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The Rivalry Era: A brief history of the energy industry from 2015 to 2040

05 October 2014 Jim Burkhard Tiffany Groode

WASHINGTON, October 1, 2041 - It finally happened. After a century riddled with ill-fated initiatives, oil’s monopoly as a fuel source for cars and trucks is no longer. Sure, oil is still a widely used fuel—and the amount of oil actually displaced may not seem particularly impressive at first glance. Oil faces real competition, not from heavily subsidized alternatives, but from market-priced gas and electricity. Indeed, more and more cars can run without gasoline or diesel—at least for a time—but not without electricity

Oil’s weakened grip on the transportation sector is an example of how the energy landscape has changed dramatically over the past 25 years. An unprecedented “rivalry” among different types of energy for market share was the hallmark of the history of energy from 2015 to 2040. Oil and coal are still important energy sources, but the position of energy dominance they enjoyed for a century is a faded memory.

By the 2030s, for the first time in modern history, no source of energy had more than 30% of the global market (see figure below). Demand for oil and coal was curbed by high costs, government policy, and geopolitics. Indeed, a peak in global oil demand is on the horizon—if not upon us now. In contrast, natural gas demand grew more than any other energy source. Gas deepened its role in power generation and became an established fuel for transportation. But the rivalry era was by no means just about competition among fossil fuels. Last year (2040), non-fossil energy sources satisfied nearly a quarter of the world’s primary energy demand. Today, no energy source has a “lock” on demand in any given sector. Consumers have more options than ever when deciding how to propel a vehicle or illuminate the night.

The energy rivalry was impacted by a larger rivalry among nations. The key dynamic of the geopolitical rivalry was a much-diminished gulf between the economic power of the West and other countries. China has had the largest economy in the world for many years now. And last year the Chinese economy was bigger than the combined output of Japan, Germany, and Brazil.

Of course, all countries pursue their own interests. But the world’s relatively new powers—particularly China and India—have had a much bigger impact in the pursuit of their interests than ever before because of their deeper and broader economic capabilities. Their influence and reach expanded in many forms—commercial, military, and political.

At times during the rivalry era, the world edged close to the kind of upheaval that could have irrevocably damaged the global order. Disputes were often fueled by national pride, prestige, and historical grievances. Dense webs of economic relationships did not inoculate the world from friction and conflict. Power—in all its forms—became more and more decentralized and rebalanced commercial, military, and political strength. During this period, the global economy managed to grow at an average annual rate of just above 3%, but not without frequent bouts of anxiety.

Forces for change

Competition for power and influence among major countries was a key force shaping the rivalry era. New energy relationships formed—or took on new dimensions. Russia’s 2014 gas supply deal with China was an early example. Saudi Arabia’s push into solar power was another. Solar supplanted a portion of the oil previously used in domestic power generation, which helped maintain a crude oil production buffer for the oil market. This preserved Saudi Arabia’s important role at the intersection of the oil market and geopolitics.

More broadly, a number of countries adopted policies to encourage the development of unconventional oil and gas. Motivation came from concern about the lack of competitiveness relative to the United States on energy costs as well as ambitions to produce more fuel domestically for the sake of supply security—particularly amid the many years of turbulence that rocked the Middle East and North Africa.

Another key driving force of the rivalry era was price signals. If you believe in the power of price signals to shape behavior, the experience of the rivalry era supports your case. The most prominent example was the reaction to high oil prices and low gas prices. Indeed, it would have been more surprising had there been no reaction. After all, the price of oil remained well above gas prices, including in East Asia.

It took time for gas to gain a real foothold in the transportation market. It’s easy to look back at price trends and see the incentive for change. But back in the mid to late 2010s it was far from certain that natural gas prices would remain low enough to justify the cost of switching to gas from diesel.

Many energy historians view the year 2018 as the point when oil began to lose its dominance and competition in the energy sector took off. In that year, diesel demand in the heavy trucking industry in North America and China began to weaken because of increased use of natural gas as a heavy truck fuel. Gas prices in North America were the lowest in the world—oil was about $100 more expensive on a per-barrel-of-oil equivalent basis during the rivalry era—but even in China natural gas prices were half that of diesel.

