World Energy Trends
2015: a challenging year for the industry
Since the publication of the 2014 edition of the WOO in November last year, the most obvious market development has been the oil price collapse. While the average price of the OPEC Reference Basket (ORB) during the first half of 2014 was over $100/barrel, it dropped to less than $60/b in December 2014 and has averaged close to $53/b in the first nine months of 2015. This new oil price environment has had an impact on both demand and supply prospects in the short- and medium-term, and some lasting effects can be expected in the long-term. Furthermore, huge reductions in exploration and production (E&P) capital expenditures and job lay-offs have been reported in the industry. The low oil price has also had negative consequences for oil exporting countries.
At the same time, economic factors have continued to weigh on the oil market. The economic picture in the non-OECD region is gloomier than last year. The Chinese economy seems to be maturing and growth is decelerating faster than previously expected. Economic pessimism in Eurasia has also been exacerbated due to geopolitical developments. Furthermore, from a policy point of view, additional climate change mitigation actions, as well as increasing support to renewable energy, the removal of subsidies, new upstream fiscal regimes and further energy efficiency targets have emerged as important factors.
All in all, 2015 has been a challenging year for the industry.
Economic growth assumed to improve but still remains below its potential
Global economic growth is assumed to improve in the next couple of years to reach 3.8% per annum (p.a.) in 2018 and 2019, so that the global average growth for the period 2014–2020 is 3.6% p.a. Growth in the OECD region improves initially before stabilizing at around 2.2–2.3% p.a. In developing countries, annual growth also stabilizes, but at around 5.1–5.2% p.a. In Eurasia, improving conditions are assumed in the medium-term, which translate into recovering GDP growth.
Economic growth, however, remains below its potential as the legacies of the financial crisis and new emerging issues negatively impact the global growth momentum. These issues include the high debt level (both governmental and private households) in many key economies, the weak labour market in the Euro-zone, the ongoing challenges of low core inflation, low growth in Japan, slowing growth in developing economies (amid decelerating foreign investments) and considerable structural issues in major emerging economies. These factors will continue to keep global growth below 4% in the medium-term.
World population will increase from 7.2 billion in 2014 to 9 billion in 2040
Based on the UN World Population Prospects, world population will increase from 7.2 billion in 2014 to 9 billion in 2040. Population growth in the OECD region is expected to be rather low, while Eurasia is anticipated to see its population decline in the period to 2040 driven by developments in Russia. Most population growth will come from developing countries. Middle East & Africa and OPEC Member Countries are expected to exhibit the highest population growth rates in the next 25 years. China’s population will peak in 2028, and India will surpass China as the country with the largest population sometime around 2026.
Key features of changing demographics: ageing populations and expansion of urban areas
The world population is expected to age significantly in the next few decades. The population pyramid in 2040 is clearly less pronounced than in 2014. The share of people under 15 declines in every region, particularly in Other Asia and India. Furthermore, the share of people over 64 increases in every region, especially in China and OECD Asia Oceania. In the latter region, one out of every three individuals will be over 64 in 2040.
Another important demographic trend that is anticipated to have a significant impact on energy demand is the continuous urbanization of the world. While in 1950 only one out of every three people lived in urban areas, in 2008, for the first time, more people were living in urban areas than in rural settlements. It is expected that by 2040 the urbanization rate will reach 63%.
Growing by 3.5% p.a. on average, the global economy will more than double in the period to 2040
Driven by demographic and productivity trends, world Gross Domestic Product (GDP) growth is estimated to average 3.5% p.a. for the period 2014–2040. As a result, the world economy in 2040 will be 244% of that in 2014. Developing countries will account for three-quarters of the growth averaging 4.6% p.a. for the forecast period. China and India alone will account for half of this growth. The average growth rate for the OECD is estimated at 2.1% p.a. Within the OECD, the region with the highest expected growth is OECD America, driven by healthy population expansion. For Eurasia, an average growth rate of 2.1% p.a. is projected over the forecast period.
