How Different Will Tomorrow Be? Thinking About The Energy Future

The energy business has one of the longest timelines of any industry. Decisions are being made today for oil or natural gas fields that will only begin to flow fifteen years from now. Investors, in the meantime, have to decide where to put their bets on technologies that will take years to come to fruition.

The energy business has one of the longest timelines of any industry. Decisions are being made today for oil or natural gas fields that will only begin to flow fifteen years from now. A power plant approved tomorrow may be operating for half a century. And, increasingly, many of the big decisions will be measured not in the hundreds of millions, but billions, of dollars. Investors, in the meantime, have to decide where to put their bets on technologies that will take years to come to fruition.

Inevitably, much will change over those time frames. Unexpected geopolitical clashes will roil markets. Economic performance will surprise. Technology will bring in new energy sources and change the competitive playing field. Governments will undoubtedly change their minds on the balance between markets, on the one hand, and regulation and state ownership, on the other-and more than once.

Today, the outlook for regulation of carbon emissions creates another layer of uncertainty. There could be strong pressure to change the fuel choices in the face of tighter carbon regulations. Or the international community may fail to agree on effective carbon controls, and regulations could be limited or not effectively enforced. There will certainly be much debate as to whether to rely on markets or on regulation to meet climate change goals.

How to make decisions in the face of such uncertainty? "Scenarios" can play a very useful role. A disciplined process of scenario development provides a framework for the uncertainties. These are not forecasts or extrapolations. Rather, they are logical "stories" about alternative futures that force one to think about the "what-ifs," the surprises and the range of uncertainties. Think of them as thought experiments, but grounded in wide-ranging research and analysis. Our energy scenarios combine structured narratives of how the larger world could evolve in the future with detailed energy market modeling. Yes, they are thought experiments, but the objective is to help people to think systematically about trends and the potential for changes, ruptures and discontinuities. Scenarios, of course, can be used for any industry or for public policy.

Cambridge Energy Research Associates (CERA) recently completed study, Dawn of a New Age: The Energy Future to 2030, presents three long-term energy scenarios. The objective is to clarify the risks and choices ahead. Each of the scenarios examines an important strategic question about how the world may unfold over the next 25 years and what this means for energy markets (see CERA's Dawn of a New Age Scenarios in Brief).

What happens if China, India and other countries in Asia continue to grow at their current breakneck speed? Our Asian Phoenix scenario examines the implications for energy markets of such a world. In this scenario, Asia reaches 54 percent of world GDP in 2030 and grows from its current 29 percent of world energy consumption to 42 percent. Continued strong economic growth in Asia pushes oil consumption to new highs. Tight markets keep prices are well above the last 25 year average of $25 per barrel.

One result is that the rivalry for access to oil and gas resources not only grows but involves new players. "Eastern oil companies" emerge to compete with the traditional Western companies, especially in new regions of supply such as Central Asia and Africa. Another result, perhaps surprising to some, is that coal consumption will grow substantially, particularly in China and India. Coal powers these nations to new global standing but it also will become, if without mitigation, an increasing source of geopolitical tension as climate concerns mount.

What happens if oil prices move well above the $78 per barrel experienced last year? Could oil lose its current almost totally dominant position in the transportation sector? These are the questions that the Break Point scenario explores, a world in which oil breaks through the $100 per barrel barrier for a sustained period. In this scenario, it is not shortage of resources below ground that pushes prices up, but rather geopolitical events. The scenario demonstrates how ultra-high oil prices and energy insecurity could unleash a mix of policy and price responses and technological innovation that would push the world to break from usual energy patterns.

In this scenario, one result of government and industry action, and new entrants in the energy business, is that by 2020, oil no longer has a monopoly grip on the transportation sector. Other liquid fuels derived from biofuels, oil/tar sands, coal-to-liquids and gas-to-liquids jostle for market share. Plug-in hybrids begin to win a share of the market.

Another outcome of high prices explored in Break Point is progress toward reducing carbon emissions. National security concerns associated with high oil prices work hand-in-hand with concern over climate change (see "Aspen Declaration of Energy Independence"). The result is that the U.S., Europe, Japan and even China and India embrace policies that expand investment in renewables, nuclear and emerging carbon capture and storage technologies. The high oil price also creates strong incentives to improve energy efficiency. In Break Point, global energy intensity (the amount of energy required to produce a unit of GDP) in 2030 is 32 percent lower than in 2005.

What would happen if public support for globalization around the world wanes and economic insecurity feeds greater nationalism and protectionism? That question is at the heart of Global Fissures, which suggests that energy markets could evolve in an entirely different direction. Diminished economic growth would cause oil prices to tumble back into the $20 range. In this scenario, governments assert more control over the energy sector. The trend in the electric power industry in many countries is a move away from competition and toward social mandates and more regulatory intervention-in some cases, even the nationalization of assets.

Given the high stakes and uncertainty surrounding the future of energy, there is a need for structured ways of thinking about how the future may unfold. The next 25 years will be full of surprises. Scenarios can help us better prepare for these surprises-and perhaps even anticipate the surprises before they arrive.

About the author: Daniel Yergin, chairman of CERA, received the Pulitzer Prize for "The Prize: The Epic Quest for Oil, Money & Power" and the United States Energy Award for lifelong achievements in energy and the promotion of international understanding. Vist CERA at http://cera.ecnext.com.