Every year British Petroleum PLC publishes its authoritative “Statistical Review of World Energy.” And with sticker shock at U.S. gas pumps coupled with stories of pending oil shortages, this year’s review sheds valuable light on what has been happening in world energy markets.
“The purpose of the review has always been to provide reliable, timely, unbiased energy market data,” Mark Finley, BP’s head of energy analysis, said at a June 24 media presentation in Anchorage. “… This data is the first comprehensive snapshot of what’s happened in the world of energy in 2004.”
The big story from last year turned out to be surging world energy consumption fueled by global economic growth, Finley said. In 2004 the world economy enjoyed its best year in 15 years, he said. And in tandem with that, world energy consumption grew by 4.3 percent — the highest annual percentage growth since 1984 and the biggest incremental rate ever in world energy consumption.
“It was above the 10-year average for every part of the world and for every fuel type that we track,” Finley said.
However, the growth in energy usage was most rapid outside the countries with mature industrial economies, he said.
Energy usage in 2004 drove up oil consumption.
“Outside of China we estimate that the very strong economic growth we saw last year boosted oil consumption by about 0.5 million barrels per day beyond what you would see in a normal year,” Finley said.
Worldwide oil production increased in response to these demands for fuel. Although the production increases have come from a broad assortment of countries, growth has been particularly notable in Russia and the deep waters of the Atlantic. But production from mature industrial countries such as the United Kingdom, the United States and Norway declined. OPEC countries have increased their production, led by increased production from Iraq.
“(OPEC production) reached a record level last year of 33 million barrels per day,” Finley said.
But because world economic growth has slowed by about a percentage point in the past year, the BP analysts don’t think that energy usage will escalate as rapidly in 2004 as it did in 2005.
Increasing carbon emissions
With so much of the world’s energy coming from oil and other fossil fuels, a rapid growth in carbon emissions has mirrored the growth in energy usage — carbon emissions have increased throughout the world by about 25 percent since 1990, the base point for the Kyoto Protocol. Countries that ratified the Kyoto Protocol have increased their emissions somewhat less than other countries.
Carbon emissions increased by 4.5 percent in 2004.
“The rate of growth in carbon emissions (in 2004) … was the fastest growth rate we’ve seen since 1976,” Finley said. “In volume terms the amount of carbon emitted was the highest ever.”
Worldwide there’s a strong correlation between economic growth and carbon emissions, he added.
The China factor
China’s booming economy and that country’s increasing energy demands especially impact the markets for oil and coal. Although in the past China has been self-sufficient in energy, the country had to start importing energy in 1995. And China is now the world’s third largest oil importer, with imports leaping by 800,000 barrels per day in 2004.
“Since 2000, and especially since 2002, energy growth has surged in China,” Finley said. “China’s been in the midst of an energy-intensive period of economic growth.”
Coal, however, remains China’s primary fuel. There was a surge in Chinese oil needs in 2004 but this partly resulted from coal supply constraints, while continuing and rapid increases in the number of vehicles on China’s roads are pushing up the demand for refined petroleum products.
“Both gasoline and diesel consumption have risen by about 20 percent last year,” Finley said.
Total Chinese energy usage grew by a little over 15 percent in 2004, as compared with 2.8 percent in the rest of the world. But, because China only accounted for 13.6 percent of total world energy consumption, the total quantity of energy used increased more outside China than inside China.
Finley also pointed out that demand for energy in China has been somewhat erratic in the past few years and actually fell between 1997 and 2000. The 15 percent growth in 2004 was a slight slowdown in growth rate from previous years; initial data for 2005 suggest that the surge in demand for oil in China is slowing somewhat.
Not the highest real prices
Although high oil prices have hit the headlines in the past year, Finley said that after taking inflation into account the recent prices are not in fact as high as those in the price peaks between 1974 and 1985 — in real terms the price of oil reached $82.15 per barrel in 1980, according to the BP review.
But prices have clearly escalated recently and Finley pointed out several reasons for this phenomenon.
“We think that there are a variety of both fundamental supply-and-demand causes and items playing into market expectations that are all mutually reinforcing,” he said.
However, it’s clear that the strength of demand growth was a contributing factor — supplies increased to meet the growing demand but at the cost of drawing down the surplus capacity that forms a cushion against unexpected fluctuations in supply or demand.
“It’s understandable that (as a result of lack of spare capacity) the market would be nervous and bid prices up,” Finley said.