By the 2030s, energy competition had hit oil demand. Global demand for refined products grew by a paltry annual average of 0.3% from 2031 to 2040, down from an average of 1.5% from 2014 to 2020 (see figure below). After a century, oil lost its dominant position in the transportation industry as more vehicles, particularly heavy trucks, used natural gas. More and more cars now run on electricity as well.

The pollution paradox

The energy rivalry, however, was not simply a bald response to market prices. The “pollution paradox”—which postulates that a country must grow richer and consume more energy in order to effectively address local pollution—played out many times over in recent decades. This was not a new phenomenon. Nobel Prize-winning economist Simon Kuznets began to identify this dynamic nearly a century ago. But the scale on which it unfolded over the past 25 years was unprecedented. In developing countries—or those that were developing in the early decades of this century—higher energy consumption fueled higher living standards, which in turn led to the means and resolve to address pollution. Efforts to reduce local pollution abetted the energy rivalry in places where price differentials alone may not have been enough for consumers to shift away from oil, or to substitute coal with cleaner energy in power generation.

In China there were many instances in which gas was preferred over coal in power generation, despite its higher cost. Indeed, the lower cost and greater abundance of coal in China has meant there is still a wide price gap between the two fuels. But there is little doubt that lower carbon emissions from gas played a key role in boosting its use in China and elsewhere.

The move to gas and away from coal was exemplified in the late 2010s by the “cleaning” of Pearl River Delta cities Guangzhou, Shenzhen, and Hong Kong. In the 2020s it spread to other areas. Xian—one of the oldest cities in China—has many of the newest clean-burning natural gas power plants and this was driven by environmental imperatives, not price.

China was visited by some of the most high-profile impacts associated with a changing climate over the last 30 years. Who can forget the terrible series of cyclones that overwhelmed swaths of coastal China in the 2020s? These events were painful, but also catalysts to strengthen the low-carbon investment focus.

‘The year without lettuce’

In North America increased occurrences of severe weather and related events—droughts, hurricanes, tornadoes, wildfires, dust storms, and water rationing—increased the level of public and political concern over climate and its impact on the economy. Impacts ranged from the very serious—financial distress for affected areas—to inconveniences.

“The year without lettuce”—when high temperatures devastated output by the world’s two largest lettuce producers—had the broadest impact on climate change perspectives in a number of salad-loving locales. A prominent former skeptic of climate change science quipped, “Why didn’t environmental activists tell me my salad would cost $50? That would have been more effective than telling me about thin ice thousands of kilometers away from me.”

In Africa, many countries experienced strong economic growth punctuated by droughts and devastating storms. A leading Nigerian economist calculated that climate volatility shaved growth by 1% to 2% annually—a big impact on a country of 350 million people. To be sure, such figures generated as much controversy as insight, but they did influence policy trends.

These trends and events boosted support for a lower-carbon economy and to stiffen resilience of infrastructure and critical systems, such as food and water supply. In the US, although a comprehensive, integrated climate and energy policy did not materialize at the federal level, policies to manage greenhouse gas emissions did come about on a sector-by-sector basis.

Globally, generational shifts in attitudes about climate reinforced the desire for change. Over time, public surveys in many countries pointed to growing sensitivity about the impact of human behavior on climate.

Although there was not an effective global deal—despite plenty of conferences and agreements—actions at the national and regional levels did have international significance. A retired Chinese premier remarked a few years ago that while policy in Europe and the US was not a dominant driver of change in China, it would be “tough to imagine” China pursuing climate change policies if other “major powers” had stood still, including those responsible for “historical emissions.”

Still, efforts to move to a lower-carbon energy system only slowed the rise of carbon dioxide emissions. In 2040 global CO2 emissions were 27% higher than in 2015.

