Dr. Fatih Birol, chief economist of the International Energy Agency, discusses the findings of the World Energy Outlook 2006, which examines global energy trends and the resulting challenges. Jad Mouawad, energy reporter for the New York Times, presides.
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Dr. Fatih Birol
Fatih Birol is chief economist and head of the economic analysis division of the Paris-based International Energy Agency. Dr. Birol also serves as the organizer and director of the World Energy Outlook series, the IEA's flagship publication.
In June 2005, he received the International Association of Energy Economics' Outstanding Contributions to the Profession Award and in October 2006 was made a Chevalier dans l'ordre des Palmes Academique by the French Government in recognition of his distinguished services to the field of energy economics.
Jad Mouawad is an energy reporter for the New York Times.
Good afternoon, ladies and gentlemen. Welcome to the Council on Foreign Relations.My name is Jad Mouawad. I'm with The New York Times.Before we begin, I was asked to remind everyone to please turn off your cell phones, and also thismeeting will be an on-the-record meeting.With us today is Dr. Fatih Birol, who's the chief economist at the International Energy Agency and theauthor of IEA's yearly World Energy Outlook.This year the publication makes a few sobering points. Basically, it shows that without a radical changein policy, energy consumption is set to soar in the next three decades. Paradoxically, the IEA warns thatthere's no assurance that the massive investments needed to meet this soaring demand will be made in time.The report also says that the growth in consumption is going to lead. might lead to the development ofso-called dirtier energy sources. coal, heavy oil, more tar sand and perhaps shale oil. sorry. oilshales. So just as the debate on climate change heats up, we're going to be getting more dirty fuels.All this points to a contradiction. Energy security and environmentalsecurity seem to be pulling us in different directions.In its report, the IEA says the world is facing twin energy-related threats: that of not having adequateand secure supplies of energy at affordable prices and that of environmentalharm caused by consuming too much of it. Dr. Birol, the floor is yours.Thank you very much for the kind introduction.Good afternoon, ladies and gentlemen. It's a great pleasure again that I have the opportunity to sharethe views of the International Energy Agency with you.We have last week published the World Energy Outlook 2006, in London, and we look at the globalenergy trends and the resulting challenges for all of us for the next two and a half decades.In doing so, we outline two different visions of our energy system, global energy system. The first one:if we stick to our current policies, we see an energy system which is vulnerable in terms of security ofoil and gas supply, dirty in terms of environment, and expensive in terms of investments. And we thinkthis is a trend which is unsustainable, and we need to change these trends. And therefore we buildanother vision, which we call the alternative policy scenario, and I am going to discuss this. both ofthese scenarios in a nutshell, with yourselves, and afterwards we willbe very happy to have your questions and remarks.So first of all, with the current policies, where are we heading at? With the current policies in place, oildemand is coming strongly, mainly driven by China and India, which are responsible. more than 50percent of the growth in the global oil demand between now and 2030, and the main driving sector willbe the transportation sector. cars, trucks and jets.Coal is coming strongly. I will elaborate in a minute, but coal's growth is very impressive.Gas also grows in a substantial manner, but our expectation for gas this year are a bit lower than whatwe had last years, mainly as a result of high gas prices.Biomass, mainly coming from developing countries; nuclear power, with the current policies in placeI again underline this. with the current policies in place, as of 2006, is going to lose market share, asthere. lots of retirements in the OECD countries.Renewables are growing but still making a small share in the global energy mix.So this very picture will have major implications for our energy system. the very first picture.The first one and the most critical one for the International Energy Agency is on the oil security front.The growth in oil demand will need to be met from a very few number number of countries in thefuture. Number of suppliers will be less and less, mainly as a result of declining oil production levelsoutside of the OPEC countries. We expect that the non-OPEC production will reach a peak before2015, within the next 10 years of time, and therefore the demand will be met more and more by fewnumber of countries, mainly coming from OPEC.Three countries are key here, mainly Saudi Arabia, Iran and Iraq.In terms of Saudi Arabia, as you know, the Saudi investment climate is very different than what weused to see in Gulf of Mexico and North Sea. The decisions, in terms of the investments and productioncapacity growth will be made by their national oil company and, of course, looking at the marketconditions. But market conditions may not be the only factor that they look into.In terms of Iraq, we know there are question marks and big potential. But there a lot of question marksin terms of the political stability of Iraq and when they will be increasing their oil production.Iran. lots of oil and lots of gas, but again, as