As BP launches its latest version of the Energy Outlook, chief economist Spencer Dale explains the headlines, from the impact of the mobility revolution to what’s required to meet the Paris Climate Agreement
The big picture
The energy transition underway is the main story in this year's Outlook. Energy demand is expected to increase by around 30% by 2035 as global prosperity rises, and we are seeing the shift in the fuel mix continuing towards lower carbon fuels, with renewables the fastest growing source of energy at 7.1% a year.
Gas is the fastest growing fossil fuel at 1.6% a year, while oil’s growth will continue at 0.7% a year, although its pace of growth is expected to slow gradually. Coal’s annual growth declines sharply down to 0.2% a year compared to an annual average of 2.7% over the past 20 years.
One of the biggest uncertainties is the speed of the transition to a lower carbon world. In our base case projections carbon emissions are projected to grow at less than a third of the rate seen in the past 20 years.
However, on this ‘most likely’ path, carbon emissions from energy use still grow by about 13% by 2035.
This is far in excess of, for example, the International Energy Agency’s (IEA) 450 Scenario which suggests carbon emissions need to fall by around 30% by 2035 to have a good chance of achieving the goals set out at the Paris conference on climate change in 2015.
For this year's Outlook, we’ve considered two alternative pathways for carbon emissions.
Our ‘faster transition case’ assumes a far tighter range of existing policy mechanisms, leading to carbon emissions 12% below 2015 levels. And our ‘even faster transition’ case matches the trajectory of the IEA ‘450 scenario’.
The emissions reductions in this even faster case come predominantly from the power sector, which is almost entirely decarbonized. Interestingly, in both of our faster transition cases, oil and gas combined continue to provide around half of the world's energy needs in 2035.
Oil - a crowded market
Global proved oil reserves have more than doubled over the past 35 years, so for every barrel of oil consumed, more than two new barrels have been discovered. This abundance of resources today far exceeds the world’s most likely consumption of oil out to 2050 and beyond.
With oil demand growth slowing, this could have an influence on the production of global oil supplies. For instance, low-cost producers in the Middle East and Russia might use competitive advantage to increase market share by producing more oil. This is likely to lead to the crowding out of higher cost producers.
Natural gas – the world is getting smaller
We think natural gas will grow strongly over the next 20 years, quicker than either oil or coal. Underpinning this is strong growth in supplies – particularly from U.S. shale – and the rapid expansion of liquefied natural gas (LNG). What is really special about LNG is its relative mobility – being transportable on ships around the world, rather than restricted to the length of a pipeline. This means a globally integrated market is likely to emerge by 2035.
Risks to gas demand
As natural gas grows, it will gain share within the overall fuel mix. But what if coal is more resilient than we think?
To explore this possibility, we created an alternative ‘slower gas’ case where climate and environmental polices tighten by less than expected and the demand for coal falls less rapidly than in the base case. In particular, the set of regulatory policies aimed at promoting a shift away from coal and towards natural gas are considerably weaker and there is effectively no support from carbon pricing (a cost applied to carbon pollution to encourage reduction of emissions into the atmosphere).
If we consider the faster transition cases for carbon emissions alongside the ‘slower gas’ case, we can see that future natural gas demand could be challenged by the strength, or weakness, of future climate and regulatory policies.
Electrification speeds up
Electric vehicles are all set to grow rapidly in the next twenty years, from about one million vehicles today to something closer to 100 million by 2035. This increase could reduce the growth of oil demand by 1.2 million barrels a day (Mb/d). As context, the number of conventional cars on our roads will continue to be the vast majority, with the total fleet expected to go from 900 million today to nearly 1.7 billion in 2035. This will be largely down to the fast-growing economies of Asia. So while we do expect electric vehicles to carry on growing rapidly, the implications for oil demand will not be a game changer.
OECD = the Organisation for Economic Co-operation and Development
What if mobility changes quicker than we think?
Change is afoot in the personal transportation sector that goes beyond the rise in electric vehicles to autonomous driving (self-driving cars), car sharing (where multiple people share ownership of a car instead of owning one each) and ride pooling, (where passengers share journeys with one another.)
So we looked at what impact these various new technologies could have on oil demand. 100 million autonomous cars (self-driving vehicles), for example, could lower oil demand by around 0.4 Mb/d in 2035, whereas an extra 100 million electric cars could displace 1.4 Mb/d of oil – four times as much.
Another example is car sharing, which on its own may not affect oil demand, but if combined with a new technology (such as self-driving cars or electric cars) can act to amplify the disruptive effect of these new technologies, since more miles are travelled via new technology vehicles and less using conventional cars.
Ride pooling is another example, which reduces the number of vehicle miles driven by raising the number of occupants per vehicle – a 10% fall in vehicle miles could lower oil demand by around 2.5 Mb/d in 2035. But the mobility revolution could also provide an offsetting boost to the demand for car travel by lowering costs and enabling wider access to cars – so the overall impact on oil demand is uncertain.
A shift in demand for China
It may be stating the obvious, but China really matters – it is the largest market for energy, and also the world’s largest growth market for energy with an increase of nearly 2% per annum until 2035. However this is compared to over 6% per year over the last 20 years, so what we’re seeing are China’s energy needs shifting.
The growth of its economy is slowing over time, and the structure of the economy is shifting from industrial to consumer and services activity, bringing a reduction in energy intensity. The fuel mix is also set to change substantially with a series of government policies instigating a shift away from coal to cleaner, lower carbon fuels like natural gas, nuclear energy and renewables.