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Oil price and the potential impacts to the global economy

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It seems one cannot go a day without seeing a headline about the low price of oil and the potential impacts to the US and global economy and the oil and gas industry. In order to help make sense of the myriad of information available, we have broken down the issue into the following fundamental questions.

Why did oil prices correct so suddenly? Is the current low price environment due to lower demand or increased supply or a combination of both?

The answer is a combination of both. The correction is a net result of lower-than-projected demand growth and a remarkable increase in supply. On the demand side, in July 2014 the Energy Information Administration (EIA), International Energy Agency (IEA), and OPEC forecast 2015 global liquids growth to be 1.7 percent on average. However, these expectations declined to just 1.1 percent by December 2014, despite a low price environment that typically would have been conducive to boosting demand.i One reason for the muted demand response to the low price signal has been the increasing strength of the US dollar relative to other major world currencies. Notably, the US Dollar Index has risen nearly 15 percent to 97.4 since July 2014. A stronger dollar makes dollar-denominated crude more expensive for buyers using foreign currency. Consequently, while the United States is enjoying the full benefit of low prices, many other countries are only experiencing a portion of the price decline, giving them less reason to consume more petroleum products.

On the supply side, several years of $100/bbl oil drove tremendous production growth in many countries. US crude output, including lease condensate production, increased by over 2 MMbbl/d from 2012 to 2014. This domestic supply surge greatly offset US net crude oil imports, shrinking them from 8.5 MMbbl/d in 2012 to less than 7 MMbbl/d in 2014. Meanwhile, Brazil, Iraq, and Canada collectively added nearly 1 MMbbl/d over the same two-year period.

All told in 2014, production growth of 1.9 percent exceeded demand growth of 1 percent, leading to an inventory build-up of 500 thousand bbl/d with another 400 thousand bbl/d projected for 2015.

Is OPEC content to wait it out until high-cost producers fall by the wayside? Or, will OPEC cut production?

When oil prices first started to fall, many thought OPEC members might agree to cut production to support prices. However, members rejected that idea during their regularly scheduled meeting in November 2014, leaving OPEC’s official crude production target unchanged at 30 MMbbl/d. In light of the news, the market responded with an immediate 10 percent decline in the price of WTI crude.

Why couldn’t OPEC members agree on a strategic response despite the urgency of the situation? The opposing concerns of two different factions split the camp.

The fiscal breakeven cost is the price that OPEC producers need to receive for their oil in order to balance their government budgets, which are heavily reliant on oil revenue. When prices fall below the fiscal breakeven cost, oil-exporting economies must make up for the shortfall by drawing on cash reserves or reducing expenditures. Countries such as Iran, Venezuela, and Nigeria have high social costs and low cash reserves. The collapse in oil prices not only puts them under financial pressure but also potentially threatens the stability of their governments if transfer payments cannot be made. These fears make them more amenable to crying “uncle” and cutting production to boost prices.

Meanwhile, other OPEC members, such as Saudi Arabia, Kuwait, and the U.A.E., have cash reserves to finance the shortfall for many months. Their biggest fear is not near-term financial collapse, but instead long-term loss of market share. Here, the strong oil prices over the last few years have worked against them in some ways. Prices in the neighborhood of $100/bbl have facilitated significant growth in global crude production, particularly in North America. Today, the increasing volume of unconventional production in the US and Canada is changing import/export dynamics and decreasing western reliance on OPEC producers.

Rather than acting to defend prices, the Gulf producers within the organization, led by Saudi Arabia, are working to defend their global market share. In doing so, they are gambling that as the lower cost producers, OPEC members will ultimately prevail over more costly unconventional operators. Indeed, Saudi Arabia’s oil minister Ali al-Naimi has stated directly that the kingdom will not intervene to support prices. “Whether it goes down to $20, $40, $50, $60, it is irrelevant … it is not in the interest of OPEC producers to cut their production, whatever the price is”.

However, conventional oil field development generally requires years of planning and construction before the first barrels of oil are produced. Today’s low prices may not be enough to curtail the numerous development projects already underway.

What is happening in China, the leading contributor to global growth? Is it rebalancing its economy or has it started a painful correction?

In 2014, the Chinese economy officially grew at a rate of 7.4 percent, down from 7.7 percent, which represented the slowest rate of growth in 24 years.ix In the fourth quarter of 2014, the economy was up 7.3 percent from a year earlier, a figure that was a bit better than what investors had expected, but still indicative of a continuing slowdown.x Moreover, the IMF now predicts that GDP growth will fall below the psychologically important 7.0 percent level in 2015.