much as those, there are question marks about theinvestment climate, and moreover, the political situation Iran is in.So we also expect some non-conventional oil, mainly from Canada, to come to the market. But thiswill not change the main picture, that the bulk of the growth in the oil demand in the future will need tobe met from very few number of countries, mainly focusing in the Middle East region. And this is aconcern that the number of suppliers is decreasing, from our perspective.The picture in terms of gas is not very different. Gas demand is growing, gas trade is growing, and thebulk of the growth in the gas demand will need to come (from) Russia, Iran, a very few other MENA,Middle East\North Africa, countries. There's a concentration of reserves also here. Just to put in acontext, perhaps, Russia plus Iran make about 50 percent of the proven gas reserves. two countrieswhich are in the headlines of the newspapers for energy and non-energy related reasons.The third field I would like to discuss with you is coal. One of the messages coming from the WorldEnergy Outlook 2006 is that coal is coming back. Coal is coming back with all its consequences,positive and negative; positive consequences in terms of the enhancing the security of supply, havingresources throughout the world dispersed in an equal manner in Australia, China, U.S., Canada, SouthAfrica and elsewhere; but in terms of the CO2 emissions, carbon dioxide emissions, this is a major problem.The growth. what we have seen in the last three years in coal globally. 2003 plus 2004 plus 2005. isequal to the growth what we had seen in the previous 23 years. So such a huge growth coming fromcoal, mainly driven by China, as well as driven by the high natural gas prices,switch from gas to coal in many examples.As I said, it is important to note that the increasing coal demand has implications for the CO2emissions. And in general, carbon dioxide emissions increase 55 percent between now and 2030. And abulk of this increase is coming from China plus India, which make more than 50 percent of theemissions. And perhaps a good news. "good" in quotes. for the U.S. colleagues here. China hastaken over the United States as the biggest emitting country of the world in 2009, if not earlier. Andother developing countries are also increasing their emissions a lot. More than two-thirds of theemissions, growth of emissions coming from the developing countries.However, one shouldn't blame China here. One should see that in the population that China has, interms of per capita emissions, China still emits less CO2 emissions than the OECD person in theOECD in 2030. However, this brings to the picture that if we want to have effective solutions to theclimate change problem, we shouldn't afford not to have China, India on board for the futureenvironmental architectures that we may propose.The very first picture I show you in the global energy mix, how the different energy perhaps aregrowing, ends up with substantial requirements in energy investments. We expect that there is a need tobuild new power plants, transmission lines, distribution lines, oil fields, gas fields. About $20 trillionneeded between now and 2030; a bulk of it for the electricity sector. building power plants,transmission lines and distribution lines.In terms of countries, China alone would need $4 trillion for its energy sector. Just to put it in a context,if China grows every year, China electricity sector, equal to the one U.K. electricity sector, the growthin China equal to U.K. each year, and it grows in that level.For the OECD countries put together, we need about $8 trillion. It may sound a bit contradictory thateven though the bulk of the growth in energy demand is coming from China, you need more money forthe OECD countries. The reason here is the demographics, demographics of the energy infrastructure;namely, in the OECD countries we need to make investments not onlynd not mainly in order tomeet the growth in the energy demand, but in order to replace the existing structure which is going toretire within the next two decades. So we need more money to replace the retiring infrastructure,retiring power plants, declining oil and gas fields, and so on, more than meeting the demand.One of the major problems that the global economy is facing today, as we believe at the IEA, is thehigh oil and gas prices. In terms of oil prices, when we look at the current investments discussed by theinternational and the national oil companies, we look at it on a project-by-project basis, how much oiland gas we can realistically expect to come to the markets within thenext five years so that the prices will affect it accordingly.First we look at the past five years to see whether or not in the last couple of years the high prices endup with higher investments in the upstream sector in the oil production. And when we first looked atthese trends, we were very happy to see that the investments in the oil sector increased substantiallybetween 2000 and 2005. However, looking at the cost inflation, which is the increasing cost of richmaterial, skilled labor, if we adjust this, if we look at it in real terms, in terms of real spending, theinvestments were more or less flat between 2000 and 2005, a major cost inflation aspect.And looking at the future, we look at all the projects, sanctioned projects, on a field-by-field basis. Andwhat we have seen is that if all the sanctioned projects see the light of the day by 2010, the currentspare production capacity, which is about 2 million barrels per day, may increase slightly higher than 1million