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World Energy Outlook 2006 - SUMMARY AND CONCLUSIONS - International Energy Agency, Paris France

affordable energy plays in economic growth and human development, and of

the vulnerability of the global energy system to supply disruptions.

Safeguarding energy supplies is once again at the top of the international policy

agenda. Yet the current pattern of energy supply carries the threat of severe and

irreversible environmental damage – including changes in global climate.

Reconciling the goals of energy security and environmental protection requires

strong and coordinated government action and public support.

emissions is more urgent than ever. G8 leaders, meeting with the leaders of

several major developing countries and heads of international organisations –

including the International Energy Agency – at Gleneagles in July 2005 and in

St. Petersburg in July 2006 called on the IEA to "advise on alternative energy

scenarios and strategies aimed at a clean, clever and competitive energy future".

This year’s Outlook responds to that request. It confirms that fossil-fuel demand

and trade flows, and greenhouse-gas emissions would follow their current

unsustainable paths through to 2030 in the absence of new government action –

the underlying premise of our Reference Scenario.  It also demonstrates, in an

Alternative Policy Scenario, that a package of policies and measures that countries

around the world are considering would, if implemented, significantly reduce the

rate of increase in demand and emissions. Importantly, the economic cost of these

policies would be more than outweighed by the economic benefits that would

come from using and producing energy more efficiently.

period to 2015 alone. Over 70% of the increase in demand over the

projection period comes from developing countries, with China alone

accounting for 30%. Their economies and population grow much faster than

in the OECD, shifting the centre of gravity of global energy demand. Almost

half of the increase in global primary energy use goes to generating electricity

and one-fifth to meeting transport needs – almost entirely in the form of oil based

fuels.

both scenarios. In the Reference Scenario, they account for 83% of the overall

increase in energy demand between 2004 and 2030. As a result, their share of

world demand edges up, from 80% to 81%. The share of oil drops, though oil

remains the largest single fuel in the global energy mix in 2030. Global oil

demand reaches 99 million barrels per day in 2015 and 116 mb/d in 2030 –

up from 84 mb/d in 2005. In contrast to WEO-2005, coal sees the biggest

increase in demand in absolute terms, driven mainly by power generation.

China and India account for almost four-fifths of the incremental demand for

coal. It remains the second-largest primary fuel, its share in global demand

increasing slightly. The share of natural gas also rises, even though gas use grows

less quickly than projected in the last Outlook, due to higher prices.

Hydropower’s share of primary energy use rises slightly, while that of nuclear

power falls. The share of biomass falls marginally, as developing countries

increasingly switch to using modern commercial energy, offsetting the growing

use of biomass as feedstock for biofuels production and for power and heat

generation. Non-hydro renewables – including wind, solar and geothermal –

grow quickest, but from a small base.

Market fundamentals point to a modest easing of prices as new capacity comes

on stream and demand growth slows. But new geopolitical tensions or, worse,

a major supply disruption could drive prices even higher. We assume the

average IEA crude oil import price falls back to $47 per barrel in real terms in

the early part of the next decade and then rises steadily through to 2030.

Natural gas prices are assumed broadly to follow the trend in oil prices, because

of the continuing widespread use of oil-price indexation in long-term gas

supply contracts and because of inter-fuel competition. Coal prices are assumed

to change proportionately less over time, but follow the direction of oil and

gas prices.

increasingly dependent on imports as their indigenous production fails to keep

pace with demand. Non-OPEC production of conventional crude oil and

natural gas liquids is set to peak within a decade. By 2030, the OECD as a

whole imports two-thirds of its oil needs in the Reference Scenario, compared

with 56% today. Much of the additional imports come from the Middle East,

along vulnerable maritime routes. The concentration of oil production in a

small group of countries with large reserves – notably Middle East OPEC

members and Russia – will increase their market dominance and their ability

to impose higher prices. An increasing share of gas demand is also expected to

be met by imports, via pipeline or in the form of liquefied natural gas from

increasingly distant suppliers.

impact on international oil prices of a supply disruption. The share of

transport demand – which is price-inelastic relative to other energy services –

in global oil consumption is projected to rise in the Reference Scenario. As a

result, oil demand becomes less and less responsive to movements in

international crude oil prices. The corollary of this is that prices would fluctuate

more than in the past in response to future short-term shifts in demand and

supply. The cushioning effect of subsidies to oil consumers on demand

contributes to the insensitivity of global oil demand to changes in international

prices. Current subsidies on oil products in non-OECD countries are estimated

at over $90 billion annually. Subsidies on all forms of final energy outside the

OECD amount to over $250 billion per year – equal to all the investment

needed in the power sector each year, on average, in those countries.