This raises questions about China’s future oil demand. In the past, China’s focus on infrastructure and capital projects made it the second largest consumer of crude oil in the world, and it imported large volumes of it at market prices—however high. But its transition to a more consumer-oriented economy might make it more price-sensitive in the future. Regardless, industry stakeholders should stay abreast of economic developments in China, since the nation has been responsible for 55 percent of total growth in oil consumption worldwide between 2005 and 2013.

How much new supply is poised to come online in 2015 and 2016?

In 2014, new non-OPEC large-field projects (i.e., those producing over 25 thousand bbl/d each) collectively brought on 2.3 MMbbl/d in new supply. These efforts spanned diverse geographies and production methods, ranging from Brazil’s offshore projects in the Roncador, Parque, Iracema, and Sapinhoa fields to Mars B in the Gulf of Mexico, and to Russian and Canadian oil sands projects. Notably, these supply additions excluded the numerous shale oil fields being developed in the US. OPEC also contributed to the expanding large-field supply picture, adding another 1.4 MM bbl/d of new oil production capacity in 2014.

For 2015, a Deloitte MarketPoint analysis suggests large-field projects could bring on 1.835 MMbbl/d in new supply (i.e., 1.2 MMbbl/d from non-OPEC producers and 0.635 MMbbl/d from OPEC members). These projects are well underway and are unlikely to be halted, even in the current low-price environment. Taking this momentum into account, the analysis further forecasts large-field production additions of 2.676 – 3.434 MMbbl/d from non-OPEC producers and 0.759 MMbbl/d from OPEC members in 2016.

For the past two years, US tight oil production has grown at an annual rate of approximately 1 MMbbl/d. This growth is expected to continue in 2015, but at a slower rate.xvii While the recent drop in crude prices has squeezed the capex budgets of shale producers, some reportedly have been able to lower their operating costs to below $40/bbl through efficiency gains and better economics in the “sweet spots” of the shale plays. As a result, production growth is expected to continue in the short term despite low prices, albeit more slowly than in prior years. While there is no consensus on the extent to which growth will slow, many analysts expect declines of 300-500 thousand bbl/d off the 2014 pace.

It is important to note that the world experiences a four to five percent production loss per year just from normal depletion. So the added production has to equal this amount if we are to stay even with no additional growth.

Will the industry stabilize and balance after 2016?

Based on current data, demand should grow faster than supplies starting in 2016. Low prices over the next few years will likely inhibit investment in new projects—especially those in the early stages of discussion or in the engineering and design phases. It should also bolster demand, due to price elasticity,much faster than otherwise would be the case.

What does the future look like in 2020?

By simulating how the aforementioned variables could affect market conditions, the Deloitte MarketPoint World Oil Model (the Model) provides some insight into where prices might be headed. The findings from the Model’s output include the following:

•     Based on the EIA’s estimates, production is expected to continue to outpace demand in 2015 by approximately 400 thousand/bbd. This assumption is driven largely by continued production growth through the first half of 2015 as many producers strive to complete projects falling into the “too late to turn back” category and as yet-to-expire hedging contracts allow them to continue producing despite uneconomic market conditions.

•     On a half-cycle basis, oil prices could fall below $40 bbl. There have been several periods in the last 25 years where prices have dipped well below this level. However, in the current market environment, some of the very low prices witnessed in the past are unlikely to reappear, at least on a sustained basis. Since oil markets are self-correcting, market forces should trigger an adjustment, mainly through low prices that engender more demand, decrease marginal, high-cost supply, and encourage supply depletion. This suggests that historically low prices could not be sustained for more than 3 to 12 months, absent other drivers affecting demand.

•     If the low-price environment continues as expected through the first half of 2015, it should trigger a demand response that will likely be felt in the second half of the year. This is the same time period when cut-backs on the number of shale drilling rigs in operation, expiring hedging contracts, and other production-related belt-tightening should start to have a more prominent effect on production growth and market perception.

•     As a result, Deloitte MarketPoint forecasts crude prices to rise in the second half of 2015, elevating the average annual price above present levels. Additionally, the forecast expects the average 2015 WTI price to reach $62/bbl and then to rise gradually over the next few years until it reaches a new steady range of $75-$80/bbl (i.e., combined WTI and Brent world crude price) as early as 2018. This new equilibrium price is approximately $20/bbl lower than the steady state achieved in previous years, because it reflects two new circumstances in the marketplace:

Prior to the “shale revolution,” there was a scarcity premium of $10-$20/bbl in place. With the newfound abundance of tight oil in the US and potentially in other areas around the globe, that scarcity premium has been reduced.