Technology advances renewable energy

Advances in technology as well as the spread of technology were also part of the rivalry story—particularly for renewable energy. Declining costs and rising energy production efficiencies made it less expensive to “go green.” Greater efficiency in manufacturing processes complemented mandates to increase the use of solar and wind power. Steady improvements in battery technology also helped out.

Although no one would declare efforts to address climate change a wild success, electricity production from renewable energy—primarily wind and solar—grew far faster than any of its competitors. Just last year, 15% of global electricity production was from wind, solar, and other renewables (excluding hydropower), up from 6% in 2010. Indeed, three solar companies—the Equator Sun Company, Sino Sun, and SolePower—have been among the top-performing global growth companies since 2030. None of these companies existed in the early days of the rivalry era.

Technology’s impact was also essential in meeting regulations to increase fuel economy in light-duty vehicles. Advances in engine efficiency and alternative powertrains helped turn regulatory targets into reality. Rather than restricting consumer choice, innovation and change created more options for consumers in vehicle showrooms. Gasoline and diesel are still preferred by many, but not as many as in the past.

Although sales of electric-only vehicles never matched promoters’ aspirations, increased use of electricity in vehicles helped to achieve impressive gains in fuel economy around the world. In 2010, the average fuel economy of a new light-duty vehicle in the United States was 28.4 miles per gallon (8.3 liters per 100 kilometers). By 2040 this had jumped 114% percent to 60.8 miles per gallon (3.9 liters per 100 kilometers). The same general trend characterized new cars in Europe, China, and Japan (see sidebar on page 52).

Gas: The fulcrum in the energy rivalry

Between 2015 and 2040, total global primary energy demand increased 44%, while the world’s population grew by 28% from 7 billion to 9 billion. Gas was the big winner among all sources of energy in terms of demand growth. World demand for gas increased 78%.

Natural gas epitomized the age of energy rivalry. New opportunities for demand growth emerged. Gas broke oil’s de facto monopoly in the transportation sector as about 2.5 million barrels a day of diesel was displaced by gas. Gas faced competition in the power sector from renewables and coal but ultimately came out a winner. The share of global primary energy demand satisfied by gas increased from 21% in 2015 to 27% in 2040.

Global gas demand expanded, but the geography of growth was uneven. Demand in Russia and the rest of the Commonwealth of Independent States was just slightly higher—3.6%—in 2040 than in 2015. In Europe, gas demand took over 20 years to return to its 2008 peak. It was in Asia where gas demand grew the most, but it also increased in Latin America, the Middle East, and North America. Gas demand more than doubled in Africa, but from a low starting point.

Rising global demand was supplied by the transformation of the global gas reserve base that began with shale gas in North America in the early part of the century. Much attention was focused on the development of shale gas resources in the United States and beyond. But the development of deep water and associated gas—often in connection with unconventional oil—was also critical. These non-traditional gas resources significantly increased the diversity of gas supply. New contracting structures altered the way that gas is bought, sold, and priced.

Global coal: Success leads to downfall

Before oil and gas, coal was the world’s industrial fuel. In recent decades, despite its vilification as a “dirty fuel,” coal has remained one of the world’s top three sources of energy. In an age of growing concern about climate change, coal was able to retain its top-three position because it was cheap. Demand trends for coal were polarized. Marginalized in North America and Europe, coal demand rose in many other places, especially throughout Asia. Ironically, as coal use increased, so too did concern about the pollution it created—an example of the pollution paradox. These concerns eventually led to its loss of market share.

As recently as the first decade of this century, coal use was still growing faster than any other fuel. But in the 2010s, coal ceded first place to gas. Coal producers thus had to adapt to a marketplace in which price competitiveness and security of supply were ultimately the only cards that could be played in coal’s favor. These arguments, particularly affordability, sustained coal’s place in the world but did not make for attractive mining margins. For example, investment in steam coal mining was a tough, often unrewarding business.

The world in 2040

The diversity in the global energy mix in 2040 is unprecedented. Yes, oil and coal are still important energy sources, but their century-long lock as the world’s dominant fuels is no longer. Price signals, environmental concerns, geopolitics, technological change, and efforts to increase energy security and national competitiveness collectively fueled the energy rivalry.

