International Energy Outlook 1999

World energy consumption is projected to increase by 65 percent from 1996 to 2020. The current economic problems in Asia and Russia have lowered projections relative to last year’s report.

In the reference case projections for this International Energy Outlook 1999 (IEO99), world energy consumption reaches 612 quadrillion British thermal units (Btu) by 2020 (Figure 2 and Table 1)—an increase of 65 percent over the 24-year projection period. The IEO99 projection for the world’s energy demand in 2020 is about 4 percent (almost 30 quadrillion Btu) lower than last year’s projection. The downward revision is based on events in two parts of the world: Asia and Russia. In Asia, the economic crisis that began in early 1997 persisted throughout 1998, as economic recession deepened in Japan, the region’s largest economy. In Russia, a deteriorating economy was propelled further downward by the August 1998 devaluation of the ruble and the collapse of the Russian banking system.

Sources: History: Energy Information Administration (EIA), Office of Energy Markets and End Use, International Statistics Database and International Energy Annual 1996, DOE/ EIA-0219(96) (Washington, DC, February 1998). Projections: EIA, World Energy Projection System (1999).

Growth in energy demand has been severely hampered by the current international economic troubles. The curtailed demand for oil and natural gas resulting from the Asian economic recession and warmer than expected winters in North America and Europe in 1998 resulted in worldwide energy surpluses which have, in turn, helped drive oil prices to 20-year lows. Uncertain financial markets have made it difficult to secure financial backing for some projects. Exploration and development expenditures for oil and gas were sharply cut back in most parts of the world at the end of 1998. Russia’s economic troubles have meant that investments that would have been used to expand the country’s participation in international oil and natural gas markets have been tabled for the near future.

Despite the current economic problems affecting the countries outside the industrialized world, IEO99 still projects that much of the growth in energy use will occur in those countries over the next two decades. Energy consumption in the developing world (defined as developing Asia, Africa, the Middle East, and Central and South America) is expected to more than double over the projection period, with highest growth rates expected in developing Asia and Central and South America. Indeed, energy use in the developing world is projected to surpass that of the industrialized world by 6 percent in 2020—some 16 quadrillion Btu—whereas in 1996 energy consumption in the developing countries was about 40 percent lower than that in the industrialized countries (Figure 3).

The projections for Eastern Europe and the former Soviet Union (EE/FSU) have been lowered by about 13 percent relative to last year’s outlook, primarily because of the expectation that economic recovery in the FSU will be delayed more than expected. Less than a year ago, most forecasting sources were projecting positive growth for Russia’s economy—the largest economy in the FSU—and accelerating recovery in the years to come; but at the end of 1998 it seemed likely that there would be negative economic growth in 1999 with no positive growth expected before 2001. In the IEO99 reference case, energy use in the FSU is projected to begin recovering by 2005, but even at the end of the projection period consumption remains below its 1990 level (Figure 3).

In the industrialized countries, a major issue for the development of energy markets appears to be the possible impact of the Kyoto Climate Change Protocol, which would require reductions or limits to the growth of carbon emissions within the Annex I countries² between 2008 and 2012, resulting in a combined 4-percent reduction in emissions relative to 1990 levels. As of March 15, 1999, 83 countries had signed the Kyoto Protocol; however, none of the Annex I countries had ratified it by the time the IEO99 was prepared for publication. Should the Kyoto Protocol enter into force, it could have profound effects on the use of energy in the industrialized world.

The IEO99 reference case projection suggests that the industrialized world would account for about 30 percent of the world’s increment in energy use between 1996 and 2010. If the Protocol’s emissions targets were achieved solely by reducing fossil energy use, consumption of fossil fuels in the industrialized countries would be reduced by between 30 and 60 quadrillion Btu—equivalent to between 15 and 30 million barrels of oil per day. It is more likely, however, that fuel-switching opportunities will be used and that a more modest reduction in total fossil fuel use will be required. Emissions trading and other offsets (such as reforestation) that may be allowed under the Protocol could further lower the need for fossil fuel reductions; however, the specific mechanisms for such offsets have not yet been established.