Producers in high-cost regions, such as the Canadian oil sands and certain tight oil plays in the US, have continued to improve their margins through technological innovation. While their margins will be lower in the new equilibrium-price environment, they should still be able to operate profitably.

The Deloitte MarketPoint price forecast is only one possibility among a multitude of potential outcomes. Changes in key assumptions, such as the magnitude of the demand response as well as the trajectory of tight oil production growth, would greatly change this picture. With only negligible shifts in demand or production in the next 12 to 18 months, the average price could likely be lower, and the recovery would likely be “U” shaped, reinforcing the price signal to shale producers to decrease production.

Forces that could potentially make upside price scenarios more likely include any number of black swan events affecting supply or the perception of supply scarcity. However, since oil markets are highly cyclical, they tend to overshoot or undershoot most long-term outlooks. The current price environment has, or soon will, curb many development plans. These can be restarted in the future once the pricing environment becomes more favorable, but the lag could just be the catalyst for pushing the market back into a scarcity mindset sooner than expected.

History has demonstrated that the oil and gas industry is resilient. Oil prices are rarely stable for extended periods of time, and the industry has shown a remarkable ability to adapt and thrive as cycles change. Even after analyzing market fundamentals and other variables, the questions keep coming: Will demand continue to moderate or grow in the face of lower gasoline prices? Will companies become more efficient, leading to lower breakeven prices for US shale plays? How will global/political circumstances change?

While forecasts can be helpful for thinking about possibilities, the future is never entirely visible. However, one thing is clear: Many oil and gas companies will need to retrench and determine how they can best adapt and manage change in this challenging environment. Enlightened companies will use this time as an opportunity to improve their organizations by continuing to focus on:

•     Enhanced efficiency and performance through business process and/or supply chain optimization

•     Strategic and operational improvements

•     Reduced and/or refocused capital expenditures

•     Portfolio upgrades through acquisitions and/or divestitures

•     Talent acquisitions

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Gas doom hanging over Ukraine

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The long history of gas transit across independent Ukraine began with Kiev’s initial failure to pay anything for Russian natural gas, both intended for transit to Europe and for domestic consumption, on the pretext of fraternal relations between the former Soviet republics. Later it cost the Ukrainians a meager $25 for 1,000 cubic meters of Russian gas, and that ridiculously small sum remained unchanged for quite some time. The sizeable amount of Russian gas provided at a discount price, plus domestically available oil resources, were distributed by the country’s greedy elite the following way: domestically produced gas was used on utilities, proceeds from the transit of Russian gas went to the state budget (minus the money that lined bureaucratic pockets), and Russian gas – to the industry (plus the corruption component).

Then came the Ukrainian revolutions and Kiev’s desire to join “Euro-Atlantic structures” and the desire to “get off the Russian gas needle and prevent the Kremlin from using energy as a weapon.” Ukraine has tried and is still trying to believe in all this by playing up to the collective West and hoping that the West will compensate Kiev for the losses caused by its revolutionary endeavors and anti-Russian antics. As a result, we see gas prices going through the roof, an energy crisis in Europe, and the completion of the Nord Stream 2 gas pipeline.

Those in power in Kiev hoped for the very last moment that the West valued their country more than it did the energy security of European countries. Much to their surprise (and only theirs), this is not so. It looks like the Europeans are interested in Russian gas supplies and are not so eager to keep Ukraine as the main transit country. Moreover, having “democratized Ukraine” to the state of an openly anti-Russian country, the West turned it into a country, whose leadership the Kremlin does not really want to talk to simply because it does not see any point in doing this. This is the reason why third countries care (or rather pretend to care) about Ukraine. Thus, in July of this year, there came out the “Joint Statement of the United States and Germany on Support for Ukraine, European Energy Security and Our Climate Goals.” According to it, Germany pledged to do everything in its power to make sure that the agreement between Moscow and Kiev on the transit of Russian gas across Ukrainian territory was extended for up to ten years. The statement came when it was already obvious that the construction of Nord Stream 2 would be completed, Germany resisted US pressure on this issue, Moscow paid no attention and Washington, exhausted by the battles of the presidential elections and the search for new strategies in the Old World, was trying to pit America’s European friends against Russia.