Big changes in terms of GDP… not in terms of GDP per capita
The configuration of the world economy will change significantly in the next 25 years. In 2040, China’s GDP will be 120% and 60% higher than that of OECD Europe and OECD America, respectively. India’s GDP will exceed that of OECD Asia Oceania and OECD Europe, and approach the size of OECD America. Latin America and OPEC will overtake OECD Asia Oceania in terms of GDP, while Other Asia’s GDP will approach the size of OECD Europe.
Contrary to a ranking of regions based on GDP size, the ranking on a per capita basis will not change dramatically. OECD America will continue to have the highest GDP per capita of all regions followed by OECD Asia Oceania and OECD Europe. As income per head in China and India will almost triple, these countries will move up in the rankings. However, the figures also underscore the unequal distribution of wealth in the world. While in 2014 the ratio between income per capita in the poorest region (Middle East & Africa) and the richest region (OECD America) was 9.8, in 2040 it is expected to increase to 11.5.
Need to develop oil production in more expensive areas will drive long-term oil prices higher
In this Outlook, the price of the ORB is assumed to average $55/b during 2015 and to resume an upward trend in both the medium- and long-term. The medium-term foresees a $5/b increase each year so that a level of $80/b (nominal) for the ORB is reached by 2020, reflecting a gradual improvement in market conditions as growing demand and slower than previously expected non-OPEC supply growth eliminate the existing oversupply and lead to a more balanced market. This, in turn, will provide support to prices. Translated into real prices, the oil price is assumed to be $70.7/b by 2020 (in 2014 prices).
The long-term price assumption is based on the estimated cost of supplying the marginal barrel which will gradually move to more expensive areas. This continues to be the major factor in the period through to 2040. The price of the ORB in real terms is assumed to rise from more than $70/b in 2020 (in 2014 prices) to $95/b in 2040 (in 2014 prices). Correspondingly, nominal prices reach $80/b in 2020, rising to almost $123/b by 2030 and more than $160/b by 2040. It should be noted that these are not price forecasts, but working assumptions to guide the development of the Reference Case scenario.
Recent changes in energy policies primarily focus on emissions reduction
The Reference Case takes into account policies already in place, but also accepts that the policy process will evolve over time by allowing the introduction of new policies as a reasonable extension of past trends and as a reflection of current debate on policy issues.
Recent changes in energy policies focus primarily on emissions reduction through the use of different sets of measures. One set of measures targets tighter fuel efficiency standards, such as Phase 2 of the Corporate Average Fuel Economy (CAFE) standards for heavy-duty vehicles in the United States (US), the new Corporate Average Fuel Consumption standards (CAFC) in India and the introduction of EURO 6 standards in the European Union (EU). These are typically supplemented by better energy efficient standards for residential buildings (for example in China, the US, the EU). Another set of measures relates specifically to the power sector either through specific targets for emissions reduction (for example, the Clean Power Plan in the US) or through support to renewable energy in the sector (for example, EU efforts to increase the share of renewable energy). Finally, the removal of subsidies and price controls in several countries (such as India, Egypt, Malaysia and the UAE) also contributes to the overall focus.
The Intended Nationally Determined Contributions (INDCs) being submitted to the United Nations Framework Convention on Climate Change (UNFCCC) during 2015, in the run-up to COP21, also provide an important indication about the direction of future energy policies in many countries.
Global energy demand set to increase by almost 50% in the period to 2040 with the mix continuing to be dominated by oil and gas
In the years ahead, global energy demand is set to grow by 47%, reaching 399 million barrels of oil equivalent per day (mboe/d) by 2040. Much of this growth will continue to be concentrated in the developing world as industrialization, population growth and the unprecedented expansion of the middle class will propel the need for energy.
By 2040, the developing world is expected to make up 63% of the total global energy consumption, a marked increase from 50% in 2014. OECD energy consumption, on the other hand, will only increase 4% from 2014–2040 due to its continued focus on low energy-intensive industries, improved energy efficiency and slower economic growth.
Moreover, changes in the energy mix are expected to continue, though fossil fuels will continue to dominate the mix with a 78% share by 2040. In the next 20 years, oil will remain the fuel with the largest share of global energy use. However, its relative weight will decline in the next decades. By the 2030s, oil is expected to drop below 28%. A similar trend is expected for coal. By 2040, natural gas is expected to have the largest share, making up close to 28% of global energy demand with both oil and coal having lower shares by then. However, combined, oil and gas are expected to supply around 53% of the global energy mix by 2040, similar to current levels.