An offset that could provide an alternative to reducing fossil fuel consumption is the concept of “joint implementation” under the Kyoto Protocol. Joint implementation is a mechanism by which emissions reduction projects could be undertaken by private parties or governments outside their own countries. The Kyoto Protocol proposes two parallel mechanisms to implement the concept of joint implementation: Article 6, under which projects undertaken in an Annex I country could generate emissions reduction units transferrable to another Annex I country; and Article 12, the “clean development mechanism,” under which projects undertaken in a non- Annex I country could generate certified emissions reductions transferrable to an Annex I country to meet its emissions target.

World carbon emissions are expected to reach 8.0 billion metric tons by 2010 and 9.8 billion metric tons in 2020 according to the IEO99 reference case projection (Figure 4), which does not take into account the potential impact of the Kyoto Protocol. In this forecast, world carbon emissions exceed their 1990 levels by 39 percent in 2010 and by 70 percent in 2020. Emissions in the industrialized world grow by about 1.0 billion metric tons between 1990 and 2020, with about half the growth arising from an increase in the use of natural gas as countries continue to choose less carbon-intensive natural gas over the more carbon-intensive coal for electricity generation and industrial uses.

Sources: History: Energy Information Administration (EIA), Office of Energy Markets and End Use, International Statistics Database and International Energy Annual 1996, DOE/EIA-0219(96) (Washington, DC, February 1998). Projections: EIA, World Energy Projection System (1999).

In the developing countries, carbon emissions are projected to grow more quickly. Emissions from the developing countries were about 60 percent of those from the industrialized countries in 1990, but by 2010 they will surpass them. The rapid increase is expected to be caused both by rapid economic growth, accompanied by growing demand for energy, and by continued heavy reliance on coal—the most carbon-intensive of the fossil fuels—especially in developing Asia.

To achieve the emissions targets proposed under the Kyoto Protocol, emissions in 2010 would have to be 24 percent lower than those currently projected for the industrialized, Annex I countries (Table 2). In the United States and Canada, meeting the targets would require reductions of 30 and 27 percent, respectively, from 2010 projected emissions. In contrast, emissions in the EE/FSU are so much lower now than they were in 1990 that it is doubtful they could be restored to those levels by 2010.

If energy consumption in the countries of the FSU grows as projected in the IEO99 reference case, carbon emissions will remain about 33 percent below the levels allowed under the Protocol (which requires no reductions from 1990 emissions levels in the transitional economies of the FSU). Even in Eastern Europe, where countries are allowed to increase emissions in 2010 to 7 percent above their 1990 levels, emissions will still be about 18 percent below the required targets. The Kyoto targets for Bulgaria, Hungary, Poland, and Romania—which currently account for some 66 percent of all emissions from Eastern European countries—were recalculated in this year’s IEO to reflect Article 3.5 of the Protocol, which allows the four countries to use base years other than 1990. Bulgaria and Romania are using 1989 as a base year; Poland is using 1988; and Hungary is using the average emissions for the years 1985 to 1987. As a result, the Kyoto target for total carbon emissions for Eastern Europe in 2010 is 320 million tons in IEO99, up from 277 million metric tons in the International Energy Outlook 1998 (IEO98).

The reduction in expected energy consumption for the FSU region in this year’s projections could substantially change the amount of effort required by the Annex I countries as a whole to meet their Kyoto Protocol targets. In IEO98, energy demand in the FSU was expected to recover to its 1990 level by the end of the projection period. Carbon emissions were also expected to rise, but they remained below the 1990 level because the recovery featured increases in the use of less carbon-intensive natural gas rather than more carbon-intensive coal. As a result, IEO98 projected that in 2010 credits available from the FSU would contribute 199 million metric tons to the total of 822 million metric tons that the industrialized Annex I countries would need to eliminate from the baseline projection to meet the Annex I targets. In this year’s projection, however, the potential contribution in 2010 from the FSU has increased by 62 percent, to 324 million metric tons.