It has never been a secret that the West needs reliable transit, and this is something that Ukraine also insists on. However, Kiev has officially labelled  Russia as an “aggressor country,” which means that this very “aggressor” must ensure this transit and bring billions of dollars in revenues to the Ukrainian budget. This looks like a kind of “Euro-schizophrenia” where Ukraine is an anti-Russian country and simultaneously serves as a reliable transit country for Russian gas. Things do not work this way, however, and it looks like Europeans are beginning to realize this. Therefore, most of the European consumers support Nord Stream 2 even though they do not show this in public. Suffice it to mention the recent conclusion of a years-long contract for gas supplies to Hungary.

Vladimir Putin’s statement, made amid soaring gas prices and growing threats to European industry, came as an energy lifeline for all Europeans.

“Russian President Vladimir Putin supported the initiative of Deputy Prime Minister Alexander Novak to increase gas supply on the market amid rising energy prices in Europe… Novak said that Russia can stabilize the situation with prices by providing additional volumes of gas on the exchange, adding that this country’s main priority is to accommodate domestic demand,” Lenta.ru reported.

Commenting on the possibility of increasing gas supplies via Ukraine, President Putin recalled that Ukraine’s gas transport system had not been repaired “for decades” and that “something could burst” there any time if gas pressure goes up.

“At the same time, it is more profitable and safer for Gazprom to operate new pipeline systems,” he added. Putin thus confirmed what is already clear to all that Ukraine is an unreliable and, in fact, an extra link, and that Europe can get gas bypassing technically and politically unreliable Ukrainian pipes. He also pointed out that Gazprom would suffer losses from an increase in gas transit via Ukrainian territory, while new gas pipelines offer cheaper transit options. He added that Gazprom is saving about $3 billion a year by using new pipelines and that Russia was ready to increase gas supplies and make them cheaper for European consumers.

Gas shortages have already forced the Ukrainian government to freeze gas prices for household consumers, but prices for gas for industrial enterprises are rising along with those on European exchanges, where on October 6, they reached a very impressive $ 2,000 per thousand cubic meters and went down only after Putin’s statement came out.

Meanwhile, the head of Ukraine’s Federation of Glass Industry Employers, Dmitry Oleinik, said that this [rise in gas prices – D.B.] would lead to an inevitable rise in prices. However, producers will not be able to jack up prices indefinitely, because at some point buyers simply will not be able to cover production costs.

“The Ukrainian consumer will not even be able to cover the cost of production. Plants and factories will slowly shut down and people will lose their jobs – this is already very serious. Budget revenues will “plummet,” and expenses will skyrocket… The issue of bankruptcies is just a matter of time,” Oleinik warned.

If Ukraine continues to follow the chosen course, it will face de-industrialization. By the way, this will suit the West, but certainly not the Ukrainian industrial oligarchs, who have long been eyeing agriculture, including the prospect of turning themselves into land barons. However, the farming sector will not be happy about the high prices on gas that bakeries, sugar factories and greenhouses run on. There will be nowhere to run.

Apart from purely practical realities, the conclusions I can draw from the current energy situation in the world and Vladimir Putin’s statements regarding the Ukrainian transit, are as follows:

  • Gas supplies through Ukraine and to Ukraine are not solely an economic issue, given Kiev’s endless anti-Russian escapades;
  • This problem affects the energy security of Europe;
  • Since there are several angles to this problem, it must be solved in a comprehensive manner;
  • At the same time, this cannot be done exclusively in the interests of the West and Ukraine to the detriment of the interests of Russia.

As you can see, it is once again up to Kiev and its shadow patrons to decide. And winter is just around the corner…

From our partner International Affairs

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Russian Energy Week: Is the world ready to give up hydrocarbons?

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In an official message to mark the opening of the Russian Energy Week international forum on 13-15 October in Moscow, Russian President Vladimir Putin stressed that there are numerous issues on the agenda related to current trends in the global energy market, including improvements to industry infrastructure and the introduction of modern digital technologies into its operation.

“The efficiency of energy production and consumption is the most important factor in the growth of national economies and has a significant impact on people’s quality of life. Many countries have already adopted policies to accelerate the development of clean energy technologies,” he wrote in the message to guest and participants.

“The forum business programme is therefore set to look in detail at the possibility of developing green energy based on renewable sources and the transition to new, more environmentally friendly fuels. I am confident that the events of the Russian Energy Week will allow you to learn more about the achievements of the country’s fuel and energy sector, and that your initiatives will be put into practice,” Putin said.

