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Monday, December 19, 2011

Where We May, or May Not, Be Headed on Energy

Figuring out what energy markets are going to look like ten, twenty, or thirty years down the road is a dicey proposition, to say the least.

After all, history is strewn with predictions that turned out to be dead wrong, sometimes even goofy. That's especially the case with doom-and-gloom energy prognosticators that like to declare that the end is near for oil. That crowd has been around for more than a century, and they're not going away anytime soon.

At the same time, if you are in the energy business, a clear need exists to come up with some set of assumptions that will help guide the firm and the industry in general into the future, assisting in the creation of strategic plans.

Exxon Mobil came out with its annual long term energy outlook on December 8 titled "The Outlook for Energy: A View to 2040." The findings/predictions make for interesting reading.

Tellingly, the most precarious or debatable of the predictions made for decades down the road are dependent upon the decisions made by politicians and their appointees. As we have seen in recent times, views and outlooks from the political class on energy matters can change quite dramatically, with policies being altered as well.

On matters economic and technological, the Exxon Mobil report offers some well-grounded projections. These include:

• "Global energy demand will be about 30 percent higher in 2040 compared to 2010, as economic output more than doubles and prosperity expands across a world whose population will grow to nearly 9 billion people." Demand is expected to flourish in much of the developing world (more on this below).

• "The need for energy to make electricity will remain the single biggest driver of demand. By 2040, electricity generation will account for more than 40 percent of global energy consumption."

• "Oil, gas and coal continue to be the most widely used fuels, and have the scale needed to meet global demand, making up about 80 percent of total energy consumption in 2040."

• "Natural gas produced via conventional methods is growing in many regions, but declining in Europe and the United States. In the United States, this decline will be offset by growth in unconventional gas - the natural gas found in shale and other rock formations that was once considered uneconomical to produce. In recent years, a combination of horizontal drilling and hydraulic fracturing has enabled the energy industry to economically access and produce this gas. In hydraulic fracturing, a solution - primarily water and sand, mixed with a small amount of chemicals - is injected into the rock to open very thin cracks, allowing trapped natural gas to migrate up to the well. These technologies have been in use for decades. But by combining them, the United States has seen a turnaround in domestic gas production."

Add in investments and innovations in other areas of energy development, such as in offshore exploration and drilling, and the technology and economics of energy production look to have a very exciting future. That's good news for energy consumers, of course, including entrepreneurs, small businesses and their employees and customers.

But there's always the uncertainty and costs that come with politics and special-interest-driven policies. Various estimates offered in the report rely on, in effect, political projections. For example:

• Given coal's abundance and therefore relatively low cost, it should be a major source of energy for the foreseeable future. However, the Exxon Mobil outlook notes the current political opposition to coal, and effectively assumes that this anti-coal movement will take firm control in developed nations and spread elsewhere. Given that assumption, it is projected: "Demand for coal will peak and begin a gradual decline, in part because of emerging policies that will seek to curb emissions by imposing a cost on higher-carbon fuels." Later, it continued: "Demand for coal, on the other hand, will peak around 2025 and then decline, as improved efficiency couples with a shift to less carbon-intensive energies, particularly in the electricity generation sector. This shift will be led by the OECD, but even China, which today accounts for close to 50 percent of global coal demand, will see its coal usage fall by more than 10 percent through 2040. This would mark the first long-term decline in global coal usage since the start of the Industrial Revolution."

And finally, it is asserted: "In many nations, coal historically has been the fuel of choice for electricity generation. But largely because of environmental policies that will encourage a shift to cleaner fuels, by 2030 global coal demand will begin a long-term decline for the first time in modern history."

If current policies pushed by the environmental movement, and emphasized heavily in certain political circles in Western Europe and the United States, do in fact come to full fruition and spread around the globe, then these assessments would appear to be generally correct. However, if the economics of coal matter, including investments that have and will continue to make coal a cleaner fuel, and the baseless aspects of the political opposition to coal are more fully exposed, then these assumptions about the future of coal become far more doubtful.

• It is noted in the outlook: "India ... will see steep growth in its population and its working-age group, as will Africa. These demographic trends will help India and Africa become two of the strongest areas of GDP growth through 2040."

That hopefully will be the case. However, growth is not just about demographics, and as we have seen throughout history, growth is not inevitable. Economic growth and wealth creation come about by providing a fundamental foundation upon which economic opportunity, investment, innovation, and entrepreneurship can flourish. The reason that much of the developing world has not yet developed is because of the lack of such foundations, such as the rule of law, and the establishment and protection of property rights.

• Of course, government failure can and too often does undercut energy development in developed nations as well. While there are tremendous opportunities for expanded oil and natural gas production due to horizontal drilling and hydraulic fracturing, as noted above, government might stand in the way. As noted in the Exxon Mobil report: "Because these production methods are being applied in new ways - and also because shale resources can be located in areas that are not traditional oil and gas producers - the pace of future development will depend on industry, government and local communities working together to build understanding of the potential benefits of unconventional gas production, as well as proven practices used to protect groundwater and air quality, and minimize other environmental impacts."

In the end, perhaps the most important declaration made with the release of this report came from Rex W. Tillerson, chairman and chief executive officer of Exxon Mobil Corporation. He observed: "The Outlook for Energy demonstrates that by applying innovation and technology, the world does not need to choose between economic growth and environmental stewardship." Indeed, as history shows, wealth creation via free enterprise translates into having the resources to maintain a clean environment.

For good measure, when looking into our energy future, we can be certain about a critical point: With private sector incentives to invest in exploration, innovations and new technologies, the idea that the world will run out of reliable, affordable energy is simply absurd - that is, unless politicians step in and mess everything up.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

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