The main trends in human energy needs are population growth, an economic population shift towards the middle classes and energy efficiency. Population growth will plateau after 2030-2040, causing energy demand to stabilize and decline afterwards. The current overcapacity in the oil markets will ensure a lasting shift in fossil markets. In this new, competitive landscape operational costs will have to be significantly brought down in order to stay afloat. causing major disruptions for the oil and gas majors. Renewables are already ridiculously cheap, with the cheapest forms of solar energy already at less than half the price of fossil fuels. People have yet to catch up on this fact.

Part I - What is up with the world?

The energy markets, broadly taken to be fossil fuels and renewables, have seen significant changes over the past years. While it is expected fossil fuel demand will rise, the broad consensus amongst most outlooks is that the growth will eventually plateau due to energy efficiency and developments in renewables. Uncertainties rain rampant however. This article summarizes several major energy outlooks of the past year and combines them to establish an overview of the energy market trends and developments.

As with all forecasts, a short disclaimer is in place. I am no Nostradamus and do not pretend to be that big of an expert. This article is more of an amalgamation of several outlooks to establish what is perceived as the broad consensus among major policy makers, such as the UN, International Energy Agency, IRENA and BP. And I have to admit, the evidence on certain trends is quite convincing. 

World Population Growth

It can be stated that energy demand for the future is driven by two basic drivers: world population growth and average income growth. Surprisingly enough for most people, it is estimated the global world population will continue to grow but will reach a maximum of approximately 11.2 billion people according to the UN. The timeframe for this developments varies, with some saying the maximum population will peak at around 2040, others proclaiming it will more likely be 2100. There are however major differences between regions. Most African regions will continue to grow well into the 21st and even 22nd century. The OECD regions minus the USA will most likely peak in between 2020-2025, with the USA expected to peak at around 2040. Despite the differences in “Western” and currently developing countries’ population growth, the world population living in extreme poverty continues to decrease significantly. A large portion of the developing countries’ population is entering the middle class, which is one of the main drivers behind the need for energy.

In a very short amount of time the human population exploded and is still growing very fast. Will this lead to the end of our civilization? Warning, unpopular opinions ahead!

Future Global Energy Demand

A growing world population, combined with a growing world GDP by fast-growing emerging economies will significantly drive the energy demand for the coming years. The extent of this growth however is partly offset by rapid gains in energy efficiency. Though hard to predict, most outlooks expect energy demand to rise by about 30% by 2030. The World Energy Council, along with some other policy makers even expect the global demand for energy will peak by that time. This peak in energy demand is driven by both the gains in energy efficiency, new technologies and stricter policies that will transform the energy industry. China and India will account for half of the growth in energy demand. Despite the expected ‘phenomenal’ growth in wind and solar energy, fossil fuels will remain a solid part of the energy mix in the future. It is expected the energy mix will  be the most diverse ever seen. By 2035, oil and gas will still meet around half of global energy demand, though coal consumption flatlines.

Part II - Competitive Oil Markets

Global oil demand will likely grow for the coming years, driven by rising prosperity in fast-growing developing economies. But that pace of growth is likely to slow overtime and eventually plateau, as efficiency improvements accelerate and a combination of technology advances, policy measures and changing social preferences lead to an increasing penetration of other fuels in the transportation sector. Some projections show oil demand peaking during the period they consider, others beyond their forecast horizons. It is hard to predict the exact timing for peak oil demand. Projections range between 2020 up to 2040, but all outlooks seem certain of this event within the next years. It is debatable whether discussion on the exact timing is fruitful.

“The real significance of peak oil demand is that it signals a paradigm shift from an age of (perceived) scarcity to an age of abundance.”

The conventional wisdom that dominated oil market behavior over the past few decades, based around the notion of peak oil ‘supply’ and the belief that oil would become increasingly scarce and valuable over time, has been debunked. Instead, we are experiencing a shift to an age of abundance. Faced with the possibility that significant amounts of recoverable oil that may never be extracted, low-cost producers have a strong incentive to use their comparative advantage to squeeze out high-cost producers and gain market share – just as with any other competitive market.

Moreover, if some oil may never be extracted, a high reserves-to-production ratio is no longer such a sign of strength. Better to have money in the bank than oil in the ground. This suggests that the oil market is likely to become increasingly competitive over time as producers fight for market share.

This struggle by major oil- and gas players around the world for a larger piece of the pie is the most likely driver for cost reductions throughout the industry’s supply chain. In this new, competitive landscape operational costs will have to be significantly brought down in order to stay afloat. That will be the challenge for oil and gas companies in the coming years.

Part II - Developments in Renewables

How fast will renewables continue to grow in the coming decades and to what extend will they “replace” fossil fuels? So far, this multi-million dollar question remains just that: a question with no answer. Nevertheless, the growth of renewables in the last few years is nothing but remarkable. Several milestones have been reached last year, with one of the major milestones being the Danish group Dong Energy, which plans to build German offshore wind farms without financial aid or subsidies. Due to that groundbreaking deal, the Dutch Government has decided to start the lease process for several offshore wind farms without subsidies. Several parties have already placed bids for these tenders.

On top of that, the price of solar energy in some parts of the world has dropped to more than half of the price of energy provided by fossil fuels and continues to drop. The figure to the right highlights some of the major developments in the world, taken from IRENA 2017. The remarkable fact of this graph is that it is practically outdated at the time of writing, as the developments in renewable energy continues to defy expectations. The cheapest energy comes in the form of solar in Middle Eastern countries, where a price of below $ 1.8 cents (!) are not uncommon. Even in the Netherlands, solar energy is at a price of roughly $ 9 cents per kWh, which is just a few cents shy of regular fossil fuels which comes at a price of around $ 5 cents per kWh. Not taking into account the negative externalities. 

The IEA too has had to increase their projections on the share of renewables significantly over the past few years due to the simple fact reality beat their expectations every time. And just as Africa has leapfrogged land-line phone technology and is now the largest mobile phone market, several policy makers expect the same will happen in the energy market the coming years.

The Impact of Cheap Renewables on Fossils

At a certain point, the transition towards cheap and renewable energy will come with a realization for energy users: energy is really cheap. This will impact major industrial processes heavily and can shift the balance of what is economical possible. An example of this is the creation synthetic fuel, where natural gas is recombined into liquid fuel products (also called Gas-To-Liquids or GTL). A huge amount of energy is required to transform these chemicals. But the abundance of cheap solar energy makes this a viable process. Already, Shell is producing enormous quantities of synthetic fuel powered by cheap Qatari electricity.

Shortly put, creating synthetic fuel is becoming a viable alternative to using crude oil. This process can be extended even further up to a point no crude oil is required at all. If solar energy becomes cheap enough, water and carbon dioxide can be captured from natural surroundings (water or air) and transformed into a synthetic fuel. This product would be a totally circular, sustainable fuel that can be used using current infrastructure. No additional investments would be required. Imagine the implications.

The Future is Bright

In a growing number of countries, renewable energy has emerged as a mainstream solution for meeting energy demand in a cost-effective, secure and environmentally sustainable manner. Global renewable energy capacity and output have increased rapidly and continue to grow at an unprecedented pace, particular in the power sector. These developments have set in motion a rethinking, or transformation, of the global energy system. I believe the abundance of cheap renewable energy will revolutionize modern societies and this trend will only continue to grow. What a time to be alive and be an engineer to help create this future!

References

BP Energy Outlook 2018

IRENA, Rethinking Energy 2017

Kurzgesagt, the Human Explosion Explained

International Energy Agency Outlook 2017