Leaders of foreign states have also sent greetings to the participants and guests. For instance, President of the Republic of Angola João Manuel Gonçalves Lourenço, Prime Minister of Vietnam Pham Minh Chinh, Crown Prince of Abu Dhabi Armed Forces Mohamed bin Zayed bin Sultan Al Nahyan, and Vice Premier of the State Council of China Han Zheng.

In their greetings, it generally noted the importance of the topics to be discussed at the forum as well as the need to build an international dialogue and consolidate efforts to achieve the sustainable development goals, including as regards climate change.

The programme covers a wide range of issues of transformation and development in the global energy market. In the context of energy transition, the issues of energy development are inextricably linked with the introduction of new technologies, and the transformation aimed at reducing greenhouse gas emissions into the atmosphere. Climate protection is a task that cannot be solved by one country; it is a global goal, which can be achieved through building dialogue and cooperation between countries.

The participants in the discussion will answer the question: Is the world ready to give up hydrocarbons? In addition, during the panel session, the participants will discuss whether oil, gas and coal are really losing ground in the global energy sector; whether the infrastructure will have time to readjust for new energy sources; how long will there be enough hydrocarbons from the field projects that are being implemented; and whether an energy transition using fossil fuels is possible.

The international climate agenda is forcing many countries to reform their carbon-based energy systems. For Russia, which holds a leading position in the global hydrocarbon markets, the transition to development with low greenhouse gas emissions presents a serious challenge, but at the same time it opens up new opportunities for economic growth based on renewable energy, hydrogen technologies, advanced processing of raw materials and implementing green projects.

The Climate Agenda included sessions dedicated to the operation of the Russian fuel and energy sector in the context of energy transition, the impact of the European green pivot on the cooperation between Russia and Europe, as well as the session titled ‘The Future of Coal in a World Shaped by the Climate Agenda: The End, or a New Beginning?’

Sessions of the ‘New Scenarios for the Economy and the Market’ track are dedicated to the global challenges and opportunities of the electric power industry; the impact of ESG on the Russian fuel and energy sector; the potential for the renewable energy sources; and other issues of the future of energy.

The Russian Energy Agency under the Ministry of Energy brings together experts from key international analytical organizations to discuss the future of world energy during the session titled International Energy Organization Dialogue: Predicting the Development of Energy and Global Markets.

The Human Resource Potential of the Fuel and Energy Sector, participating experts will discuss the prospects for developing the professional qualification system, and a session titled Bringing the Woman’s Dimension to the Fuel and Energy Sector. Optimizing regulation in the energy sector and organizing the certification and exchange of carbon credits in Russia are the basis of the Regulatory Advances in Energy. 

Anton Kobyakov, Advisor to the Russian President and Executive Secretary of the Russian Energy Week 2021 Organizing Committee, said “the level of various formats of international participation testifies to the importance of the agenda and Russia’s significant role in the global energy sector. We are a reliable strategic partner that advocates for building international cooperation based on the principles of transparency and openness. With the period of major changes in the industry, it is particularly important to engage in a dialogue and work together to achieve both national and global goals.”

The forum, organized by the Roscongress Foundation, the Russian Ministry of Energy, and the Moscow Government, brought together many local and foreign energy and energy-related enterprises. The speakers attending included  Exxon Mobil Corporation Chairman of the Board of Directors and CEO Darren Woods, Daimler AG and Mercedes-Benz AG Chairman of the Board Ola Kallenius, BP CEO Bernard Looney, and TotalEnergies Chairman and CEO Patrick Pouyanné.

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World Energy Outlook 2021 shows a new energy economy is emerging

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A new energy economy is emerging around the world as solar, wind, electric vehicles and other low-carbon technologies flourish. But as the pivotal moment of COP26 approaches, the IEA’s new World Energy Outlook makes it clear that this clean energy progress is still far too slow to put global emissions into sustained decline towards net zero, highlighting the need for an unmistakeable signal of ambition and action from governments in Glasgow.

At a time when policy makers are contending with the impacts of both climate change and volatile energy markets, the World Energy Outlook 2021 (WEO-2021) is designed as a handbook for the COP26 Climate Change Conference in Glasgow, which offers a critical opportunity to accelerate climate action and the clean energy transition. The new analysis – which the IEA is making available for free online – delivers stark warnings about the direction in which today’s policy settings are taking the world. But it also provides clear-headed analysis of how to move in a well-managed way towards a pathway that would have a good chance of limiting global warming to 1.5 °C and avoiding the worst effects of climate change.

The WEO-2021, the IEA’s annual flagship publication, shows that even as deployments of solar and wind go from strength to strength, the world’s consumption of coal is growing strongly this year, pushing carbon dioxide (CO2) emissions towards their second largest annual increase in history.