Although most oil-importing economies around the world have continued to

grow strongly since 2002, they would have grown even more rapidly had the

price of oil and other forms of energy not increased. In many importing

countries, increases in the value of exports of non-energy commodities, the

prices of which have also risen, have offset at least part of the impact of higher

energy prices. The eventual impact of higher energy prices on macroeconomic

prospects remains uncertain, partly because the effects of recent price increases

have not fully worked their way through the economic system. There are

growing signs of inflationary pressures, leading to higher interest rates. Most

OECD countries have experienced a worsening of their current account

balances, most obviously the United States. The recycling of petro-dollars may

have helped to mitigate the increase in long-term interest rates, delaying the

adverse impact on real incomes and output of higher energy prices. The longer

prices remain at current levels or the more they rise, the greater the threat to

economic growth in importing countries. An oil-price shock caused by a

sudden and severe supply disruption would be particularly damaging – for

heavily indebted poor countries most of all.

Outlook call for cumulative investment of just over $20 trillion (in year-2005

dollars) over 2005-2030. This is around $3 trillion higher than in WEO-2005,

mainly because of recent sharp increases in unit capital costs, especially in the oil

and gas industry. The power sector accounts for 56% of total investment – or

around two-thirds if investment in the supply chain to meet the fuel needs of

power stations is included. Oil investment – three-quarters of which goes to the

upstream – amounts to over $4 trillion in total over 2005-2030. Upstream

investment needs are more sensitive to changes in decline rates at producing

fields than to the rate of growth of demand for oil. More than half of all the

energy investment needed worldwide is in developing countries, where demand

and production increase most quickly. China alone needs to invest about

$3.7 trillion – 18% of the world total.

Government policies, geopolitical factors, unexpected changes in unit costs and

prices, and new technology could all affect the opportunities and incentives for

private and publicly-owned companies to invest in different parts of the various

energy-supply chains. The investment decisions of the major oil- and gas producing

countries are of crucial importance, as they will increasingly affect the

volume and cost of imports in the consuming countries. There are doubts, for

example, about whether investment in Russia’s gas industry will be sufficient even

to maintain current export levels to Europe and to start exporting to Asia.

Capital spending by the world’s leading oil and gas companies increased sharply

in nominal terms over the course of the first half of the current decade and,

according to company plans, will rise further to 2010. But the impact on new

capacity of higher spending is being blunted by rising costs. Expressed in cost

inflation-adjusted terms, investment in 2005 was only 5% above that in 2000.

Planned upstream investment to 2010 is expected to boost slightly global spare

crude oil production capacity. But capacity additions could be smaller on account

of shortages of skilled personnel and equipment, regulatory delays, cost inflation,

higher decline rates at existing fields and geopolitics. Increased capital spending

on refining is expected to raise throughput capacity by almost 8 mb/d by 2010.

Beyond the current decade, higher investment in real terms will be needed to

maintain growth in upstream and downstream capacity. In a Deferred

Investment Case, lower OPEC crude oil production, partially offset by increased

non-OPEC production, pushes oil prices up by one-third, trimming global oil

demand by 7 mb/d, or 6%, in 2030 relative to the Reference Scenario.

They reach 40 gigatonnes in 2030, an increase of 14 Gt over the 2004 level.

