Energy Outlook Portends High Oil Prices, Low Adoption of Hybrid Vehicles

The International Energy Agency (IEA) recently released its annual World Energy Outlook (WEO) for 2010, a report that is eagerly anticipated by governments and companies worldwide. The IEA was created 36 years ago in the wake of the first oil price shock and now has 28 member countries, including the U.S., most Western European nations, Japan, and several others. 

The main writers of the WEO 2010 (all 26 of them), with input from many outside experts (203 are listed in the report), gazed into their crystal balls to try to discern what’s going to happen with energy during the next 25 years. When reading a document like this, I always try to keep in mind some sage words attributed to Yogi Berra, “It’s hard to make predictions, especially about the future.”  It’s almost guaranteed that the quantitative predictions in a report like this won’t come to pass, but the deep analysis of trends presented in it offers a useful way to better understand where the world is today with regard to energy, and where we are headed. (And the analysis is really deep! The sheer volume of the document is intimidating, spanning 731 pages and including 120 tables and 267 graphs).

The WEO treats all manner of esoteric topics in depth — such as unconventional oil, energy poverty, energy in the Caspian region, and fossil-fuel subsidies. While many of these are primarily of interest to expert energy analysts (or those with too much free time on their hands), at least one topic — crude oil prices — should be of interest to just about anybody who will be driving a car between now and 2035, the end year for WEO projections.

Historical annual average price of imported crude oil and three projections for the future. Source: International Energy Agency, World Energy Outlook 2010.

As the figure above shows, under the WEO’s “Current Policies” scenario, i.e., assuming the world keeps going along its current energy trajectory, the annual average oil price is projected to be $140 per barrel by 2035. 

Some may remember that the oil price in the U.S. hit $140 per barrel in 2008, but that lasted only a week or two. The price of oil imported to the U.S. for all of 2008 actually averaged about $93 per barrel. In 2009, it was $59 per barrel. Its average so far for 2010 is under $80 per barrel.

The WEO points out that an important reason for the escalating oil price in this scenario is that the world’s thirst for oil continues unslaked, and the oil price must rise to keep supply in line with demand. 

One consequence is that in the “Current Policies” scenario (a more descriptive, albeit judgmental, name might be the “Unsustainble Policies” scenario), the world has no chance of keeping carbon dioxide (CO2) emissions from fossil fuel combustion low enough to avoid an increase in global average temperatures that world leaders and most climate scientists believe will lead to dangerous changes in climate.

The WEO’s “New Policies” scenario assumes successful implementation of energy-related policies and plans already announced by many governments, including greenhouse gas emission reduction targets articulated in the non-binding Copenhagen Accord. The net effect of these measures would be to reduce demand for oil compared to the “Current Policies” scenario, and reduce the projected oil price (see graph above).

The “New Policies” scenario gives the world a better chance to stay under the threshold of a 2°C increase in global average surface temperature. But the WEO analysts conclude that even hewing to the “New Policies” scenario may not be enough. The “450 Scenario”, referring to 450 parts per million concentration of CO2-equivalent greenhouse gases in the atmosphere, would guarantee staying within the 2°C threshold. Oil prices are even lower in that scenario due to even greater reductions in demand.

How Will Hybrid and Electric Cars Sell When Oil Prices Go Up?

Estimated payback time to a U.S. consumer for a new hybrid car compared with a new conventional car. Source: International Energy Agency, World Energy Outlook 2010.

Since oil is overwhelmingly used for transportation, most of the reductions in oil demand envisioned in the “New Policies” and “450” scenarios come from more efficient vehicles. The WEO estimates that the efficiency of cars with conventional engines will continue to improve. They also analyze even more efficient hybrid cars and conclude that the time it would take a new car buyer to recoup the extra cost for a hybrid will discourage the typical U.S. consumer from buying one, even when the oil price is $100 per barrel.

Accordingly, they project that hybrid cars will make up just 19 percent of new car sales in 2035 in the “New Policies” scenario. Electric cars, which don’t use gasoline at all, are barely a blip on the WEO’s radar in 2035.

A Grain of Salt

As I suggested earlier, the WEO’s projections for oil prices, for hybrid and electric car sales, and for just about everything else can only be taken as informed guesses — with some guesses better informed than others. The WEO analysis helps raise awareness about future energy-related problems the world will encounter if it continues on its current course. The analysis also identifies opportunities for action, especially by governments of member countries, that could help steer the world away from such problems.

Regardless of what the WEO predicts, it will ultimately be actions of individuals, the business community and governments that determine the world’s energy future.