The economic collapse in Russia has meant reductions from the IEO98 projections of FSU fossil fuel use in 2010: 21 percent for oil, 10 percent for natural gas, and 22 percent for coal. IEO99 projects that, by 2010, the resulting emissions from this lowered outlook for fossil fuel use in the FSU reach only 666 million metric tons, nearly 16 percent less than projected in IEO98. Because the transitional Annex I countries currently account for about 86 percent of the EE/FSU region’s total emissions, much of the projected emissions reduction could be used as tradable emissions units with the industrialized Annex I countries as they attempt to meet Kyoto Protocol emissions targets. Accordingly, with the higher level of credits available from the EE/FSU, Annex I countries would need to reduce emissions by 10 percent from the reference case projection to meet their Kyoto Protocol targets, rather than by 16 percent as reported in IEO98. Indeed, emissions are expected to grow by 7 percent between 1990 and 2010 in the industrialized Annex I countries and the EE/FSU combined, because the 27-percent decrease in emissions expected for the EE/FSU offsets the 23-percent increase projected for the industrialized Annex I countries.

Oil prices fell to historic low levels in 1998, with average crude oil prices one-third lower than in 1997. The IEO99 reference case price projection traces slow recovery over the next several years, as surplus oil supply is used to meet slower demand growth than was projected in IEO98. World oil prices are expected to reach $23 per barrel (constant 1997 U.S. dollars) at the end of the projection period—about the same as in last year’s forecast (Figure 5). For the near term, however, the IEO99 price trajectory is substantially altered by the plummeting oil prices in 1998 that were not anticipated in last year’s report. The timing and magnitude of an expected rebound in both oil demand and oil prices are the source of much uncertainty. Nevertheless, short-term price movements generally have not affected long-term price projections 5 to 10 years out.

Sources: History: Energy Information Administration (EIA), Office of Energy Markets and End Use, International Statistics Database and International Energy Annual 1996, DOE/ EIA-0219(96) (Washington, DC, February 1998). IEO98: EIA, International Energy Outlook 1998, DOE/EIA-0484(98) (Washington, DC, April 1998). IEO99: EIA, World Energy Projection System (1999).

Despite relatively low prices in the near term, deepwater exploration and development initiatives should be continue to be developed at a slower pace, with offshore West Africa emerging as a potential source of major oil production. Technology and resource availability can sustain large increments in oil production capabilities in many parts of the world at prices ranging from $18 to $22 per barrel, but the present low price environment makes it likely that the pace of development in some highly prospective areas—including especially the Caspian Sea region—will be slowed.

By the middle of 1998, declining world oil prices caused renewed efforts to lower oil production under the sponsorship of the Organization of Petroleum Exporting Countries (OPEC). In both March and June, OPEC and key non-OPEC producers Mexico and Norway agreed to restrict their crude oil sales, and there were indications from several other producers that they would cut back production. Their efforts were not supported by Iraq, which wanted to increase oil sales. As a result, oil production management efforts had only modest success. OPEC’s share of world oil supply is projected to increase significantly over the forecast horizon, but competitive forces are expected to remain strong enough to forestall efforts to increase real oil prices substantially.

Oil is projected to remain the world’s dominant energy source even as its share of world energy consumption slips somewhat over the next two decades, falling from 40 percent to 38 percent as countries switch to natural gas and other types of fuel, particularly for electricity generation in many industrialized and developing countries. Oil consumption in the reference case is projected to reach 110 million barrels per day by 2020. In the industrialized countries, most of the growth in oil use is projected for the transportation sector, where competition from other fuels is limited. In the developing countries, oil use for transportation increases more rapidly than in the industrialized countries, and substantial growth is also expected for other uses of petroleum fuels. Expanding industrial activity and power generation will be fueled in part with oil, especially in Asia, where natural gas is less available than it is in North America and Europe.

On the whole, natural gas is projected to be the fastest-growing primary energy source from 1996 to 2020. Within the next decade, world natural gas consumption is expected to surpass coal consumption (Figure 6). Gas is becoming the fuel of choice for new electricity generation worldwide, primarily because combined-cycle gas turbine plants tend to be less expensive to build than other means of power generation. And in Central and South America, gas-fired electricity generation capacity is being built to diversify national power supplies that have been based largely on hydropower, which can be unreliable in times of drought. Moreover, among fossil fuels, natural gas is the most likely to be in greater demand in times of favorable supply and demand economics and increasingly stringent environmental regulation. Environmental benefits accrue from increased gas use because of its clean burning characteristics and low carbon content as compared with other fossil fuels.

