty green goals. Global climate talks are stuttering, while most EU members missed a recent deadline to submit their plans for granting permits to companies, needed so that the EC can set the number of free permits it grants during the next phase of trading. The likely abundance of free carbon credits will neatly reflect a shortfall in political will.
The EIU's Energy Briefing provides ten-year forecasts and daily news analysis for the world's most important energy markets, along with a database developed in association with the International Energy Agency.
In November, we discussed Iran’s major oil export markets in the light of rising tensions with the West over Tehran’s nuclear programme. This hostility has contributed significantly to higher oil prices, with Brent crude oil futures settling at around $113/barrel, an increase of 9% since mid-December.
The US and the EU both recently announced tighter restrictions on Iranian oil exports, which provide around 50% of the Islamic Republic’s government income and 80% of its export revenue. An EU ban on Iranian crude oil would hurt Iran more than it would hurt the EU, but the extent of this impact would depend on whether other countries, especially in Asia, co-operate with Western efforts to cut Iranian oil imports.
Any meaningful ban on importing Iranian oil would require replacement from other producers, leaving additional supplies from key exporters like Saudi Arabia putting pressure on spare capacity. The International Energy Agency puts the Opec cartel’s spare capacity at around 3.1m barrels per day (b/d). The majority of this belongs to Saudi Arabia, which has already increased production to 10m b/d, from 9m b/d in mid-2011.
An outright ban on Iranian oil imports by the EU would require about a fifth of Opec’s spare capacity to make up the difference, while a global ban on Iran’s output would soak up around 80% of the cartel’s spare output. Needless to say, both possibilities imply much higher oil prices. For this reason, the last thing a weak global economy needs is for Iran’s relations with the West to pass the point of no return.
The EIU's Energy Briefing provides ten-year forecasts and daily news analysis for the world's most important energy markets, along with a database developed in association with the International Energy Agency.
The International Energy Agency reckons that the world may be entering a “Golden Age of Gas”, given the growth in supplies of unconventional gas, such as shale gas and coalbed methane, as well as national strategies to reduce dependence on dirtier fuels like coal.
However, Old King Coal has been the fastest-growing source of energy over the last ten years, driven primarily by the voracious appetite for coal-fired power in China. The IEA’s own data shows that in the last decade coal accounted for nearly half the global increase in primary energy demand, growing by around 1.2bn tonnes of oil equivalent. A staggering 80% of this increase in global coal demand alone came from China, with India contributing a further 11%. Today, China accounts for nearly 50% of global coal consumption.
Even as “Chindia” plans to expand the role of gas in its energy mix, it will continue to drive growth in global coal demand, as over the next decade coal consumption will rise by around 25% in China and 60% in India, according to the EIU’s forecasts. Thanks to this growth, and the stagnation or decline in coal’s role in the US and Europe, non-OECD emerging markets will consume three times as much coal as developed OECD countries in 2020, according to the IEA.
The EIU's Energy Briefing provides ten-year forecasts and daily news analysis for the world's most important energy markets, along with a database developed in association with the International Energy Agency.
In 2009 and 2010, US crude oil production registered two consecutive years of growth for the first time since 1984 and 1985. Output from deepwater Gulf of Mexico fields remains important, but more recently the rapid growth in oil-bearing shale plays is what’s really moving the dial. High oil prices, new shale discoveries and enhanced recovery techniques will contribute to further rises in US oil production over the next 25 years, according to the US Energy Information Administration.
The so-called shale gas revolution garners most of the headlines, but liquids-rich shale plays are also contributing to the boost in US oil production. Take the Bakken shale. North Dakota, where most of the horizontal drilling and hydraulic fracturing activity in the Bakken takes place, now produces more than 400,000 barrels per day (b/d), more than four times the state’s output at the start of the century.
North Dakota is now the fourth-largest oil-producing state in the US, behind Texas, Alaska and California. In its optimistic case, North Dakota’s department of mineral resources reckons that production of some 800,000 b/d, or around 80% of what the US currently imports from Saudi Arabia, is achievable. Although not nearly enough for the US to declare energy independence, it is yet another example of the ongoing transformation of America’s energy supplies.
The EIU's Energy Briefing provides ten-year forecasts and daily news analysis for the world's most important energy markets, along with a database developed in association with the International Energy Agency.
Iran’s standoff with the West over its nuclear programme is making an impact on oil markets, following the decision by the US to extend secondary boycott measures to include Iran’s refining and petrochemical sectors, and by the UK and Canada to ban dealings with Iran’s financial sector.
These measures were taken in the light of the latest IAEA report on Iran’s nuclear activities, the agency’s strongest statement to date on the possible military dimensions of the country’s nuclear programme.
More recently, France announced a unilateral ban on imports of Iranian crude oil. But France is not a major buyer of Iranian oil, importing just 49,000 barrels per day in the first half of this year.
Furthermore, unilateral sanctions do not have a great record in influencing the actions of targeted states. The US, for example, has not bought any Iranian oil since the 1979 revolution. And whatever barrels Iran cannot sell to France, or others in the EU—Italy is reported to be urging domestic firms to shun Iranian oil—it will be able to sell elsewhere, largely to energy-hungry markets in Asia. These days, most Iranian barrels head east.
The EIU's Energy Briefing provides ten-year forecasts and daily news analysis for the world's most important energy markets, along with a database developed in association with the International Energy Agency.
