Energy
in 2017: Two steps forward, one step back
The BP Statistical Review of World Energy, an annual publication
from the energy giant, published a couple of weeks ago, at first glance paints
a gloomy picture. After three years of little or no growth in global carbon
emissions from energy consumption, 2017 saw an uptick in emissions, reflecting
both increased energy consumption and the larger share for coal in the global
energy basket. But the report hastens to add, this ‘two step forward and one
step back’ trend is an anticipated one, and the world is on a path of lower
intensity of energy consumption and is making progress in moving towards less
carbon intensive energy production and usage.
2017 turned out to be different as it came in the wake of three
years in which the world saw significant gains in energy efficiency, robust
growth in consumption of renewables (wind and solar, in particular), and
year-on-year declines in consumption of coal. This was apparently too good to
last.
2.2% increase in global energy demand
According to the review, global energy demand grew by 2.2% in
2017 – a sharp uptick from the 1.2% increase seen in the previous year, and
much higher than the 10-year annual average of 1.7%. Much of the increase came
about due to stronger economic growth, particularly in the European Union (EU).
Just as important was the slowing of the pace of improvement in overall energy
intensity (i.e. the amount the energy needed to produce a unit of output).
Unlike in the past, when developing economies accounted for
nearly all of the increase in energy use, 2017 saw a strong growth in energy
demand in countries of the OECD, a club of mostly-rich countries. Nevertheless,
emerging economies – India included – accounted for nearly 80% of the overall
increase in energy demand in the year.
China, not surprisingly, contributed to nearly a third of the
global increase, with a 3% increase in overall consumption in 2017. This was
driven by an increase in output at some energy-intensive industries including
iron, crude steel and non-ferrous metals. But this increase was sharply lower
than the 10-year average rate and the rate of decline of energy intensity was
more than twice the global average. This is a reflection of both fundamental
shifts in the nature of the Chinese economy and the modernisation,
consolidation and energy efficiency improvements ongoing there.
Fuel mix – larger share for natural gas and renewables
Around 60% of the increase in primary energy consumption was
provided by natural gas and renewables, with the former making the largest
contribution as usage expanded in several countries, most notably China. Demand
grew 3.0% or 83-mtoe (million tonnes oil equivalent) on a global basis.
Renewable energy sources (including biofuels) grew 14.8%
(72-mtoe), spurred on by wider adoption of wind and solar energy, particularly
in China and India.
A retrograde step was the 1.0% increase in coal usage,
representing 25-mtoe of additional demand in 2017. This was the first increase
in demand seen for the carbon-rich fuel since 2013.
Oil: Production cutbacks & strong demand raise prices
Demand for oil grew 1.7-mbpd (million barrels per day) – similar
to 2016, but significantly greater than the 10-year average of 1.1-mbpd. This
was despite all the talk of peak oil demand, increasing efficiency of cars and
growth of electric vehicles – factors that many believed would curb demand to
below historical rates and even reverse the increasing trend seen year after
year.
While all of the above trends are very much valid, an
overwhelming factor has been the low prices of oil for much of the first half
of 2017. Oil importing countries, including the US and Europe, saw a sharp
uptick in oil demand in the year, compared to average decline over the previous
10-year period. While growth in gasoline demand slowed in 2017, due rising
prices in the second half of the year, diesel demand grew faster, buoyed by
increased industrial activity.
Oil output grew by 0.6-mbpd in 2017 – similar to the previous
year – but the pattern of growth was very different. Output by the countries of
OPEC and other members of the Vienna group (which includes 10 other countries,
of which Russia is the most important), fell by 0.9-mbpd, following an
agreement to slash production, even as output by countries outside of the group
(including the US) rose by 1.5-mbpd. The unintended cutback in output in
Venezuela, due its economic problems, contributed to depletion of oil stocks,
even as increased production of tight oil and natural gas liquids (NGLs) in the
US contributed to some easing of supply constraints.
2017 made it clear that OPECs ability to swing markets through
production cuts will be counterbalanced by the ability of US shale oil
producers to raise output.
While oil prices drifted downward during the first half of 2017,
as stocks remained stubbornly high, they began firming up in the second half as
the production cuts agreed in Vienna began to take effect. For the year as a
whole, average prices for Brent were around $54 a barrel – $10 higher than the
average for the previous year. Not withstanding the firming up of prices in
2018 as well, the recent growth in US tight oil output is a pointer that the
price surge may be transient and a settling down to levels more reflective of
the fundamentals is likely.
Natural gas: record growth in supply & demand
2017 saw record increases in both demand and supply of natural
gas, with China, in particular, showing spectacular growth of 15% in gas demand
– one-third of the global increase. This was a consequence of a ‘carrot and
stick policy’ to prod industrial and residential users to switch from using
coal to gas or electricity. While this new demand level is expected to continue
in the future, further increases may be more muted.
Global gas markets also benefitted from the expansion of
liquefied natural gas (LNG) supply, which increased 10% in 2017 as new projects
were commissioned in Australia and the US. In 2017, China overtook South Korea
to emerge as the second-largest importer of LNG (after Japan). The fear of a
glut of LNG as new supply came into the market seems to have been overstated,
although it did result in low prices for the fuel, as suppliers offered it even
if they could cover just operating costs.
Coal: A mini-revival
Coal markets experienced a mini-revival in 2017, after several
years of decline, with consumption rising 1%. India saw the fastest growth of
4.8% or about 18-mtoe, thanks to strong demand from the power and industrial
sectors. China too saw an increase in demand for coal, driven by use for power
generation.
Production of coal increased 3.2% in 2017 – an increase of
105-mtoe – thanks to an upsurge in both China and the US. The share of coal in
global power generation remained at 38%, similar to its share in 1998,
indicating that the world has a long way to go in its transition to
decarbonised energy production.
The decline of nuclear energy and the consequences
The backward step in energy markets was most stark in 1.6%
increase in carbon emissions from the energy sector – after three years of
little or no growth. Some of this backsliding was inevitable, given the
exceptional outcomes of the last three years.
Despite the huge policy push encouraging a switch away from coal
and the rapid expansion of renewable energy in recent years, there has been no
improvement in the mix of fuels feeding the global power sector. Indeed, the
share of non-fossil fuels for power generation was actually lower in 1998 than
in 2017, as growth in renewables failed to compensate for the decline in nuclear
energy.
The challenges of meeting the commitments made in the Paris
Agreement were very much evident in 2017.
Ravi Raghavan
CHWKLY 26JUN18
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