INSIGHT: Costly oil spawns novel alternatives

14 June 2006 17:41  [Source: ICIS news]

LONDON (ICIS news)--Sky high oil prices, concerns over gas availability and the push to re-discover coal have all combined to draw attention to the world’s need for energy and its reliable supply.

The good news is that energy market adjustments are beginning.

Energy markets are volatile this year not because of supply/demand fundamentals but due to shifting demand patterns and rising geopolitical tensions. Underlying energy statistics have acquired new life and certainly raise more than passing interest among industrialists and even the energy consuming public.

BP said on Wednesday that world energy demand growth slowed in 2005 to 2.7%, closer to the 10-year average and away from the 4.4% increase seen in 2004 which was the steepest in 20 years. Last year, demand slowed in every region and for every fuel despite being driven further by above trend economic growth.

The energy complex coped admirably with the crippling impact of the two major hurricanes that hit the US Gulf Coast in 2005. Yet as BP’s chief economist, Peter Davies, noted at the launch of the BP Statistical Review of World Energy 2006, supply availability has continued but at the cost of high prices.

Markets are adjusting, however, and Davies suggested this will continue.

“There has been a price effect already with coal and gas prices falling and oil consumption growth slowing sharply and inventories rising,” he said.

This dramatic period for the energy sector produced in 2005 the third consecutive year of higher energy prices, according to the BP data. Brent crude rose by more than 40% over the course of the year and pushed over $60/bbl in August. It averaged $45/bbl for the year.

The oil price increase highlighted the limited ability of the world refining system to refine heavy sour crude which were often sold at steep discounts to the lighter grades traded on the NYMEX and IPE futures markets. Against the backdrop of higher priced oil attention turned to gas and alternative energy sources like coal.

The energy statistics are revealing but also hide some of the truth behind the headlines. Energy consumption in the US fell by 0.1% last year, the first time since 1985 the country had experienced above trend economic growth and lower energy consumption.

The hurricanes were largely to blame – the decline in oil consumption was concentrated in the last four months of the year. But high prices also clearly took their toll of demand. High and volatile gas prices hit industrial users in countries like the UK where consumption in the world’s third largest market fell by 2.2% on the back of high prices.

US gas consumption fell 1.5% but the fall was close to the global average.

China’s energy consumption grew less strongly in 2005 at 9.5% compared with growth of 15.5% in 2004 even though its economic growth was flat at 9.9%. China is the driver on coal, the fastest growing fuel globally. Its coal use grew 11% in 2005, compared to 14.4% in 2004, and accounted for 8% of global consumption growth.

China is the largest producer of hydroelectricity and its hydroelectric output last year was up 14%.

Not surprisingly, alternative energy sources and renewables are taking a larger slice of the energy pie.

Installed wind power capacity was 28.6% higher in 2005, for instance, but was used to generate only an estimated 0.7% of worldwide electricity. Global ethanol production rose by 10% in 2005 reaching 16m tonnes of oil equivalent or about 0.4% of world oil consumption, BP said.

Despite the relatively small impact, the rates of growth are noteworthy. If oil prices remain high then the world will seek out lower cost alternatives. The drive for greater energy sustainability will continue. The dry statistics reveal a great deal and emphasise the winds of change.

By: Nigel Davis
+44 20 8652 3214

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