Dr. Salman Ghouri
and Dr. Yumna Ghouri
Fossil fuels
have been the dominant source of energy for global economic prosperity for over
150 years and today still accounts for over 86% in global energy mix. The
question is what would be its role during the next 2 to 4 decades? There is an on-going
debate among various agencies, researchers and academia whether the role of
fossil fuels will significantly diminish. It is quite possible that things
might change drastically during the next 2 to 3 decades owing to technology,
severe climate change and transformation of our mind-set. In today’s world the
speed of technological
innovation is in seconds compared to
decades in the past (comparatively terms). The
innovation in fuel cells, electric cars, NGVs, significant decline in cost of
solar and wind power during the last decade turn out to be great challenges for
oil and gas industry. The question is how big a share of fossil fuels will be
taken up by renewable sources by 2040? Is this share substantial enough to
undermine the role of oil and gas industry?
In order to explore the
possible answer this paper forecasts the total primary energy consumption in
North America by 2040 (such forecast can be carried out for other regions at a
later stage). In order to estimate consumption behavior we have to develop econometric models for oil,
natural gas, coal, nuclear, hydro and renewable energy using respective prices,
GDP, population, trend variable with and without constant in order to find the
best estimated relationship for each of the energy resources. Different
models are required to explain the behavior of each of the energy resources as
one model cannot explain the consumption pattern for all forms of energy
resources, because of the importance in consumer’s budget and its usage. The
consumers are generally constrained by habit, technological and other factors,
such as a regulatory barriers; therefore response to a price change, or change
in technology e.g. availability of electric cars, NGVs, fuel cells, is weak in
the short-term. However it will strengthen over time. To capture this lag
structure we have used a polynomial distributed lag model (Almon model) to
estimate the respective energy demand. We have also run autoregressive and
moving average wherever necessary in order to correct the autocorrelation
problem. The best-fitted model has been used to forecast respective energy
demand by 2040 under alternative scenarios.
Historical data have
been drawn from various sources. For instance, regional historical energy
consumption is drawn from BP Statistical Review of World Energy June 2015. GDP (current
prices) and population data is extracted from IMF reports and energy prices
from the Energy Information Administration (EIA) reports. In order to forecast
energy demand we used the GDP and population growth assumptions (shown in Appendix
-A). Future forecast of energy prices - oil, natural gas, coal and electricity
(though electricity prices vary from consumer to consumer; residential,
industrial, commercial, transport, we have used total electricity prices) are derived
from the EIA. For low and high case scenarios we have assumed GDP and population
will grow at an annualized rate as highlighted in Appendix-A.
North America TPEC - 2014
In order to comprehend the market it is useful to briefly
review the current energy situation in North America. Out of global total
primary energy consumption (TPEC) of 12928 million tonnes of oil equivalent
(MTOE) in 2014, North America accounted for 2822 MTOE or 21.83%. The share of the USA was 18%, oil and gas
dominate with 67% (oil 36.3%, natural gas 30.7%), coal 17.3%, nuclear 7.65%, hydro
electric 5.4% and renewables 2.6% (Figure -1). Despite consuming oil and
natural gas fuels in bulk, its indigenous resource base is quite thin. For
example, it holds 232 billion barrels of oil reserves, a global share of 13.7%
and a life expectancy of 34 years. Natural gas reserves are at 429 TCF, 6.5% of
the global reserves with a life expectancy of 12.8 years. Coal stands at 245 billion tonnes with a global
share of 27.5% and a life expectancy of 248 years.
Figure-1:
North America Total Primary Energy Consumption by Fuel – 2014 (BP Statistical
Energy Review – 2014)
North America Resources
North America also holds enormous
unconventional shale oil and shale gas resources (Figures -2 & 3).
Technological advancement in horizontal drilling and hydraulic fracturing
allowed US to significantly increase shale oil and shale gas production. As a
result, US net oil import dependency
declined from 60% in 2007 to about 27% in 2014. Shale gas and renewable fuel (ethanol)
is expected to continue to penetrate the transport sector and industrial uses which
would help North America to reduce its
crude oil consumption in favor of natural gas and renewable fuel.
Figure-2: US Shale oil basins
Figure-3: US Shale gas plays
Source: Energy Information Administration (EIA)
North America Energy Demand
Outlook - 2040
North American energy demand is mainly driven by
respective energy prices, GDP and trend variables. Trend variables have been
used to capture technological advancements. The population though is an
important driver of energy demand and should be positively correlated, however
for North America it failed to explain energy behaviour and when included
distorted the other important explanatory variables like GDP is therefore
dropped. A number of models have been tested including static, Koyack and polynomial
distributed lag (Almon) model with varying degree of weights and lags to
capture the lag structure. The best estimated models for each of the energy
sources are selected and later re-run to forecast respective energy demand to
2040 under alternative scenarios.