The world is more prosperous than ever, largely due to the spread of energy supply and distribution infrastructure across Asia and Africa. The energy rivalry played a pivotal role in making energy more accessible and cleaner. Living standards—for most—are higher than in the previous generation. At the same time, there is no complacency that this will continue. The US and China succeeded in avoiding open conflict, but the world is far from assured this will continue. China’s influence over the “first island chain” is far greater today—mainly due to the commercial union between Taiwan and the mainland. This development, by itself, does not make the world safer or more dangerous. But it is a significant change in a still-unsettled global order.

Is the world able to maintain peace without a hegemon in place? We will find out in the years ahead.

The power of scenario planning

Perfect prediction of future events is impossible, regardless of how much planning and preparation are conducted. However, the use of a scenario framework—where two or more different views of the future are considered—can make investments and strategy more robust and resilient under a range of potential outcomes.

In 2014, IHS Energy is releasing a new generation of scenarios. Rivalry is the planning scenario, which provides a comprehensive global energy outlook to 2040. Our two alternative scenarios, Autonomy and Vertigo, are intended to help our clients consider and prepare for outcomes that are different from the planning scenario.

This article is a summary of the Rivalry scenario—a “history of the future of energy.” A scenario narrative goes beyond the numbers and explains the driving forces that shape the future. The Rivalry narrative is written from an imagined perspective of 2041. Most of us are accustomed to reading history books written in the past tense with the writer knowing what came before and after the events being discussed. We have adopted a similar approach with the aim of providing a scenario narrative style that is familiar and, we hope, an edifying and insightful read.

Auto retrospective, 2015-2040: Emerging markets drove growth

DETROIT, October 1, 2041- In the past 25 years, the number of vehicles on the road has doubled, hitting 2 billion globally just last year. Sales growth of light-duty vehicles in the emerging markets of the Asia-Pacific region, and especially China, far outpaced that of other regions of the world.

The increase in sales came as emerging market economies led the world in GDP growth, expanding at an annual rate of 4.8% over the past quarter century compared with advanced economies, whose growth lagged at an average annual rate of 2.0%. As emerging economies became richer and consumed more energy, pollution, and in particular poor urban air quality, became a bigger issue and led to more stringent environmental regulations. The tightening of tailpipe emission standards and stricter fuel economy standards resulted in an increase in powertrain competition and the move toward smaller and/or lighter vehicles and greater electrification.

In a roundabout way, it was the increased pollution that led the way for alternative fuels and powertrains—an example of the “pollution paradox.” Social and political opposition to increasing pollution coincided with generational changes in attitudes about climate change that ultimately led to environmental improvements and moderation in the growth of greenhouse gas emissions.

Asian countries, led by China, pursued goals to cut carbon intensity and improve air quality through a range of policies, including energy efficiency. Many emerging markets discouraged diesel use in light-duty vehicles, effectively reserving the fuel for use in larger and mostly commercial vehicles. By 2025, global diesel vehicle sales had begun to decline. While the CO2 and fuel economy standards globally continued to improve at a modest pace through 2030, the drive to regulate emissions and the push toward new electric vehicle technology became more urgent as 2040 approached.

Since 2025, an increasing percentage of global sales has comprised new-energy vehicles—primarily conventional and plug-in hybrids. Many consumers still prefer gasoline and diesel, but liquefied natural gas has become a mainstream fuel in heavy trucking in both China and the United States. More recently, we have seen a flattening in demand for vehicles using conventional gasoline and diesel, which had powered a large portion of the fleet in the past (see figure).

Around the world, electricity has become a more vital part of the transportation industry. Increased use of electricity in the full range of electric vehicles, including hybrids, has been pivotal in the impressive gains in CO2 reduction and improvement in urban air quality.

Jim Burkhard, Vice President and Head of Global Oil Market Research and Energy Scenarios, IHS Energy
Tiffany Groode, Senior Principal Researcher, IHS Automotive

Posted 5 October 2014

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