FORESEEING DEMAND

Averting the next energy crisis: The demand challenge
Jaeson Rosenfeld, Jaana Remes, Lenny Mendonca, Wayne Hu, Sendil Palani and Utsav Sethi, March 2009 (McKinsey Global Institute)

SUMMARY
Energy price volatility over the last 5 years has been extraordinary. The next questions: What comes after the current economic downturn and when?

The best answers, according to McKinsey Global Institute's Averting the next energy crisis: The demand challenge: Uncertainty in both the supply and demand halves of the energy equation for at least another year and maybe for 3 years.

McKinsey's “moderate” scenario: A 4.7% global GDP downturn through the end of 2009 with recovery in 2010 and an energy demand lull in 2009 with a rebound across all fuel types and a serious confrontation with emissions.

But, because of repeated revisions downward from forecasters Global Insight and International Monetary Fund (IMF), McKinsey has added “severe” and “very severe” scenarios showing GDP falling 6.7-to-10.8%, the latter postponing recovery until 2012.

As the economy recovers in the medium to long term (2010 to 2020), McKinsey expects developing regions to account for 90% of global energy demand growth through 2020 as the U.S. and other developed nations become more productive per unit of energy.

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Fastest energy demand growth will come in the Middle East.

It is likely the supply of oil will be outstripped by demand putting upward pressure on liquid fuel energy prices. Supplies of coal and natural gas are expected to be adequate.

The only thing that can keep oil prices from once again rising beyond the $75 per barrel level are government policies that restrain demand.

Policy measures that can keep oil prices down: (1) Expanding energy productivity opportunities, especially vehicle efficiency standards and building and industry energy intensity standards; (2) Biofuel mandates and removing trade barriers to sugar cane ethanol; (3) Requiring all vehicles to be flex-fuel capable; (4) Moving passenger vehicles away from diesel; and (5) substituting other fuels for oil in boilers.

CO2 emissions will grow marginally more slowly than energy demand, especially in developed economies, due to the rapid growth of New Energy supply.

China’s emissions growth will be larger (3.7% per year) than energy demand growth (3.5% per year).

Investment in New Energy and Energy Efficiency technologies can abate some of the anticipated findings.

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COMMENTARY
GDP drives oil demand and demand drives price. Historically, the price of oil leads the price of other energies. High oil prices drive New Energy development.

In the short term, slowed GDP growth will cause oil product demand to slow and keep prices flat. GDP in developed economies will be flat and it will be negative in developing economies.

In the medium to long term, GDP growth will return and liquid fuel consumption will grow. As demand grows, oil prices will rise. This will tend to reduce demand in developed economies where technology and education provide the opportunity for improved efficiencies. A better energy intensity, meaning more productivity from each unit of energy consumed, will result.

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Developing economies will not, in the short and medium terms, have the technologies and educated consumers that can drive significant improvement in energy intensity.

McKinsey forecasts global energy demand growth of 2.3% per year from 2010 to 2020. Demand in the Middle East, China and India is expected to lead, with growth rates at 3.6% per year or more.

Energy demand growth will come equally from consumer and industry consumption.

When GDP and demand growth return, the leading sectors will be air transport, petrochemicals and steel, largely as the result of infrastructure expansion in developing nations.

Light vehicle fuel will see the slowest demand growth. EVs will grow but are not expected to affect GDP or energy demand until the 2020 to 2030 period.

The forecast acknowledges the potency of New Energy and Energy Efficiency to reduce oil demand but goes into little detail. Growth in these areas, not just in the U.S. and developed nations but in the developing world as well, could completely rewrite these numbers.

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QUOTES
- From the report, on global demand: “Global energy-demand growth is expected to flatten in the short term but will rebound with recovery. Indeed, there is potential for liquids-demand growth to outpace that of supply—risking a new spike in oil as soon as 2010 to 2013, depending on the depth of the economic downturn.”
- From the report, on the varying scenarios: “Since GDP is the most important driver of energy demand and the trajectory of world economic growth is exceedingly uncertain, the report presents several scenarios for energy-demand growth to give a feel for the range of outcomes possible. It examines energy-demand growth across end-use sectors and regions and by fuel type.”

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- From the report, on demand for liquid energy: “Liquids demand will be stagnant in the short term due to impact of high prices in 2007 and the credit squeeze. MGI’s moderate case projects that liquids demand will grow only weakly by 0.4 percent in 2009 but will rebound in 2010 to post growth of 2.1 percent.”
- From the report, on the influence of light-duty vehicles: “The light-duty vehicles sector accounts for about 70 percent of the total road-transport sector, which is crucial to gaining an understanding the evolution of petroleum. MGI finds that energy demand from light vehicles is set to grow at 1.9 per annum to 2020. Adding to energy demand is extremely rapid growth in the vehicle stock in China, the Middle East, and India. However, robust new-vehicle efficiency standards—particularly but not exclusively in developed countries—offset this trend.”
- From the report, on the influence of trucks: “Truck transport accounted for 4.5 percent of 2006 global demand. However, because the sector’s energy-demand growth will be more rapid than the increase in energy demand overall, its share of the total will rise to 4.9 percent of global demand in 2020. Although this is a small fraction of total energy demand, the truck-transport sector is important as a large source of petroleum demand, particularly diesel.”

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- From the report, on the influence of air transport: “Air transport accounted for 2.0 percent of global demand in 2006 but, as the fastest-growing energy end-use sector, will see its energy demand grow to 2.4 percent of global demand in 2020. While air transport accounts for a very small share of the world’s total energy demand, it nevertheless bears analysis because this sector is a rapidly growing source of demand for petroleum.”
- From the report, on the influence of building consumption of energy: “The buildings sector, comprised of residential and commercial buildings, represented 31 percent of global end-use energy demand in 2006—making it the single-largest energy-consuming sector—and 9 percent of global petroleum demand (8 million barrels per day). MGI projects that these shares will remain steady at 31 percent of energy demand.”

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- From the report, on the influence of industry’s energy consumption: “The industrial sector, comprised of industries such as steelmaking, chemicals, and pulp and paper production, represented 51 percent of global energy demand in 2006 and 29 percent of global petroleum demand. The industrial sector is expected to grow at 2.1 percent a year—equal to the overall rate of energy-demand growth across sectors—and continue to account for 51 percent of global energy demand in 2020.”
- From the report, on power sector demand: “MGI examines primary energy demand from the power sector, which is the sum of power losses from power generation and final electricity demand by end-use sectors. Primary energy from the power sector is today the largest source of primary-energy use, as well as CO2 emissions. The power sector's primary demand represented 35 percent of global energy demand in 2006. The power sector's primary demand accounted for five million barrels a day or 6 percent of global petroleum demand in 2006. MGI projects it will decline to four million barrels a day or 4 percent of petroleum demand by 2020.”