Oil Demand Outlook - 2040
North American
oil demand is projected to decline over time due to penetration of NGVs,
electric and fuel cell cars in the transport sector as well as due to efficiency
gains. At the end of 2040, under the reference case North America is expected
to consume 894 MTOE (20.41 MMBD)
as compared to 1024 MTOE (23.34 MMBD) in 2014 see Figure -4. The reference case
is bounded by low and high case of 822 (18.76 MMBD) and 979 MTOE (22.34 MMBD). The
way the technology is developing transport sector, electric and fuel cells cars
in particular, it is quite possible that the share of oil in the North American
energy mix will decline from the current 36% to 20% at the end of 2040.
Figure-4: North America Oil Demand Outlook -2040
Source: Based on author’s econometric models & IEA
world Energy Outlook 2014
Natural Gas Demand Outlook - 2040
Unlike oil, natural gas demand is projected to
increase in North America. The reason being the region’s enormous
unconventional gas resources and the expected continuance of the shale gas boom.
Both the USA and Canada have aggressive plans to export natural gas in the form
of LNG to the global market. In
addition, consumption of natural gas in power generation increased,
particularly in the USA. Natural gas share in power generation went
up from 17% in 2001 to 27.4% again due to significant increase in US shale gas
production. North American natural gas demand under the reference
case is projected to increase from 866 MTOE in 2014 (949 BCM) in 2014 to 1083
MTOE (1192 BCM) at the end of 2040 Figure -5. The reference case is bounded by
low and high case of 994 (1093 BCM) and 1162 MTOE (1278 BCM) in 2040. We
anticipate a greater role for natural gas because it will capture a share in
power generation from coal and because of its growing importance in the transport
sector.
Figure-5:
North America Natural Gas Demand Outlook -2040
Source: Author’s econometric models and IEA World
energy Outlook 2014
Coal Demand Outlook - 2040
The contribution of coal is mostly associated with
power generation. However, the recent shale gas boom has reduced its role
particularly in the power generation. The contribution of
coal in US power generation for instance went down from 51% in 2001 to about
39% in 2014. While the share of natural gas in power generation went up from
17% in 2001 to 27.4% again due to significant increase in US shale gas
production. During 1980 to 2014, coal consumption increased from 413 MTOE in
1980 to 489 MTOE in 2014. However, due to strict environmental regulations and
availability of natural gas and energy renewable sources its role is expected
to shrink during next 2.5 decades. The model predicts that coal consumption is
projected to decline from 489 MTOE in 2014 to 332 MTOE in 2040 under the reference
case (Figure -6). The reference case is bounded by a low (298 MTOE) and a high
of (365 MTOE) in 2040. We have added another scenario which assumes if the very rigid environmental regulations
are imposed and technological advancement allow for the speedy penetration of
renewable sources. In this case we have used trend variable (T2). In this scenario
coal demand is projected to decline significantly to 120 MTOE.
Figure-6:
North America Coal Demand Outlook -2040
Source: Based on author’s econometric models and IEA
world energy Outlook 2014
Nuclear Demand Outlook - 2040
Electricity demand is dependent on various factors –
GDP, prices, weather, however it is positively correlated with the economic
growth measured by GDP. During 1980 to 2014, the demand for nuclear energy
increased from 68 MTOE in 1980 to 216 MTOE in 2014 – an increase of 217%
(Figure -7). More than 94% of the variation in nuclear demand is explained by
GDP and electricity prices. GDP remains the main driver of electricity demand
as one percent increase in GDP will lead to 0.68 percent increase in nuclear
demand. Under the reference case nuclear demand is projected to decline from
216 MTOE in 2014 to 211 MTOE in 2040 due to efficiency losses and closure of some
of old nuclear plants. Reference case is bounded by low of 205 MTOE and high of
224 MTOE in 2040.
Figure-7: North America
Nuclear Demand Outlook -2040
Source: Based on author’s econometric models and IEA
world Energy Outlook 2014
Hydro Electricity Demand Outlook - 2040
Canada is the major producer and consumer of hydro
electricity in North America accounting for 56% of the regional hydro
electricity in 2014. The hydro electricity consumption increased from 118 MTOE
in 1980 to 154 MTOE in 2014 – an increase of 30%. Based on the model, hydro
electricity demand is surprisingly projected to decline during the 2014/2040 in
period probably due to decrease in the availability of hydro electricity or
model failed to explained the correct behaviour. Under the reference case it is
projected to decline from 154 MTOE in 2014 to 111 MTOE in 2040, in the low case
it further declines to 104 MTOE and for high economic growth it declines to 117
MTOE (Figure -8). The demand for hydro or electricity should be increasing
unless it is constrained by its availability or massive increase in renewables
– solar, fusion and wind.