Fast growth of renewable energy set to continue
Non-fossil fuel energy will also face significant changes in the coming years. Between 2013 and 2040, nuclear energy will increase at 2.2% p.a., on average, making up 5.9% of the world’s total energy consumption by 2040. The share of hydro and biomass, though growing, will remain relatively stable (hydro at around 2.5% and biomass within a narrow range of 9.5–9.8%). Other renewables, mainly wind and solar, are expected to grow at the fastest rates, multiplying their contribution to total primary energy supply by more than seven times. Their overall share will nevertheless remain low, reaching around 4% in 2040.
Oil demand in the medium-term revised upward, reaching 97.4 mb/d by 2020…
Oil demand in the Reference Case increases by an average of 1 mb/d p.a. in the medium-term, from 91.3 mb/d in 2014 to 97.4 mb/d by 2020. Compared to the WOO 2014, global demand has been revised upwards by 0.5 mb/d in 2020.
During this period, oil demand in the OECD region is projected to decline by 0.2 mb/d, totalling 45.6 mb/d in 2020. Oil demand in developing countries is anticipated to increase by 6.1 mb/d between 2014 and 2020, reaching 46.4 mb/d. Moreover, demand in developing countries will surpass that of the OECD by 2020. Demand in Eurasia is expected to increase by 0.3 mb/d, totalling 5.5 mb/d by the end of the medium-term.
… but the demand response to lower prices is constrained by other factors
Short- and medium-term oil demand growth estimates are clearly impacted by the recent decline in oil prices. Oil demand is estimated to increase by 1.5 mb/d in 2015 and 1.3 mb/d in 2016. Nevertheless, several aspects are checking the impact of lower oil prices on demand. The limited share of the crude price in the retail price of refined products in many countries, together with the recent depreciation of domestic currencies against the US dollar in some countries, means that declines in the oil price are not fully passed through to final consumers.
While the ORB’s value dropped by almost 60% in August 2015, compared to April 2014, gasoline prices only dropped be around 25% in the US and China, 20% in India and less than 10% in Europe. Moreover, gasoline prices in Brazil and Russia have actually increased since April 2014 and are now almost 10% higher.
Additionally, the gloomier economic growth rates foreseen in some large oil consuming and oil exporting countries; efficiency improvements and energy conservation measures; oil substitution through gas, biofuels and renewables; development of extensive public transport networks; policies and regulations; and the recent removal of subsidies in several countries have limited – and likely will further limit – the responsiveness of demand to lower oil prices in the medium-term.
Oil demand projected at 110 mb/d by 2040
For the long-term, the Reference Case sees oil demand increasing by more than 18 mb/d between 2014 and 2040, reaching 109.8 mb/d at the end of the forecast period. This figure is 1.3 mb/d lower than in the WOO 2014 as a result of further energy efficiency improvements and climate change mitigation policies, as well as slightly lower long-term economic growth estimates.
Demand in the OECD region is expected to decrease by 8 mb/d, down to 37.8 mb/d in 2040. However, oil demand in developing countries is expected to increase significantly (by almost 26 mb/d) to reach 66.1 mb/d at the end of the forecast period. Finally, demand in Eurasia is estimated at 5.8 mb/d in 2040. This represents a minor increase of 0.6 mb/d between 2014 and 2040.
Demand growth decelerates gradually in the long-term
In terms of growth, an overall downward trend in oil demand growth is projected over the forecast period. While global oil demand is expected to grow during the medium-term (2014–2020) by 6.1 mb/d, growth decelerates to 3.5 mb/d during the period 2020–2025 and 3.3 mb/d for 2025–2030.
During the period 2030–2035, it further decreases to 3 mb/d and then to 2.5 mb/d during the last five years of the forecast period. On an annualized basis, global demand growth gradually declines from 1 mb/d on average during the medium-term to around 0.5 mb/d each year during the period 2035–2040. Decelerating economic growth, declining population growth rates and further energy efficiency improvements are behind this downward growth trend.