barrels per day, and the currentnd the spare production capacity in 2010 may be a bit higherthan 3 million barrels per day, which means that we are far from having a comfortable oil market. Inother terms, if some of these projects for some reasons, if there are some slippages, some delays, as aresult of the factors that we had not foreseen. it may be climatic reasons, it may be as a result ofgeopolitics or other reasons. the spare production capacity maybe even lower, therefore significant impacts on the prices.Looking at the long term, I think this is the picture that I would choose as the most strategicallyimportant picture for the oil industry to come, which says that looking at the proven reserves both bydistribution and investment climate, in many countries where we have a lot of oil, the foreigninvestment cannot flow freely and go and invest there, such as Saudi Arabia. So this is a completelynew structure that we used to see in the oil industry. In the past when the prices went up, we have seenvolumes coming from North Sea, Gulf of Mexico, as a response to high prices. However, in the futurethe decisions, again, will be made by the national oil companies, and again, the main reason for theinvestments may not be the international oil prices. Those companies may well have otherconsiderations than the international oil prices. So this is a new picture that there is a big problem forthe international oil companies to have access to reserves and to invest. So they have to see what theyare going to do in that situation, looking at their perhaps medium- and long-term strategies.Up to now I have discussed with you the issues related to the rich people, about the OECD countriesand the others. There is an issue which is not very typical, perhaps,for the energy meetings, but I still want to share with you.According to our analysis, today 2.5 billion people in the world, which is about 40 percent of the globalpopulation, is using. for the cooking at home is using so-called dirty biomass; namely, agriculturewaste, animal waste, dung, and similar things in order to cook in the stoves they have, which are veryprimitive. And this has several implications. One of the implications is, as a result of the indooremissions coming from these cookstoves, and the respiratory diseases it results, in every year,according to World Health Organization, 1.3 million women and children die prematurely. And thiscompares with the 1.2 million people dying from malaria.There are some other implications of this, in terms of deforestration, in terms of implications on thewomen and others. And we have seen that if we do not do anything, despite the economic growthworldwide, despite the technological innovation worldwide in the next 25 years, despite the so-calledglobalization, there will be still 2.7 billion people in 2030 usingthis type of fuel and having the consequences of it.So we think this is unacceptable. And we have seen. we just made a work, and we have seen that ifhalf of these people, in line with the Millennium Development Goals, were to go to clean energyservices, the money we would need for that would be (literally ?) peanuts.Now, let me just put together my thoughts in terms of the reference scenario if we do not change ourpolicies. Our security of oil supply will be more and more at risk. Gas security will be along the samelines, with the growing demand and the diminishing number of supplies both in the oil and gas side.One important issue coming from our work is the fact that next 10 years are very crucial for the globalenergy and environmental system. Let me explain very briefly why. China and India, we talk aboutthem a lot, and we try to give the order of magnitude how important they are. They are going throughan economic boom, both of these countries, and during this economic boom, they are making majorenergy infrastructure investments. They are building power plants, refineries, transmission lines and so on.And if they build a power plant today in China and elsewhere, it has a lifetime of 60 years. And it willbe very difficult. it will be very difficult. to shut down their power plant after 10 years and so beforeits economic lifetime is over. So there are going to be lots of decisions taken in China and India whichwill determine the next 50, 60 years of their energy patterns, and at the same time will have majorimplications for the global energy and environmental picture.The second reason why it is important for the OECD countries next 10 years is that in the OECDcountries, bulk of such investments, major investments, were made just after the Second World War,when the economy was booming. We built a lot of power plants, transmission and distribution lines,and most of them are in the phase of retiring within the next 10 years. So we are going to replace themwithin the next 10 years, and we have to again think what kind oftechnologies, what kind of fuels, what kind of design we want to put together.So next 10 years is key to have sustainable solutions to our energy problem, which is discussed in thereference scenario, which ends up with the two interests,security of supply and increasing environmental risks.The second vision I wanted to share with you is the alternative policy scenario. G-8 leaders inGleneagles in 2005, and again in 2006 in St. Petersburg, asked the IEA to provide an alternativescenario to look at the implication of policies which are not yet legally enacted but under consideration.There are many discussions about the new policies in terms of increasing energy efficiency, morerenewables, more this and that. They are