Power generation contributes half of the increase in global emissions over

the projection period. Coal overtook oil in 2003 as the leading contributor

through to 2030. Emissions are projected to grow slightly faster than

primary energy demand – reversing the trend of the last two-and-a-half

decades – because the average carbon content of primary energy

consumption increases.

overtake the OECD as the biggest emitter by soon after 2010. The share of

developing countries in world emissions rises from 39% in 2004 to over

one-half by 2030. This increase is faster than that of their share in energy

demand, because their incremental energy use is more carbon-intensive than

that of the OECD and transition economies. In general, the developing

countries use proportionately more coal and less gas. China alone is

responsible for about 39% of the rise in global emissions. China’s emissions

more than double between 2004 and 2030, driven by strong economic

growth and heavy reliance on coal in power generation and industry. China

overtakes the United States as the world’s biggest emitter before 2010. Other

Asian countries, notably India, also contribute heavily to the increase in global

emissions. The per-capita emissions of non-OECD countries nonetheless

remain well below those of the OECD.

governments may well take stronger action to steer the energy system onto a

more sustainable path. In the Alternative Policy Scenario, the policies and

measures that governments are currently considering aimed at enhancing

This would result in significantly slower growth in fossil-fuel demand, in oil

and gas imports and in emissions. These interventions include efforts to

improve efficiency in energy production and use, to increase reliance on nonfossil

fuels and to sustain the domestic supply of oil and gas within net energy importing

countries.

equivalent to China’s entire energy consumption today. Global demand

grows, by 37% between 2004 and 2030, but more slowly: 1.2% annually

against 1.6% in the Reference Scenario. The biggest energy savings in both

absolute and percentage terms come from coal. The impact on energy demand

of new policies is less marked in the first decade of the Outlook period, but far

from negligible. The difference in global energy demand between the two

scenarios in 2015 is about 4%.

by around 2015 and then begin to fall. Even so, all three OECD regions and

developing Asia are more dependent on oil imports by the end of the

projection period, though markedly less so than in the Reference Scenario.

Global oil demand reaches 103 mb/d in 2030 in the Alternative Policy

Scenario – an increase of 20 mb/d on the 2005 level but 13 mb/d less than in

the Reference Scenario. Measures in the transport sector produce close to 60%

of all the oil savings in the Alternative Policy Scenario. More than two-thirds

come from more efficient new vehicles. Increased biofuels use and production,

especially in Brazil, Europe and the United States, also helps reduce oil needs.

Globally, gas demand and reliance on gas imports are also sharply reduced visà-

vis the Reference Scenario.

and by 6.3 Gt, or 16%, in 2030 relative to the Reference Scenario. The

actions taken in the Alternative Policy Scenario cause emissions in the OECD

and in the transition economies to stabilise and then decline before 2030. Their

emissions in 2030 are still slightly higher than in 2004, but well below the

Reference Scenario level. Emissions in the European Union and Japan fall to

below current levels. Emissions in developing regions carry on growing, but the

rate of increase slows appreciably over the Outlook period compared with the

Reference Scenario.

from switching to low- and or zero-carbon fuels. More efficient use of fuels,

mainly through more efficient cars and trucks, accounts for almost 36% of the

emissions saved. More efficient use of electricity in a wide range of applications,

including lighting, air-conditioning, appliances and industrial motors, accounts

for another 30%. More efficient energy production contributes 13%.

Renewables and biofuels together yield another 12% and nuclear the remaining

10%. The implementation of only a dozen policies would result in nearly 40%

reducing emissions also yield the biggest reductions in oil and gas imports.

2005-2030 along the energy chain – from the producer to the consumer – is

$560 billion lower than in the Reference Scenario. Investment in end-use

equipment and buildings is $2.4 trillion higher, but this is more than

outweighed by the $3 trillion of investment that is avoided on the supply side.

Over the same period, the cost of the fuel saved by consumers amounts to

$8.1 trillion, more than offsetting the extra demand-side investments required

to generate these savings.

big savings. On average, an additional dollar invested in more efficient

electrical equipment, appliances and buildings avoids more than two dollars

in investment in electricity supply. This ratio is highest in non-OECD

countries. Two-thirds of the additional demand-side capital spending is

borne by consumers in OECD countries. The payback periods of the

additional demand-side investments are very short, ranging from one to

eight years. They are shortest in developing countries and for those polices

introduced before 2015.

