How many times have I heard people asserting that in the future energy can only cost more than it does today? How often was I not confronted with the strong belief of the energy sector that demand for their products could only grow? How many energy suppliers have not pointed towards the coming supply/demand crunch for natural gas and electricity when I tried to argument that rising price levels were somewhat overrated? And what do I read in my paper this weekend? Worldwide electricity demand will drop by 3,5 percent this year, according to the IEA (International Energy Agency, the organisation of energy consuming countries and as such counterpart of Opec). This is the first drop in demand for electrical power since the second world war. Earlier the Paris-based organisation had posted that it also expects oil demand to drop, by 3% this year.
Most in the energy industry will point out that this drop in demand has but one cause, the economic crisis. They will draw a rising line as for their demand expectation when the economy is growing again. They will say that it is just a backdrop and not a trend reversal. But still. The energy sector has drafted many ambitious projects for new energy supply in the past few years of growing demand. They argumented that the higher energy prices were necessary to bring in the money to invest in those projects. Will the money be invested? Or will the drop in demand be used as an excuse to shelve the projects? What would you do if you were an investor in a Canadian oil sands project? Or if you had to take a decision on building a new nuclear power plant in Lithuania? How confident is the energy sector that demand will continue to grow in the future?
Is it possible that the current downtrend in energy demand could be sustainable? If we are to believe the long term climate change policies of our political leaders, we are to answer ‘yes’ to that question. I have discussed here earlier the plans of president Obama to cut US carbon dioxide emissions to 20% of their current level by 2050. How could this be done if electricity demand continues to grow at the same pace as the economy? Between 2000 and 2006 – which is just six years! – worldwide electricity demand grew by 25%. If electricity demand would continue to grow at this pace, it would be five times larger by 2050 than it was in 2000. Who knows which technological evolutions are awaiting us in the next four decades, but still, would it be possible to produce that amount of electricity with renewables?
There are some other arguments in favour of the sustainablity of the demand growth slowdown. In European countries and in the US, energy demand was already growing less rapidly before the economic crisis showed its teeth. In Europe, Kyoto policy had a lot to do with this. All our clients are engaged in serious energy consumption reduction programmes. People in my street are improving the insulation of their houses as a result of a programma of energy savings subsidies. The inclination of Europeans to cut their energy demand was further inspired by rising energy prices. In the US, that price signal was the main reason. As the price of gasoline exploded, Americans have started to understand that driving a military vehicle to go and pick up a cup of coffee at the shopping mall 30 kilometers away, is irrational. The first months of 2008 already showed a remarkable and unprecedented downtrend in US oil demand.
But then, how sustainable is that? The first result of the current demand drop is a drop in energy prices. In our current open markets this even happened remarkably fast. With lower energy prices, the profitability of energy reduction investments falls. So, in the same way as energy producers might hesitate to invest in new energy production, consumers might hesitate to invest in energy savings. So with supply growing less fast and demand not falling so fast, we might find ourselves in a supply crunch scenario after all …
One thing is sure. In the next few years we will be able to observe an interesting case of the functioning of supply and demand dynamics in the energy market.