It's The Consumption, Stupid

Energy Outlook 2007
10.09.06, 6:00 AM ET

Quiz question: How much of the world's energy supply does oil account for?

Four-fifths? Two-thirds? A half?

With all the attention that the seven-year bull run in oil prices (and the recent decline) has gotten, you could be forgiven for guessing a high number. In fact, the answer is barely one-third. What's more, oil's share of the global energy market is down from almost 50% at the time of the oil shock of 1973.

In Pictures: What The World Pays For Energy

To be sure, some of the reason is price, though oil is still cheaper (after adjusting for inflation) than it was three decades ago (See " Real Vs. Nominal Price of Oil").

But much of the reason is that the world has learned to use oil more efficiently. Technology and the shifting patterns of global industrialization have helped the world and its largest oil consumer, the U.S., wring more economic growth from each barrel of oil consumed.

Despite all of this, however, demand continues to grow. Over the last 30 years, oil consumption has risen from 2.7 billion tons to 3.8 billion tons. And the overall energy pie has grown even faster, from 6 billion tons of oil equivalent (Btoe) to 11.1 Btoe. Even if the conservation measures now being considered are put in place, global energy consumption is still expected to top 14 Btoe by 2030, a 27% increase from where it is now.

A world in search of cheaper-priced energy has turned to natural gas, and, to a lesser extent, coal and nuclear power. It has not, for all the hype, taken in any great measure to alternatives such as ethanol and other biofuels or to renewables such as solar, wind and wave power. Their share of world energy supply has stayed barely changed over the past three decades, at around 11%.

The world is using less oil today to generate electric power than it did in 1973, despite output almost trebling to 17.5 billion watt hours of electricity, from 6.1 billion WH. Two countries alone generate 46% of the world's electricity--the U.S. and China.

The oil not being used for power generation has been diverted to moving people and goods. Transportation burns up 58% of oil supplies--1.9 billion tons--against 42%--905.6 million tons--three decades ago.

Natural gas has upped its share of world energy supply to one-fifth (2.3 Btoe), from one-sixth (1 Btoe) in 1973. Coal, too, has increased its market share, albeit slightly, to just above a quarter, from just under in 1973, with supply rising to 2.8 BToe from 1.5 Btoe.

In 1973, 13 years before the disaster at Chernobyl, nuclear power supplied less than 1% of the world's energy. More than 20 years on from Chernobyl, nuclear provides 6.5% of the world's energy--three times as much as hydro power.

The U.S., France and Japan are the world's three biggest nuclear producers, generating nearly two-thirds of the world's supply. France generates four-fifths of its electricity with nuclear energy, the most of any country; Sweden and the Ukraine both get half their electricity that way. Nuclear generates a fifth of the United States' domestic electricity.

Worldwide, nuclear energy has made great strides in electricity generation, accounting for 16% of global output, up from 3% three decades ago. Oil's share has dwindled from 25% to 7% during that time.

Nuclear power has grown faster over the past three decades than renewable alternative energy sources, such as solar, wave, wind and geothermal power. These have quadrupled their collective output since 1973, but they still only account for 0.4% of the world's energy supply--for all the promotion they are now getting.

Regardless of their environmental benefits, alternative energy supplies have not yet proved cheap or abundant enough to wean the rich countries from their oil addiction. These nations consume half the world's energy, with oil supplying two-fifths of that. (The U.S. and Canada account for half the rich countries' energy consumption; Europe, with a collectively larger gross domestic product, accounts for only a third.)

The U.S. is the world's third-biggest oil producer, but its seemingly unquenchable appetite for oil also makes it the world's largest oil importer by far. It imports almost two barrels of crude for every one it extracts. Constrained by a lack of refining capacity, it is also the world's largest importer of petroleum products.

The U.S. imports four and a half barrels for every one imported by China.

China Rises

Yet it is China, with its rapid growth, that has most transformed world energy markets, and particularly oil markets, over the past three decades. Paramount leader Deng Xiaoping's declaration in 1979 that it was glorious to get rich unleashed China's economic reform and set the country down a path to becoming both a voracious consumer of oil and a significant producer.

China now ranks as the world's sixth-largest oil producer. It produces 4.7% of the world's oil output, as much as the rest of Asia combined and a third as much as Russia, the world's second-largest producer after Saudi Arabia. It extracts a barrel and a half at home for every one it imports.

China is also the world's largest coal producer, with more than twice the output of the next largest miner, the U.S., which in turn produces more than twice the output of third-ranked India. Both China and the U.S. are net exporters of coal.

China is also the world's leading producer of hydro power, outstripping even Canada and Brazil. China is able to generate one-eighth of its domestic electricity with hydro. That is far short of the 99% generation rate in Norway, 83% in Brazil and 71% in Venezuela (freeing up its oil for use in international politics).

So far, China hasn't become a factor in the natural gas market in the same way. World production is dominated by Russia, the U.S. and Canada, which produce nearly half of the global supply among them. Neither is China a top-ten importer. That list is again topped by the U.S.

The world's increased use of energy has not been without a cost to the atmosphere. carbon dioxide emissions have increased to 26.5 billion tons, from 15.6 billion tons in 1973. The culprits: oil and coal almost equally (40%). Natural gas accounts for almost 20% of emissions, and all other fuels, 0.3%.

The rich industrialized countries emit almost half the world's carbon dioxide, with China accounting for a further fifth, and its emissions are growing rapidly as it industrializes. In the past three decades, the rich countries have pumped a further 2.6 billion tons of carbon dioxide into the air; China, a further 3.9 million tons.

Transport and power generation in developing economies could drive carbon dioxide emissions to 40 billion tons by 2030 if current consumption habits continue, the International Energy Agency has forecast.

Environmental Expense

Those sorts of numbers have triggered a politicized debate about what damage greenhouse gases are doing to the planet and how to control their output. The G-8 group of the largest industrialized economies committed themselves at both their past two annual summits to combating global warming and to cleaner energy and sustainable development.

With a world seemingly unwilling to cut back its energy demand, it remains likely that the fossil fuels of today--oil, natural gas and coal--will remain the primary fuels of tomorrow.

Renewables like wave, wind and solar power will have a greater role to play, as will nuclear, but they will not be fueling the first half of the 21st century.

Instead, the world will have to deploy more energy-efficient and low-carbon technologies, especially for power generation, if it is to keep its greenhouse gases in check.

The good news is that technologies that exist or are in development have the capacity to reduce the growth of carbon dioxide emissions so that in 2050, those emissions will be just 6% above today’s levels, according to Claude Mandil, the IEA’s executive director.

But to get there, far-sighted businesses and informed consumers will have to show the will to use more efficiently the energy they buy, from smarter buildings to higher-mileage vehicles, while power generators will have to--or be made to--go about their business more cleanly.