World coal use is also projected to increase, at an average annual rate of 1.6 percent per year on a short ton basis over the projection period. Strongest growth in demand is projected for the developing world, where coal use more than doubles between 1996 and 2020. The worldwide increase in coal use is attributable mainly to increases in developing Asia—particularly in China and India. Indeed, IEO99 projects that China and India will account for more than 90 percent of the worldwide increment in coal consumption over the projection horizon.

In the industrialized world coal demand remains nearly flat through 2020, and in the EE/FSU it is expected to decline by almost 30 percent. There have been major declines in EE/FSU coal production and use since the social and political upheaval of the late 1980s and early 1990s. As the region recovers, natural gas is expected to be employed for many of the uses historically ascribed to coal.

Nuclear power supplied 17 percent of the world’s electricity generation in 1997, and 10 countries met at least 40 percent of their total electricity demand with electricity from nuclear power plants. Over the next two decades, however, nuclear power declines in the IEO99 reference case. Only the developing nations and Japan are projected to have net additions to nuclear power capacity. In other regions, countries that are operating older reactors and have other, more economical options for new generating capacity are expected to let their nuclear capacity fade as nuclear units are retired. Market competition from natural gas, public concern about the safety of nuclear reactor operations, and the problems associated with the disposal of nuclear waste are affecting nuclear power programs in many nations. On the other hand, it is possible that ratification of the Kyoto Protocol could change the outlook for nuclear power. Nuclear power under a high capacity scenario could reduce projected world carbon emissions by 6 percent in 2020, or an estimated 206 million metric tons.

Low fossil fuel prices in world energy markets continue to diminish the potential for rapid development of renewable energy sources worldwide. Again, however, the Kyoto Protocol may provide an opportunity for growth in renewable energy demand. In the IEO99 reference case, hydroelectricity and other renewable energy sources maintain an 8-percent share of total energy consumption throughout the projection period. Almost half the total growth in the use of renewables is projected for the developing world, where large-scale hydroelectric projects boost the level of renewable consumption. In 1998, China and India pledged increases in large-scale hydroelectric development. In China, hydroelectric projects currently under construction amount to some 32 gigawatts of installed generating capacity, and in India nearly 4 gigawatts of new hydroelectric capacity is planned to be operating by 2002.

World net electricity consumption is expected to increase from 12 trillion kilowatthours in 1996 to 22 trillion kilowatthours in 2020. The economic troubles of Southeast Asia and Russia are expected to slow the growth in electricity demand over the next few years, but electricity demand in the developing countries still is projected to increase by a robust average of 4.4 percent per year, and the strongest long-term growth is projected for the developing countries of Asia, as well as Central and South America (Figure 7). Rapid population growth, along with greater industrialization and more widespread household electrification, will increase electricity use in those regions. In the industrialized countries, annual growth in net electricity consumption is projected to average around 1.6 percent over the next two decades, primarily because of the continuing spread of electricity-using equipment.

Sources: 1996: Energy Information Administration (EIA), International Energy Annual 1996, DOE/EIA-0219(96) (Washington, DC, February 1998). 2020: EIA, World Energy Projection System (1999).

A nation’s transportation system is generally an excellent indicator of its level of economic development. In many countries personal transportation still means walking or bicycling, and domestic animals are still used to move freight. Over the next two decades, fast-paced growth of transportation infrastructure is expected in the developing world. Developing Asia and Central and South America are expected to account for 52 percent of the increase in the world’s motor vehicle population between 1996 and 2020 (Figure 8).

According to the IEO99 reference case projection, energy use for transportation among the developing countries is projected to grow at an average annual rate of 4.0 percent—nearly triple the rate of growth in the industrialized countries. Growth in the transportation sector in the industrialized countries—where modern transportation systems have been in place for many decades—is expected to average only 1.4 percent per year. Even in the most economically advanced countries, however, transportation energy consumption per capita continues to increase over the projection period, as rising per capita incomes are accompanied by purchases of larger personal vehicles and by increased travel for business and vacations.

Sources: 1996: American Automobile Manufacturers Association, World Motor Vehicle Data (Detroit, MI, 1997). 2020: EIA, World Energy Projection System (1999).