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Hello and welcome to Energy Source, coming to you today from London.
Several colleagues have headed off to Labour’s annual conference in Liverpool this week, where UK Prime Minister Sir Keir Starmer is trying to fend off upstart rival party Reform.
A general election is a long way away, but if Nigel Farage’s right-wing party does win, it would upend Britain’s energy policy, in the style of Donald Trump.
Farage has described Britain’s plan to cut total emissions to net zero by 2050 as “complete and utter madness” while his deputy party leader Richard Tice has warned subsidies for green energy projects could be pulled.
For today’s newsletter, I take a closer look at what BP’s chief economist, Spencer Dale, has to say about the known unknowns of energy modelling. Enjoy reading. — Rachel
This week Energy Source launched a new initiative, the Energy Source Forum, which convenes a global community of 50,000 energy professionals, investors and officials to explore the trends that are reshaping the industry. You can read our first report, “Rethinking the energy transition”, here.
What’s causing sluggish energy efficiency gains?
Oil company BP published its Energy Outlook last week, something of an industry bible and feast for those who like to gorge on energy statistics to try to figure out a rapidly changing world.
The headline conclusion was stark — in its central outlook, BP now anticipates global oil demand to peak in 2030, five years later than its expectation last year.
India and other Asian countries will make up for waning appetite for oil in some other markets and support global demand of about 103.4mn barrels per day in 2030, BP expects, up from about 102.2mn bpd this year.
Its “scenarios” (BP is wise enough not to call them forecasts) are built around certain assumptions on lower carbon energy and economic growth. But Spencer Dale, BP’s chief economist, also draws attention to some lesser-discussed unknowns that could have a huge impact on oil demand — in particular, energy efficiency.
“I realise that shifting patterns in energy efficiency may seem a little arcane,” he says, in the foreword to the report. “But I would argue that the sustained weakness in efficiency gains over the past five years was one of the most important factors shaping global energy over this period.”
Between 2011 and 2019, BP says, energy efficiency had been steadily improving at a rate of about 2 per cent a year (ie the world needed 2 per cent less energy on average to produce the same unit of GDP).
But between 2020 and 2023, it slowed, averaging about 1.5 per cent a year. And experts, including BP, don’t really know why.
“The causes of this sluggishness in efficiency gains are not well understood,” says BP, pointing to suggestions from others such as a slowdown in investments in efficiency improvements and the growth of factories in some emerging economies.
One theory put forward by some experts is that people have been replacing their cars at a slower rate, meaning less-efficient models are still on the roads.
Because the reasons are not well understood, it’s hard for BP to work out where the trend is heading. And the direction matters hugely for energy use and for global climate goals: BP expects fossil fuels to pick up the slack, as they are typically able to respond quickly to fluctuations in demand.
For the purposes of its “current trajectory” scenario — in which oil demand climbs about 600,000 bpd by 2030 — BP assumes efficiency gains will gradually pick back up to their pre-2019 rate.
But if they don’t, oil demand could grow about 5.8mn barrels a day in 2035 — roughly the oil consumption of India. Meanwhile, natural gas demand would rise by more than 1,000bn cubic metres in total by 2035 — or about 7 per cent more than the gas consumption of the US — compared to less than 700bn cubic metres if efficiency gains pick up.
That could all translate to carbon dioxide equivalent emissions of about 42.2 gigatonnes a year in 2035, compared to 39.5GT a year if gains improve as expected, according to BP’s analysis. Annual emissions would need to be roughly 26GT then to be on track for limiting global warming to 1.5 degrees.
Energy efficiency is not the only wild card in BP’s analysis. Also in its “current trajectory” scenario, BP sees the use of oil in petrochemicals climbing to about 20mn bpd by 2035 and then to 23mn bpd by 2050.
But BP acknowledges it could be about 10mn barrels a day higher depending on how the relationship between plastics demand and economic growth evolves.
“Over the past 30 years or so, the demand for plastics has become less responsive to increases in economic activity, as the global pattern of economic demand has shifted away from goods towards services,” it notes.
All of which points to the perils of trying to work out the global oil outlook. “The likelihood that either of the two scenarios used in this year’s Energy Outlook will materialise exactly as described is negligible,” BP acknowledges in its report. Indeed. (Rachel Millard)
Charts by Cleve Jones
Power Points
Energy Source is written and edited by Jamie Smyth, Martha Muir, Alexandra White, Kristina Shevory, Tom Wilson, Rachel Millard and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.
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