“The world’s hugely encouraging clean energy momentum is running up against the stubborn incumbency of fossil fuels in our energy systems,” said Fatih Birol, the IEA Executive Director. “Governments need to resolve this at COP26 by giving a clear and unmistakeable signal that they are committed to rapidly scaling up the clean and resilient technologies of the future. The social and economic benefits of accelerating clean energy transitions are huge, and the costs of inaction are immense.”

The WEO-2021 spells out clearly what is at stake: what the pledges to reduce emissions made by governments so far mean for the energy sector and the climate. And it sets out what needs to be done to move beyond these announced pledges towards a trajectory that would reach net zero emissions globally by mid-century – the Net Zero Emissions by 2050 Scenario from the landmark IEA report published in May, which is consistent with limiting global warming to 1.5 °C.

As well as the Net Zero Emissions by 2050 Scenario, the WEO-2021 explores two other scenarios to gain insights into how the global energy sector may develop over the next three decades – and what the implications would be. The Stated Policies Scenario represents a path based on the energy and climate measures governments have actually put in place to date, as well as specific policy initiatives that are under development. In this scenario, almost all of the net growth in energy demand through 2050 is met by low emissions sources, but that leaves annual emissions still around today’s levels. As a result, global average temperatures are still rising when they hit 2.6 °C above pre-industrial levels in 2100.

The Announced Pledges Scenario maps out a path in which the net zero emissions pledges announced by governments so far are implemented in time and in full. In this scenario, demand for fossil fuels peaks by 2025, and global CO2 emissions fall by 40% by 2050. All sectors see a decline, with the electricity sector delivering by far the largest. The global average temperature rise in 2100 is held to around 2.1 °C.

For the first time in a WEO, oil demand goes into eventual decline in all the scenarios examined, although the timing and speed of the drop vary widely. If all today’s announced climate pledges are met, the world would still be consuming 75 million oil barrels per day by 2050 – down from around 100 million today – but that plummets to 25 million in the Net Zero Emissions by 2050 Scenario. Natural gas demand increases in all scenarios over the next five years, but there are sharp divergences after this.

After decades of growth, the prospects for coal power go downhill in the Announced Pledges Scenario – a decline that could be accelerated further by China’s recent announcement of an end to its support for building coal plants abroad. That move may result in the cancellation of planned projects that would save some 20 billion tonnes in cumulative CO2 emissions through 2050 – an amount similar to the total emissions savings from the European Union reaching net zero by 2050.

The differences between the outcomes in the Announced Pledges Scenario and the Net Zero Emissions by 2050 Scenario are stark, highlighting the need for more ambitious commitments if the world is to reach net zero by mid-century.

“Today’s climate pledges would result in only 20% of the emissions reductions by 2030 that are necessary to put the world on a path towards net zero by 2050,” Dr Birol said. “Reaching that path requires investment in clean energy projects and infrastructure to more than triple over the next decade. Some 70% of that additional spending needs to happen in emerging and developing economies, where financing is scarce and capital remains up to seven times more expensive than in advanced economies.”

Insufficient investment is contributing to uncertainty over the future. Spending on oil and natural gas has been depressed by price collapses in 2014-15 and again in 2020. As a result, it is geared towards a world of stagnant or even falling demand. At the same time, spending on clean energy transitions is far below what would be required to meet future needs in a sustainable way.

“There is a looming risk of more turbulence for global energy markets,” Dr Birol said. “We are not investing enough to meet future energy needs, and the uncertainties are setting the stage for a volatile period ahead. The way to address this mismatch is clear – a major boost in clean energy investment, across all technologies and all markets. But this needs to happen quickly.”

The report stresses that the extra investment to reach net zero by 2050 is less burdensome than it might appear. More than 40% of the required emissions reductions would come from measures that pay for themselves, such as improving efficiency, limiting gas leakage, or installing wind or solar in places where they are now the most competitive electricity generation technologies.

These investments also create huge economic opportunities. Successfully pursuing net zero would create a market for wind turbines, solar panels, lithium-ion batteries, electrolysers and fuel cells of well over USD 1 trillion a year by 2050, comparable in size to the current oil market. Even in a much more electrified energy system, major opportunities remain for fuel suppliers to produce and deliver low-carbon gases. Just in the Announced Pledges Scenario, an additional 13 million workers would be employed in clean energy and related sectors by 2030, while that number doubles in the Net Zero Emissions by 2050 Scenario.

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