nuclear power generating capacity increases from 368 GW in 2005 to

416 GW in 2030. But its share in the primary energy mix still falls, on the

assumption that few new reactors are built and that several existing ones are

retired. In the Alternative Policy Scenario, more favourable nuclear policies

raise nuclear power generating capacity to 519 GW by 2030, so that its share

in the energy mix rises.

competitive. New nuclear power plants could produce electricity at a cost of

less than five US cents per kWh, if construction and operating risks are

appropriately managed by plant vendors and power companies. At this cost,

nuclear power would be cheaper than gas-based electricity if gas prices are

above $4.70 per MBtu. Nuclear power would still be more expensive than

conventional coal-fired plants at coal prices of less than $70 per tonne. The

breakeven costs of nuclear power would be lower if a financial penalty on

facilitating private investment, especially in liberalised markets. Nuclear

power plants are capital-intensive, requiring initial investment of $2 billion to

$3.5 billion per reactor. On the other hand, nuclear power generating costs are

less vulnerable to fuel-price changes than coal- or gas-fired generation.

Moreover, uranium resources are abundant and widely distributed around the

globe. These two advantages make nuclear power a potentially attractive option

for enhancing the security of electricity supply – if concerns about plant safety,

nuclear waste disposal and the risk of proliferation can be solved to the

satisfaction of the public.

They account for 7% of the road-fuel consumption in 2030 in that scenario,

up from 1% today. In the Reference Scenario, the share reaches 4%. In both

scenarios, the United States, the European Union and Brazil account for the

bulk of the increase and remain the leading producers and consumers of

biofuels. Ethanol is expected to account for most of the increase in biofuels use

worldwide, as production costs are expected to fall faster than those of biodiesel

– the other main biofuel. The share of biofuels in transport-fuel use remains far

and away the highest in Brazil – the world’s lowest-cost producer of ethanol.

current technology. About 14 million hectares of land are now used for the

production of biofuels, equal to about 1% of the world’s currently available

arable land. This share rises to 2% in the Reference Scenario and 3.5% in the

Alternative Policy Scenario. The amount of arable land needed in 2030 is equal

to more than that of France and Spain in the Reference Scenario and that of all

the OECD Pacific countries – including Australia – in the Alternative Policy

Scenario.

in either scenario. But significant technological challenges still need to be

Summary and Conclusions 9

overcome for these second-generation technologies to become commercially

viable. Trade and subsidy policies will be critical factors in determining where

and with what resources and technologies biofuels will be produced in the

coming decades, the overall burden of subsidy on taxpayers and the cost effectiveness

of biofuels as a way of promoting energy diversity and reducing

carbon-dioxide emissions.

take considerable political will to push these policies through, many of which

are bound to encounter resistance from some industry and consumer interests.

Politicians need to spell out clearly the benefits to the economy and to society

as a whole of the proposed measures. In most countries, the public is becoming

familiar with the energy-security and environmental advantages of action to

encourage more efficient energy use and to boost the role of renewables.

more stringent government policy initiatives. While most energy-related

investment will have to come from the private sector, governments have a key

role to play in creating the appropriate investment environment. The

industrialised countries will need to help developing countries leapfrog to the

most advanced technologies and adopt efficient equipment and practices.

This will require programmes to promote technology transfer, capacity

building and collaborative research and development. A strong degree of

cooperation between countries, and between industry and government will

be needed. Non-OECD countries can seek help from multilateral lending

institutions and other international organisations in devising and

implementing new policies. This may be particularly critical for small

developing countries which, unlike China and India, may struggle to attract

investment.

with which policy action is required. Each year of delay in implementing

the policies analysed would have a disproportionately larger effect on

emissions. For example, if the policies were to be delayed by ten years, with

implementation starting only in 2015, the cumulative avoided emissions by

2030 vis-à-vis the Reference Scenario would be only 2%, compared with 8%

in the Alternative Policy Scenario. In addition, delays in stepping up energy related

capture and storage, would hinder prospects for bringing down emissions

after 2030.

would require much stronger policies. In practice, technological breakthroughs

that change profoundly the way we produce and consume energy will almost

certainly be needed as well. The difficulties in making this happen in the time

frame of our analysis do not justify inaction or delay, which would raise the

long-term economic, security and environmental cost. The sooner a start is

made, the quicker a new generation of more efficient and low- or zero-carbon

energy systems can be put in place.