not yet legally enacted, but they are under consideration in allthe governments of the world, mainly driven by security of supply, and sometimes climate changeconcerns, but at the same time, high energy prices give a momentumto the governments to consider such new policies.We have chosen 1,400 policies on a country-by-country basis, sector-by-sector basis. If you just look atthe IEA website, you will see them one by one. And we said if those policies which are underconsideration. which are by no means revolutionary policies, these are policies discussed in thecorridors in Washington or in Brussels or in MITI in Japan or in China and India. if they were to beintroduced, how would they change the unsustainable trends I just showed in the reference scenario.And in terms of oil imports, for example. this is the reference scenario. we see the oil importsgrowing significantly. In the alternative scenario, oil imports are coming down significantly within theOECD. The trend is changing substantially. This is mainly as a result of increasing fuel efficiency inthe OECD countries and making more use of biofuels in some cases.Another implication is on the gas and the security of gas supply questions. This is the gas imports in theU.S., EU and Japan. And in the reference scenario with the current policies in place, there's a hugeincrease; but in the case of the alternative scenario, there is a decline in the gas imports in all regions,again driven by using electricity more efficiently at home and in the industry. Therefore, less electricitydemand; therefore, less power plants; therefore, less gas-fired power plants.The second one is using more renewables, replacing gas, and thethird one is using more nuclear, replacing gas.With the CO2 emissions, the second challenge that the reference in our report has asked. that wecan bring CO2 emissions in a much (sic) reasonable levels. They can stabilize around 2030.And this stabilization takes place as a result of three major policy pillars. The first one is on theincreasing energy efficiency, mainly fossil fuel increased efficiency. This is the transportation sector,mainly coming from the cars, trucks and jets, using them more efficiently.This second one is using electricity at home. the refrigerators,washing machines, TV sets and others. more efficiently.And the third one is in the power sector, to increase the efficiency of the powerplants worldwide. This is the first pillar, and the main one.The second one is increased use of renewables, mainly wind, biofuels, hydro, geothermal and others,and third one, increased use of nuclear in the countries where it is accepted.To give you more of a flavor of the policies we have chosen, just to tell you that there are twelvepolicies out of 1,400 we have put together. We call them "the clean dozen."And here, just to give you some examples what do they mean. for example, in the case of U.S., thetighter CAFE standards would help a lot. And what does it mean? It means that the current. or itmeans that U.S. average vehicle fuel efficiency in the year 2030 will reach the current level of EUtoday. so this sort of very adventurous assumption. And I know that in Washington there's a lot ofdiscussion among the colleagues to draft. to look at the CAFEstandards and to revise them in terms of the fuel economy.Or in China, increased efficiency of coal-fired power plants. this is an important thing. And what weassume therend it's in line with the government's considerations, in fact. to bring the Chinesecoal-fired efficiency in power plants to the level of EU. current level of EU in the year 2020. soagain, a major improvement we can get from. on this.So in that respect, these policies can have a major impact on theCO2 emissions and therefore on the global picture.So just to tell you that since yet is working around, which leads. this is the third message that Iwanted to give today. is that alternative policies not only bring the costs. not only bring the oilimport dependency down, which is a good message for the energy security; not only brings the CO2emissions down; but they are cost-effective.Let me give you one example to you here in the electricity sector. If there are two television sets. oneis $10; the other one is $11nd if the $11, with the same quality, is a bit more efficient than the $10one; if I as a consumer go and buy that $11, it ends up. this efficiency savings. of avoiding buildingnew power plants worth of $2.2. So demand side investments in thefirst instance ends up with a bigger savings on the supply side.And the best use of the best power plant, the cheapest power plant, the cleanest power plant is thepower plant you don't need to build. So it is the reason that there's a big room there for improvement.And we have calculated that we need less money for the alternativescenario than we need in the reference scenario.So let me finish my presentation telling you that we made a major analysis to my. (inaudible). on thenuclear power and on biofuels. perhaps we can cover them during our Q&A sessionnd to say thatwith the current policies in place, if we do not change the reference scenario, the situation is ratherserious. We are going to end up with an energy system which is vulnerable, dirty and expensive. As wetry to make out here, we have all the means that we can build an energy system which is cleaner,cleverer and more competitive. And we have. we can do all of these things if the governments wouldtake it seriously and provide clear incentives to change the existing investment patterns.So with this, I'll stop here. Thank you very much for your attention.