INSIGHT: IEA warns of energy cost threat to exporters in EU, Japan

18 November 2013 15:54  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Cheaper natural gas for the US but a large regional disparity in energy costs are key messages from the 2013 World Energy Outlook from the International Energy Agency (IEA) published on Tuesday.

Sharp differences in energy prices between the regions are likely to affect industrial competitiveness, the agency says, as it predicts that the EU and Japan could lose as much as one-third of their combined share of global exports because of higher energy costs.

“Average Japanese or European industrial consumers pay more than twice as much for electricity as their counterparts in the United States, and even China's industry pays almost double the US level,” the agency adds. “In WEO-2013, large variations in energy prices persist through to 2035, affecting company strategies and investment decisions in energy-intensive industries.”

While the US reaps the advantages of cheap shale gas the IEA believes that two thirds of the economic potential of energy efficiency will go untapped in 2035 unless market barriers can be breached. These barriers include fossil fuel subsidies which cost an estimated $544bn in wasteful consumption in 2012.

IEA Wolrd Energy Outlook 2013 view on energyAnd there are other ways in which regional gas price variations might be smoothed out.

The gap between widely disparate regional natural gas prices could reduce as markets and pricing globalise.

Exports of liquefied natural gas (LNG) from the US and gas market and pricing reforms in Asia Pacific can help loosen the contractual rigidity of natural gas traded internationally and its indexation to high oil prices, the IEA says.

While the agency’s scenarios have to present a rigid view of the future, a lot may change in the real, more dynamic, market environment.

"Major changes are emerging in the energy world in response to shifts in economic growth, efforts at decarbonisation and technological breakthroughs," said IEA executive director Maria van der Hoeven, on the launch of the report.

"We have the tools to deal with such profound market change. Those that anticipate global energy developments successfully can derive an advantage, while those that do not risk taking poor policy and investment decisions."

Greater tight and deep light oil production will not transform global oil markets over the longer-term, the IEA believes, but will help create energy cost imbalances that will clearly affect energy intensive industries such as chemicals.

In some respects, the agency downplays the role of tight oil and deepwater oil in transforming the global energy picture. Rising oil output from the US and Brazil “reduces the role of OPEC countries in quenching the world’s thirst for oil over the next decade,” it says. But it adds that the only large source of low-cost oil, the Middle East, will take back its role as the major provider of oil supply growth from the mid-2020s.

Yet the changing pattern of consumption of oil and gas in the Middle East will have a profound effect on markets, it suggests.

Oil consumption will shift more towards Asia and the Middle East as will refining capacity. The Middle East becomes the world’s second largest gas consumer by 2020 and the world’s third largest oil consumer by 2030 under its central scenario in a world in which global energy demand rises by a third to 2035.

The IEA has spoken before this year about the increasingly important role that energy efficiency is taking in world oil, gas and renewables demand growth.

It suggests that as the balance of supply, demand and reduced consumption changes so refineries in Europe must close. What it calls low-carbon energy resource meet as much as 40% of the growth in global energy demand. “Energy demand in OECD countries barely rises and by 2035 is less than half that of non-OECD countries.” It says.

Oil demand growth slows steadily, it adds, from 1m bbl/day in 2020 on average to 400,000 bbl/day with high prices encouraging fuel switching and as the drop in OECD oil demand accelerates.

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By: Nigel Davis
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