Energy & Entrepreneurs #63

Long-Term Energy Outlook

by Raymond J. Keating

Making any predictions on the economy beyond a year or two - sometimes even just a few months (even weeks?) - is a dicey proposition, at best. But there can be some merit in getting a rough idea where things might be headed.

That certainly is the case on the energy front.

Energy policy and investment decisions depend a great deal on the outlook over a number of years, as the ultimate fruit born by such decisions take a good deal of time to play out.

The U.S. Energy Information Administration published its International Energy Outlook 2008 on June 25. Several points are worth keeping in mind as energy policy is debated both in Congress and on the campaign trail.

• "In the IEO2008 reference case - which reflects a scenario where current laws and policies remain unchanged throughout the projection period - world marketed energy consumption is projected to grow by 50 percent over the 2005 to 2030 period."

• "The most rapid growth in energy demand from 2005 to 2030 is projected for nations outside the Organization for Economic Cooperation and Development (non-OECD nations). Total non-OECD energy demand increases by 85 percent in the IEO2008 reference case projection, as compared with an increase of 19 percent in OECD energy use."

• "The IEO2008 reference case projects increased world consumption of marketed energy from all fuel sources over the 2005 to 2030 projection period. Fossil fuels (liquid fuels and other petroleum, natural gas, and coal) are expected to continue supplying much of the energy used worldwide. Liquids supply the largest share of world energy consumption over the projection period, but their share falls from 37 percent in 2005 to 33 percent in 2030, largely in response to a reference case scenario in which world oil prices are expected to remain relatively high."

• "A variety of factors have caused oil prices to increase, including strong demand growth in non-OECD Asia and the Middle East, no growth in production since 2005 from the members of the Organization of the Petroleum Exporting Countries (OPEC), rising costs for oil exploration and development, across-the-board increases in commodity prices, and a weaker U.S. dollar."

• "In the IEO2008 reference case, prices ease somewhat in the medium term, as anticipated new production-both conventional and unconventional (in Azerbaijan, Brazil, Canada, Kazakhstan, and the United States, for example) - reaches the marketplace. Ultimately, however, markets are expected to remain relatively tight."

• "Liquids remain the most important fuels for transportation, because there are few alternatives that can compete widely with liquid fuels. On a global basis, the transportation sector accounts for 74 percent of the total projected increase in liquids use from 2005 to 2030, with the industrial sector accounting for virtually all of the remainder."

• "The composition of supply differs substantially between the reference and high price cases. High prices encourage the development of previously uneconomical unconventional supplies, which account for a much larger portion of total liquids supply than in the reference case in 2030 (nearly 20 percent, as compared with about 9 percent in the reference case)."

What can we say with certainty about these projections and statements? First, energy demand is driven by economic growth.  Second, barring some economy-altering invention/innovation, the economy will remain highly dependent upon fossil fuels sources as the demand for energy rises. Third, prices matter. As prices rise, the supply side responds accordingly, for example, through increased investment in exploration, development, production, and innovation.

It also is critical to understand that skyrocketing energy costs - as we've experienced in recent times - are not an inevitable. For example, policy matters a great deal, including monetary policy and the value of the dollar; government taxes and regulations that raise energy costs; and prohibitions on energy exploration and development, as is the case in offshore areas and on federal lands in the U.S.

Get the policy mix right - meaning clearing away governmental obstacles to all kinds of energy production - and it will have a real, significant and positive impact on the market. If we want to see solid economic growth in the U.S. and around the world - and all the benefits that come with such growth, including higher incomes, more jobs, greater consumer choices, improved health care and a cleaner environment - then we need to implement a pro-growth energy policy agenda.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.