technologies that are already available or close to commercialisation. A

recently published IEA report, Energy Technology Perspectives, demonstrates that

a portfolio approach to technology development and deployment is needed. In

this Outlook, a Beyond the Alternative Policy Scenario (BAPS) Case illustrates

today’s levels could be achieved. This would require emissions to be cut by 8 Gt

more than in the Alternative Policy Scenario. Four-fifths of the energy and

emissions savings in the BAPS Case come from even stronger policy efforts to

improve energy efficiency, to boost nuclear power and renewables-based

storage technology – one of the most promising options for mitigating

emissions in the longer term. Yet the technology shifts outlined in the BAPS

Case, while technically feasible, would be unprecedented in scale and speed of

deployment.

people use fuelwood, charcoal, agricultural waste and animal dung to meet

most of their daily energy needs for cooking and heating. In many countries,

these resources account for over 90% of total household energy consumption.

The inefficient and unsustainable use of biomass has severe consequences for

health, the environment and economic development. Shockingly, about

1.3 million people – mostly women and children – die prematurely every year

because of exposure to indoor air pollution from biomass. There is evidence

that, in countries where local prices have adjusted to recent high international

energy prices, the shift to cleaner, more efficient ways of cooking has actually

slowed and even reversed. In the Reference Scenario, the number of people

using biomass increases to 2.6 billion by 2015 and to 2.7 billion by 2030 as

population rises. That is, one-third of the world’s population will still be relying

on these fuels, a share barely smaller than today. There are still 1.6 billion

people in the world without electricity. To achieve the Millennium

Development Goals, this number would need to fall to less than one billion

by 2015.

is needed urgently. The appropriate policy approach depends on local

circumstances such as per-capita incomes and the availability of a sustainable

biomass supply. Alternative fuels and technologies are already available at

reasonable cost. Halving the number of households using biomass for cooking

by 2015 – a recommendation of the UN Millennium Project – would involve

1.3 billion people switching to liquefied petroleum gas and other commercial

fuels. This would not have a significant impact on world oil demand and the

equipment would cost, at most, $1.5 billion per year. But vigorous and

concerted government action – with support from the industrialised countries

– is needed to achieve this target, together with increased funding from both

public and private sources. Policies would need to address barriers to access,

affordability and supply, and to form a central component of broader

development strategies.

© OECD/IEA, 2006

No reproduction, copy, transmission or translation of this publication may be made

without written permission. Applications should be sent to:

International Energy Agency (IEA), Head of Publications Service,

9 rue de la Fédération, 75739 Paris Cedex 15, France.

INTERNATIONAL ENERGY AGENCY

The International Energy Agency (IEA) is an autonomous body which was established in

November 1974 within the framework of the Organisation for Economic Co-operation

and Development (OECD) to implement an international energy programme.

It carries out a comprehensive programme of energy co-operation among twenty-six of the

OECD’s thirty member countries. The basic aims of the IEA are:

• to maintain and improve systems for coping with oil supply disruptions;

• to promote rational energy policies in a global context through co-operative relations

with non-member countries, industry and international organisations;

• to operate a permanent information system on the international oil market;

• to improve the world’s energy supply and demand structure by developing alternative

energy sources and increasing the efficiency of energy use;

• to assist in the integration of environmental and energy policies.

The IEA member countries are: Australia, Austria, Belgium, Canada, the Czech Republic,

Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, the Republic

of Korea, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain,

Sweden, Switzerland, Turkey, the United Kingdom, the United States. The European

Commission takes part in the work of the IEA.

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

The OECD is a unique forum where the governments of thirty democracies work together

to address the economic, social and environmental challenges of globalisation. The OECD

is also at the forefront of efforts to understand and to help governments respond to new

developments and concerns, such as corporate governance, the information economy

and the challenges of an ageing population. The Organisation provides a setting where

governments can compare policy experiences, seek answers to common problems,

identify good practice and work to co-ordinate domestic and international policies.

The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech

Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy,

Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland,

Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom

and the United States. The European Commission takes part in the work of the OECD.