Concerns about the difficulty of increasing the spare capacity have also driven oil futures to high levels. In addition, OPEC appears to have abandoned its earlier price targets for oil and has been cutting production at relatively high prices.
Crude oil quality differentials, the 2004 hurricane Ivan, the increasing tendency to view commodities such as oil as investment instruments and geopolitical concerns have all contributed to the price trends, Finley said.
So far the ramp up in oil prices seems to have had little impact on oil demand and supply. Oil industry investment has increased to record levels and is growing rapidly. But lead times to bring new production on stream tend to be very long.
Not running out of oil
Although the recent run up in the price of oil might imply a world oil shortage, that is definitely not the case, Finley said. Pressure on oil supplies has resulted from production capacity constraints and not from a shortage of known oil reserves.
In fact the Statistical Review data show that proved reserves of oil continue to increase — reserves for 2004 have sustained about the same levels as in 2003, despite rapid oil consumption.
“Proved reserves of oil, gas and coal remain more than adequate to meet the world’s growing need in aggregate for the immediately foreseeable future,” Finley said. “Oil has a reserves-to-production ratio of a little over 40 years, gas of 67 years and coal of 165 years.”
And those figures don’t take into account new technologies that will enable the development of additional reserves in the future, he said.
Natural gas markets
Finley said that natural gas was the slowest growing of all fuels last year but that there are two distinct markets for gas: North America and the rest of the world.
Supply constraints in North America have held down gas consumption for most of the last decade.
“LNG imports are rising but they still only represent about 3 percent of the total consumption,” Finley said.
But there is a growing demand for natural gas for power generation, he said.
“With supply relatively fixed that can only come at the expense of bidding prices higher until other sectors of the market exit,” he said. “In fact what we’ve seen is that industrial sector gas consumption in particular has been declining for several years although it did inch up slightly in 2004.”
And gas prices in North America grew less quickly than oil prices in 2004.
Outside North America, where gas is the preferred fuel, consumption rose by 4.5 percent and prices rose more sharply.
Coal
Gas competes with oil in the United States and globally it competes with coal. In 2004 coal consumption grew, mainly in the Asia Pacific region and coal prices rose by 70 percent. China dominates coal markets and accounts for one third of world coal consumption.
“The fossil fuel that saw the most rapid price increases last year was coal,” Finley said.
Increasing transportation costs formed a major component of the increase in coal prices, he said.
Nuclear power output increased by 4.4 percent in 2004. This increase resulted from Japanese reactors coming back on line after maintenance, the commissioning of some new nuclear plants worldwide and improved operating efficiency in the United States.
Hydroelectric power only accounted for about 6 percent of total energy production in 2004 but hydroelectric output grew by about 5 percent. Growth resulted from a combination of new capacity coming on stream and high rainfall in some parts of the world.
Overall, the generating capacity of other renewable energy sources such as wind power and solar power is growing rapidly, but from a very small base.
Increasing energy trade
Major increases in global energy trading have paralleled worldwide concerns about energy security and energy supplies in the past few years.
“(Global energy trading) has grown on average about 4.5 percent per year for 20 years running — twice the rate (of growth) of underlying energy consumption,” Finley said.
Major energy importing blocks in North America, Europe and Asia Pacific have increased their dependence on energy imports, while the Middle East, the former Soviet Union, Africa and Latin America have increased their exports.
Eighty percent of international energy trading involves oil and 54 percent of that oil comes from the Middle East. However, diversification in world oil markets has left the Middle East share of the oil market relatively constant despite the rising global consumption of the past few years.
And although the energy trade has increased, the market structure for energy consumption has changed relatively little in the past 40 years and shows little indication of change as we move into the future. Oil dominates the market, with coal and gas vying for second place — gas has been gaining ground relative to coal. Hydroelectric and nuclear power each account for about 6 percent of world energy production.
“These trends look set to continue into the foreseeable future unless something new intervenes to change course,” Finley said.
Energy security concerns, climate change and environmental considerations all might trigger changes in future patterns of energy usage, Finley said. The BP review doesn’t attempt to predict the future, although Finley did point out that, regardless of any pressure for change, it does take time for “the capital stock of the industry to turn over.”
“2004 was the year when energy was demand driven,” Finley said, “… but it’s important to note that supplies were maintained and … we did not see shortages of energy in 2004 despite high prices.
“World energy markets are now, however, in a new place — a new starting point of tight capacity and high prices.”
The complete BP Statistical Review of World Energy 2005 is on the Web at www.bp.com/statisticalreview.
