When presenting this year’s BP Statistical Review of World Energy on June 13 Spencer Dale, BP Group chief economist, reflected on the rollercoaster ride of worldwide energy markets and commented on the importance of distinguishing between the structural factors that drive long-term trends versus more short-term market cycles.
“Stability and energy don’t go together,” Dale said. “Booms, busts, rebounds and reversals are the norm.”
But beyond these gyrations a long-term transition in energy markets is taking place, in which, on the demand side, energy use is becoming more efficient, while demand growth is being driven by developing economies led by China. On the supply side, there is a movement towards cleaner, less carbon intensive energy sources, led by renewable energies and driven by a combination of environmental needs and technological advances.
But in the short term, recent slow global economic growth dampened energy demand, particularly in the industrial sector, the most energy intensive sector of the economy. The weak demand also reflected that long-term trend towards improved energy efficiency, with energy intensity, the amount of energy used per unit of gross domestic product, declining at historically rapid rates, Dale said.
In 2016 energy demand in the developed world remained flat, while China and India led the way in driving an overall worldwide demand increase, he commented. However, demand in China grew at less than a quarter of the rate seen in the previous 10 years, in particular because of a slowdown in the output of Chinese iron, steel and cement.
The oil marketIn the oil market, 2016 saw oil demand recover robustly, while production growth slowed, continuing a response to the fall in oil prices. As in 2015, strength in demand was largely driven by oil importers benefiting from the low prices, in particular Europe and India. Growth of demand in China and the United States was more subdued.
Consumer oriented fuels such as gasoline and jet fuel led the consumption growth, while diesel demand actually declined.
Declines in oil production were particularly notable in U.S. shale oil and in Chinese produced oil. On the other hand countries in the Organization of the Petroleum Exporting Countries saw solid production growth in 2016.
An overall worldwide slowdown in oil production did bring production back into balance with demand by the middle of the year, although elevated levels of oil inventories remained.
In recent years, U.S. shale oil and OPEC production have been the key factors in the drama around the oil market, Dale said. The short-cycle nature of shale oil development and production has enabled shale oil to respond much more quickly to price signals than can conventional oil. However, Dale cautioned against generalizing the shale oil market, commenting that characteristics of production from different shale oil provinces, such as the Permian basin and the Bakken, tend to differ from each other.
On the other hand, Dale likened shale oil production to a weeble figure, a toy figure which, however you cause it to wobble, will always spring back to an upright position.
“That’s the resilience of U.S. tight oil. It may fall over but it will bounce back,” he said.
This resilience enables tight oil to respond quickly to oil price changes, dampening the volatility in the market, Dale said.
OPECDale said that it appears that OPEC, recognizing that shale oil represents a long-term structural phenomenon that the international cartel cannot change, had not originally intervened in the global oil market in response to the growth in shale oil production. But the cartel’s most recent production cuts seem to represent a response to excess global oil stocks, a relatively short-term cyclical phenomenon that the cartel can address.
Ultimately, the oil supply imbalance that appeared in 2014 resulted from the growth of U.S. shale oil.
“This was not a short-term aberration. It was a new source of intramarginal supply,” Dale said.
The oil supply imbalance and growing inventory levels caused a fall in the oil prices in 2015 and into 2016. Prices then stabilized as the market moved into balance in 2016, firming somewhat towards the end of the year in the wake of the OPEC led production cut agreement.
CoalThe loser in the new global energy mix has clearly been coal, which in 2016 continued a fall in both consumption and production, a fall which got underway in 2015.
“The speed of deterioration in the fortunes of coal over the past few years has been stark,” Dale said, commenting that as recently as four years ago coal had been the largest source of global energy growth. Competition from natural gas and renewable energy, together with mounting governmental and societal pressures to shift towards cleaner, lower carbon fuels, are creating long-term forces, driving down coal demand.
At the beginning of 2016 China introduced measures to reduce excess capacity in its coal industry and to improve the efficiency of its remaining coal mines.
“Domestic coal production fell by almost 8 percent, by far the largest decline on record, and the price of steam coal increased by over 60 percent,” Dale said. “Chinese coal consumption also declined for the third consecutive year.”
The events in China have spilled into global coal markets, with tight supplies increasing coal prices but with coal consumption also falling. U.S. coal production registered its second substantial annual production drop, Dale said.
Natural gasDespite an increase in coal prices, global demand for natural gas was relatively muted in 2016, Dale said. Consumption increased by 1.5 percent, while production remained fairly flat. Prices fell, with the Henry Hub market price in the U.S. dropping 5 percent relative to 2015 - European and Asian spot prices fell 20 to 30 percent in response to increasing supplies of liquefied natural gas.
In the United States low oil and gas prices caused gas production to fall for the first time since the shale gas revolution in the mid-2000s, Dale said.
In 2016 an anticipated major growth in LNG production started to take off, with global supplies expected to increase by around 30 percent by 2020.
“That’s equivalent to a new LNG train coming on stream every two to three months for the next four years … quite astonishing growth,” Dale said.
And as the gas market evolves, gas trading is becoming more flexible.
“The shift is already apparent, with a move towards shorter and smaller contracts, and an increasing proportion of LNG trade which is not contracted and is freely traded,” Dale said.
Dale commented on the European gas market, with most gas imported into this market being delivered by pipeline from Russia and Algeria in 2016. While Russia, Europe’s primary pipeline gas supplier, has a strong incentive to maintain its market share in Europe, there are also concerns in Europe about becoming too dependent on a single supply source, Dale said.
RenewablesThe production of renewable energy continued to grow rapidly in 2016, led by wind and solar power. Although renewables’ share of primary energy production remains small, its rapid growth caused it to account for more than 30 percent of the overall global increase in primary energy production in 2016, Dale said. China continues to dominate the growth of renewables, contributing more than 40 percent of the worldwide growth and surpassing the United States to become the world’s largest producer of renewable power.
In the European Union, on the other hand, renewable output barely grew. Apparently this sluggish performance related to weather issues, a reminder of the impact that weather variability can have on renewable production.
Although wind power continues to dominate renewable energy production, solar energy, with its rapid evolution and more modular technology, is catching up quickly, Dale said.
Power generationGlobal electrical power generation, the largest consumer of primary energy, increased by 2.2 percent in 2016, an increase higher than in 2015 but lower than the long-term average. Almost all growth came from developing economies, with power generation in the developed world remaining essentially flat. In the developed world, a widening gap between GDP growth and electricity consumption since 2010 appears, at least in part, to result from efficiency gains through the deployment of technologies such as LED lightbulbs.
And, with competition between different fuels over carbon emissions, for the last 15 years renewable energy has been accounting for an increasing share of the energy supply for power generation, an effect that has begun to impact natural gas demand as well as coal, Dale said.
Carbon emissionsFor the third consecutive year, carbon emissions remained essentially flat in 2016, in sharp contrast to previous emissions increases. Some of the emissions slowdown can be attributed to weak global GDP growth, but much of the phenomenon results from reductions in the carbon intensity of energy use and in changes to the overall fuel mix, Dale said. China, with its recent reductions in carbon emissions, will play a key role in determining whether this flattening of carbon dioxide output represents a decisive break from the past or whether it is a short-term cyclical phenomenon.
There is good reason to think that there are structural factors with long-term implications for the carbon emissions trend, but some of the trend over the past couple of years reflects cyclical factors such as the slowing down of China’s more energy-intensive industrial sectors, Dale said.
There remains a long road to travel to achieve the goals set by the Paris agreement on climate change, Dale said.
“We must retain our focus and effort on reducing carbon emissions,” he said.