IEA report predicts rising oil prices, addresses subsidy issues

By Kris Bevill | November 10, 2011

The International Energy Agency’s latest World Energy Outlook predicts a rise in global oil demand of nearly 15 percent over the next 24 years, up to 99 million barrels per day in 2035, due to economic growth and rising populations. The world’s vehicle fleet is expected to nearly double in that time frame, reaching 1.7 billion vehicles by 2035, and while alternative fuel vehicles were considered to have potential in reducing oil demand, the report’s authors noted that those technologies take time to penetrate the market.

The 666-page report offers outlooks on world oil, natural gas and coal markets, power and renewable, and includes special sections on nuclear power and the outlook for Russian energy. In general, the IEA warns that the longer nations wait to implement low-carbon policies, the harder and more expensive it will become to meet energy security and environmental goals. “We cannot continue to rely on insecure and environmentally unsustainable uses of energy,” IEA Executive Director Maria van der Hoeven stated. “Governments need to introduce stronger measures to drive investment in efficient and low-carbon technologies.”

The report addressed at length the issue of subsidies for fossil fuels compared to renewables (biofuels and renewable energy) and found that fossil fuel subsidies totaled $409 billion in 2010 while subsidies for biofuels were $22 billion. The report’s authors noted that while fossil fuel subsidies are often deployed with the intent of reducing the cost of energy for those in poverty, the actual outcome is often market distortions that encourage wasteful consumption. In comparison, subsidies for renewables are put in place to incentivize deployment of those technologies and to improve the competitiveness of those forms of energy compared with fossil fuels. The report found that many renewable energy technologies will remain uncompetitive with fossil fuels through 2035 without subsidy support. The author’s also made a case for eliminating fossil fuel subsidies, stating that volatile energy markets and higher fossil fuel prices could increase the burden those subsidies place on state budgets. “But fossil fuel subsidy reform is notoriously difficult as the short-term costs imposed on certain groups of society can be very burdensome and induce fierce political opposition,” the authors said in the report, adding, “If removing these subsidies were easy, it would probably already have happened.”

The report continued on to show that if nations are successful in eliminating fossil fuel subsidies by 2020, global energy demand would be reduced by nearly 4 percent, due to higher energy prices and the subsequent incentivizing of energy conservation and efficiency improvements. Meanwhile, biofuels consumption was estimated to more than triple by 2035 to 4.4 million barrels per day, due to the improved economical competitiveness with fossil fuels. The increase in consumption would also increase subsidies paid for those fuels, reaching $67 billion in 2035, according to the report. However, the report also cautioned that several factors aside from subsidies will need to be addressed in order for biofuels to reach an even playing field with fossil fuels. “The future competitiveness of conventional biofuels depends critically on the pace at which technology costs can be reduced, and future feedstock prices,” the authors stated. “For the former, modest cost reductions are generally possible through technology improvements and economies of scale. As to feedstock costs, the increasing use of conventional biofuels is likely to put upward pressure on prices, due to the competition with other land uses such as food crop production. In addition, rising international oil prices will increase the price of fertilizers and transportation costs.”

Advanced biofuels continue to offer the best potential for reducing greenhouse gas emissions, but are not yet readily available. The report’s authors expect those fuels to enter into the market by 2020 and offered one scenario in which the cost of advanced biofuels is reduced by nearly 80 percent by 2035 as technologies are improved.

The entire report is available for purchase at http://www.iea.org/w/bookshop/b.aspx?new=10.