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Last Updated: Tuesday, 26 October 2004, 12:00 GMT 13:00 UK
Stability fears rise as oil reliance grows
By Jorn Madslien
BBC News Online business reporter

An attendant pumps petrol in Beijing
Consumers must pay the full cost of energy, including environmental costs
The world's reliance on oil and gas is set to increase sharply as global energy demand soars by 60% over the next 25 to 30 years, an influential report predicts.

"Fossil fuels will continue to dominate global energy use, accounting for some 85% of the increase in world demand," according to the World Energy Outlook 2004.

The good news is that there is plenty of oil and gas in the ground to meet demand. "The Earth's energy resources are more than adequate to meet demand until 2030 and well beyond," the report says.

And the bad news? Well, where to begin?

Pollution threat

The world will have to contend with a predicted 60% rise in "climate-destabilising carbon dioxide" emissions between 2004 and 2030, most of it from cars, trucks and power stations.

More than two thirds of the increase will come from developing countries as a consequence of fast economic growth and a massive rise in car ownership.

"By 2030, they will account for almost half of total demand," according to the report's author, the Paris-based International Energy Agency (IEA).

One way to cut harmful emissions from poor countries would be to reduce what the IEA calls "energy poverty".

"The ranks of those using traditional fuels in unsustainable and inefficient ways for cooking and heating will actually increase," the IEA says.

Despite the sharp rise in overall energy consumption, "a billion and a half of the world's poorest citizens totally lack access to electricity, and almost as many will lack it in the year 2030", says IEA executive director Claude Mandil.


The report also raises concerns about energy security.

It points out that although increasing world trade will strengthen the interdependence between consumer countries and the main producers in the Middle East and Russia, "the world's vulnerability to supply disruptions will [also] increase as international trade expands".

A worker repairs a bridge near power pylons in Beijing
Poor countries will struggle to secure investment in their electricity firms
"All the large consuming countries, now including China and India, are growing increasingly dependent on imports from an ever-smaller group of distant producer countries, some of them politically unstable," says Mr Mandil.

"Wells or pipelines could be closed or tankers blocked by piracy, terrorist attacks or accidents," the report says.

As a consequence, "oil markets are likely to become less flexible and prices more volatile", says Mr Mandil, hinting at substantial energy price rises in the years ahead.

Cash call

Another factor that will push prices higher is the increasing cost of extracting oil and other energy sources and delivering them to consumers.

"Meeting projected demand will entail cumulative investment of some $16 trillion from 2003 to 2030, or $568bn per year," the IEA says.

Most of the investment would be absorbed by the electricity sector, and about half of this investment would be required by the developing countries where production and demand are set to increase the most, the IEA says.

"Those countries will face the biggest challenge in raising finance, because their needs are larger relative to the size of their economies and because the investment risks are bigger.

"The global financial system has the capacity to fund the required investments, but it will not do so unless conditions are right."

Less than a fifth of the total energy investment would go to the oil sector and of this $105bn, exploration and development costs will account for about 70%.

Much of the rest would go towards the upgrading of existing installations in developed countries, and there will also be substantial investment in the transport of oil.

New pipelines will be built, but increasingly tankers will take over due to ever longer supply chains.

"Oil prices will play a key role in attracting investment to the sector," the report says, though even here "several factors could discourage or dry up investment in particular regions or sectors".

Pay the price

The IEA draws a gloomy picture of the future, but along with it the agency also offers hope, insisting that its predictions about future trends are "not unalterable".

Two sources of alternative energy, wind turbines and the chimney of a waste burning plant, tower over oil tanks in Amsterdam's harbour
Alternative energy sources could be made commercially viable
"More vigorous government action could steer the world onto a markedly different energy path," it says.

A truly sustainable energy system could be achieved by gearing up the search for "technological breakthroughs that radically alter how we produce and use energy", the report says.

In the short term, "carbon capture and storage technologies... hold out the tantalising prospect of using fossil fuels in a carbon-free way", while in the long run "advanced nuclear-reactor designs or breakthrough renewable technologies could one day help free us from our dependence on fossil fuels", the IEA says.

Market forces could be actively employed by governments to push for such developments by incorporating the "full cost of energy - including environmental costs", the report argues.

This should make alternative technologies, which currently appear to be expensive, seem like reasonable alternatives.

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