Figure-8: North America
Hydro Demand Outlook -2040
Source: Based on author’s econometric models and IEA
world Energy Outlook 2014
Renewable Demand Outlook - 2040
The contribution
of renewables in the North American energy mix in 1980 was barely anything,
however, its contribution increased quite rapidly during the last decade. Despite
its significant growth, the contribution of renewables remained thin and stood
at less than 3% at the end of 2014. The contribution of renewables is expected to grow
rapidly during 2014 to 2040 due to: expected significant decline in cost of
wind, solar and other renewables due to technological advancements: utility
scale solar power generation capacity delivering a price below that of
coal/natural gas power plants; extensive use of solar panel in powering the
residential and office buildings; increase in the usage of ethanol in transport
sector and change of mind set of future generations to go green. However, it is
difficult to quantify these variables in our econometric models. We have to
continue to rely on GDP and electricity prices to model consumer’s behaviour,
though various other factors are important to explain the demand for renewable
sources of energy. We have assumed that the trend variable is expected to
capture the increasing availability of renewable sources at competitive prices
and we assume the trend variable to grow exponentially during the forecasting
period due to rapid technological advancements. The other important variables
are GDP and electricity prices. Based on our assumptions and model the demand
for renewable sources of energy under reference case is projected to increase
from 74 MTOE in 2014 to 362 MTOE in 2040– an increase of over 389%. The
reference case is bounded by a low of 264 MTOE and 653 MTOE a high case
scenarios (Figure -9). Figure -10 highlights some of the sources of renewables
that are expected to increase significantly during now and 2040.
Figure-9: North America
Renewables Demand Outlook -2040
Source: Based on author’s econometric models and IEA
world Energy Outlook 2014
Figure-10: Some
Sources of renewables expected to increase significantly
North America TPEC Outlook – 2040 (MTOE)
Table-1
provides a quick summary and comparison of North America TPEC outlook 2040 by
energy sources. The Authors forecast is
based on regional GDP growth, respective energy prices and trend variables.
What message can we draw from this analysis? The news and academic papers reports about the important
role of renewable sources in TPEC mix. However, based on the forecast, the
message is quite clear that the role of fossil fuels most likely will remain
the dominant sources of energies in North America despite significant growth in
renewable sources. Based on authors
forecast the share of fossil fuels remains between 71% and 78%. It is quite
possible that the share of fossil fuels particularly that of oil may decline
from current 36% to 20% by 2040. This lost share will be captured by renewable.
Therefore, it is quite possible that the contribution of renewables may further
increase, nearing our high case scenario. Especially considering various car
companies are in the process of bringing fuel cell and electric cars to market.
In fact, Toyota already started selling the
world’s first mass market fuel-cell car in Japan in 2014 - the four-door Mirai.
The auto giant is hoping to build on the success of its popular
gasoline-electric hybrid Prius to sell tens of thousands of the eco-friendly Mirai over the next decade, as it looks to stop
producing fossil-fuel based cars altogether by 2050. Honda’s rival Clarity
Fuel-Cell vehicle features a cruising range of more than 700 kilometers (430
miles), which it claims is the longest on the market, and can store enough
power to supply an average household’s energy needs for a week. As far as solar
energy is concerned its cost has reduced significantly. According
to Lawrence Berkeley National Laboratory, who conducted the report, installed
project costs have fallen by more than 50% since 2009, from about $6.3/W in
2009 to $3.1/W for projects completed in 2014.
We believe that the contribution of
renewables most likely to remain between 9% and 12% for low and reference case
scenarios, however in the extreme high its contribution may increase to about
19% based on model predictions. In our opinion the high contribution of
renewables in the energy mix is highly dependent on timing and availability of
fusion electricity which is still in its research stages, and efforts are being
made to produce electricity on commercial scales. If fusion electricity is
available during the projection period then it is quite possible that the role renewables
will increase to 19% or even more otherwise its contribution will most likely
remain under 12%.
Good news for oil and gas industry
Our
long-term North American energy demand forecast highlights that the
contribution of fossil fuels under alternative scenarios, particularly that of
oil and gas are likely to remain the major driver of North American economy.
However, oil and gas companies should also prepare and develop alternative
strategies in case rapid penetration of renewable in transport and power
generation takes place earlier than 2030.
Table-1: North American TPEC
outlook 2040 - comparison
Appendix-A:
GDP and population growth assumptions (%)
