More on Energy Demand
Brian Trumbore
President/Editor, StocksandNews.com

The other day I saw a piece in the London Times quoting Royal Dutch Shell CEO Jeroen van der Veer who called for a "reality check" when it comes to the prospects for renewables meeting our energy needs down the road. Even with major technological breakthroughs, renewables may only account for up to 30% of energy supply in the middle of the century. He also says we greatly underestimate growth in demand from developing countries.

So, I looked up the Royal Dutch Shell site [shell.com] and read a recent speech Mr. van der Veer gave?May 31, 2007. Think of the following excerpts as an addendum to last week's piece.

---

Jeroen van der Veer

In the energy industry we make multi-billion euro investments for projects that often have a lifespan of 30 years or more. So for us, thinking about the future isn't just a hobby - it's an absolute necessity.

This is especially true now that the world is both hungry for energy and worried about greenhouse gas emissions. The energy challenge is made even more challenging by three medium- to long-term trends. I call these the three "hard truths."?.

First, the global demand for energy is accelerating?not just growing, but accelerating. The reason is that China and India in particular are entering the energy-intensive phase of their development.

Second, the growth rate of supplies of "easy oil" will struggle to keep up with growing energy demand.

And, third, increased use of coal, plus the overall dominance of fossil fuels, will cause higher CO2 emissions, possibly to levels we deem unacceptable.

Zooming in on the first hard truth, the consumption of energy in 2050 could be at least twice as high as it is today.

The two main drivers for accelerating energy demand are population growth and greater wealth, driven by the globalization of markets. Population growth translates into greater economic activity. Economic activity translates into higher demand for energy. Higher energy consumption based on fossil fuels translates into higher CO2 emissions. The world's population could well reach 9 billion by the middle of this century. That means there would be three times as many people on the planet in 2050 as when I was born. Think about it: 3 billion new participants in the global economy between now and 2050.

The second driver of energy demand is economic growth, fuelled by the globalization of markets, in particular finance, information, communication, technology and production.

Globalization is the great driving force behind the speedy economic development of China and India. It allows these countries to attract capital, expand manufacturing and keep the brains. As a result, hundreds of millions of people are being lifted out of poverty and middle classes are growing rapidly.

Until recently, the Chinese economy grew faster than China's energy consumption. Between 1990 and today, the average Chinese person doubled his income while increasing his energy consumption only 15%.

But now both China and India are entering the energy-intensive phase of their development. It's when people buy their first television, motorcycle, or car and start consuming much more transport fuel and electricity than they used to. It's the phase where industrial expansion takes root.

To give you an idea of the speed of development: after 60 years of prosperity, today there are 46 million cars in Germany. In China today there are 40 million cars, that is 3 for every 100 people. By 2020, the forecast is that China will have 150 million cars. Fuelling these cars will require an additional 2-3 million barrels of oil per day, equivalent to the current demand of South Korea.

If China follows the development path of South Korea, China's energy consumption will be double that of today by 2020. Some estimates have China consuming 16% of the world's primary energy by 2020.

The trend is clear: more people, more wealth, more energy.

This brings me to my second truth: the decline of "easy oil".

[Easy oil refers to conventional oil and gas that are relatively easy to extract.]

At exactly the moment that demand for energy is surging, more and more of the world's conventional oil fields are going into decline. Hence, the growth rate of supplies of "easy oil" will struggle to keep up with growing energy demand.

The problem is not the availability of resources as such. Overall, measured in barrels of oil equivalent, the International Energy Agency believes there could be roughly 10 trillion barrels of conventional oil and gas in place, and at least as much unconventional oil and gas. That makes for at least 20 trillion barrels of oil equivalent - equal to about 400 years of global oil and gas consumption in 2006?theoretically.

In practice, only 5-10 trillion barrels can be recovered with existing technology. Many of the world's future resources are located in the arctic or offshore under deep water. And much of it is in oil shales and oil sands that are more difficult and therefore more costly to recover.

The IEA believes 20 trillion, or 20,000 billion, dollars need to be invested in the energy sector in the period 2005-2030 to secure sufficient supplies.

Apart from the availability of capital and resources, what matters is the rate at which they can be found, produced, refined and transported. The world now produces roughly 135 million barrels of oil equivalent a day of oil and natural gas. We can raise that number, but we'll have to do that much faster than we used to and even then we cannot push up production levels indefinitely?.

The third hard truth concerns the rise of greenhouse gas emissions.

As the IEA points out, growth of CO2 emissions could outpace energy demand. In its reference scenario, the IEA has emissions rising by 55% between 2005 and 2030. In a recent study by the US Energy Information Association, CO2 emissions are projected to rise even faster - by 59% between 2004 and 2030.

The reason for the surging growth in CO2 emissions is that in a business-as-usual scenario much of the demand for energy will be met by fossil fuels, including and especially coal. To be less dependent on imports of oil and gas, countries will exploit their domestic coal reserves. This is true for China and India, but also for the United States, where over 50% of electricity is generated with coal. And in the EU-27, around 36% of power is coal-fired.

But coal is at the dirty end of the fossil fuels scale. Looking at CO2 emissions per unit of source energy - in combination with typical conversion efficiencies - coal is more than twice as CO2- intensive as natural gas per kWh of electricity. And coal is more than twice as CO2-intensive as unconventional oil per liter of liquid fuel.

Nevertheless, the energy security argument is an important one for countries, and understandably so. Coal forms about 70% of China's current primary energy mix today. But to fuel its growth, China will need to double the amount of coal used today by 2030.

China is adding more than 50 gigawatt of new electricity capacity every year, most of it coal. That is equivalent to adding almost the current generation capacity of Great Britain every year?.

[Ed. But, when it comes to the impact of renewables?]

I believe it is possible to grow alternative energy from around 1 to 2% of primary energy today to around 30%. What would this mean in practice? Well, for example, there are 30,000 wind turbines in the world today. By the middle of the century there may be a million wind turbines, and they will need to have a much larger capacity than the ones we install today, from 2 megawatt to 5 megawatt.

So we have quite a task at hand in not just developing, but implementing the necessary legislation, regulation and technologies to boost renewable energy and capture emissions from power stations?.

Governments, not industry, decide the energy mix of their societies. They determine how to balance energy security against the economic, environmental and social interests, using laws, taxes and incentives. There are broadly three sets of standards and regulations that governments need to implement in the coming decades to meet the energy challenge.

First of all, efficiency standards. In the transport sector, we will likely see a gradual tightening of fuels standards and vehicle efficiency standards. Similarly, I expect gradually tighter efficiency standards in the building sector, where many gains can be made through better insulation. To get a maximum response from industry, harmonized, cross-border standards created for the long term are better than a patchwork of different national approaches?.

Second, we need long-term clarity about cap-and-trade mechanisms that put a price on carbon emissions across as many borders as possible. We need an international market for carbon emissions.

Third, if we price CO2 emissions, we should award credit for the CO2 that is captured, and stored or re-used, as well as the emissions prevented by investments in zero-carbon alternative energy?.

Three hard truths will create a dynamic of their own and three sets of governments policies could help us manage the coming turbulence.

I have learned to be an optimist. I believe the world can have economic growth and energy security, and at the same time manage emissions. Markets will indeed direct resources to the best innovations and the most efficient practical solutions. But I am also a realist. I know that the energy challenge can only be met if we take timely and concerted action. And I know from experience that markets can only move quickly if governments act quickly.

---

Wall Street History returns next week. A look at 1987.

Brian Trumbore

BUYandHOLD does not recommend any securities. The security mentioned above is being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy.