16 March 2010

Oil Demand in the Platinum Age

Two scholars at Leeds and NYU have placed online a very interesting draft analysis of projected demand for oil. The figure above comes from their analysis.
J. M. Dargay and D. Gately, 2010. World oil demand’s shift toward faster growing and less price-responsive products and regions (PDF)
Here is their provocative conclusion:
World oil consumption has experienced dramatic share changes since 1971, shifting toward faster growing and less price-responsive products and regions. The OECD and FSU consumed 86% of world oil in 1971, compared with only 61% today. OECD use of fuel oil was 33% of total world oil in 1973, compared with 9% today.

Most of the easy reductions in demand – fuel-switching away from residual and heating oil, especially in the OECD – has been accomplished: we have picked the low-hanging fruit. Demand for these fuel switchable oils has fallen by one-third, while the demand for transport and other oil has doubled. Hence, world oil demand is now dominated by transport and other oil, which are less price-responsive and more income-responsive than residual and heating oil. Similarly, the regional shift of world demand away from the OECD and FSU has the same effect – toward regions whose income growth and income-elasticities of demand are higher, and whose price-elasticities are lower, than for the OECD and FSU.

The rest of the world now consumes 39% of world oil (but it has nearly 80% of world population), and its income is growing faster than in the OECD and FSU. Its per-capita oil demand has grown from 0.4 liters/day in 1971 to 1.1 liters/day in 2008, averaging about 2.5% annually. DOE(2009) projects that the rest-of-world’s annual per-capita oil growth rate will slow dramatically (to 0.56% ), even assuming faster income growth than in 1971-2008, increasing only to 1.2 liters/day by 2030. IEA(2009) and OPEC(2009) make similar projections. In contrast, we project a rest-of-world growth rate similar to what has occurred historically, to 1.8 liters/day by 2030. This difference in projections amounts to an extra 20 mbd in rest-of-world demand by 2030 – roughly twice the current production of Saudi Arabia. Such rapid demand growth is unlikely to be supplied by conventional oil resources. Hence this imbalance would have to be rectified by some combination of higher real oil prices, much more rapid and aggressive penetration of alternative technologies for producing liquids, much tighter oil-saving policies and standards adopted by multiple countries, and slower world economic growth.
The analysis supports assertions by Garnaut et al. that the world has entered a "platinum age" of growth in emissions:
Rapid global economic growth, centred in Asia but now spread across the world, is driving rapid greenhouse-gas emissions growth, making earlier projections unrealistic. . . we project annual emissions by 2030 to be almost double current volumes, 11 per cent higher than in the most pessimistic scenario developed by the Intergovernmental Panel on Climate Change (IPCC), and at a level reached only in 2050 in the business-as-usual scenario used by the Stern Review. This has major implications for the global approach to climate-change mitigation. The required effort is much larger than implicit in the IPCC data informing the current international climate negotiations.
The analysis is also supportive of the suggestion in Pielke et al. 2008 (PDF) that the IPCC SRES scenarios had potentially underestimated future due to aggressive assumptions about rates of spontaneous decarbonization:
. . . it is likely that we have only just begun to experience the surge in global energy use associated with ongoing rapid development. Such trends are in stark contrast to the optimism of the near-future IPCC projections and seem unlikely to alter course soon. The world is on a development and energy path that will bring with it a surge in carbon-dioxide emissions — a surge that can only end with a transformation of global energy systems. We believe such technological transformation will take many decades to complete, even if we start taking far more aggressive action on energy technology innovation today.
These various analyses suggest that the challenge of mitigation -- that is, stabilizing carbon dioxide concentrations at a low level, such as 450 ppm -- that been dramatically underestimated. If so, then the policies currently being discussed are not up to the challenge. It is uncomfortable to discuss for those wanting action on climate change, no doubt. Maybe that is why there is so much renewed attention being paid to debates over the science.