By Daniel Yergin
Demand in the developing world trumps new technology.
On Aug. 28 1859 in the backwoods of northwest Pennsylvania the first successful oil well went into production in the United States ushering in an energy revolution that would make whale oil obsolete and eventually transform the industrial world. Yet 150 years later even as demand increases in developing countries oils position in the global economy is being questioned and challenged as never before.
Why this debate about the single most important source of energyand a very convenient onethat provides 40 of the worlds total energy? There are the traditional concernsenergy security diversification political risk and the potential for conflict among nations over resources. The huge shifts in global income flows raise anxieties about the possible impact on the global balance of power. Some worry that physical supply will run out although examination of the worlds resource baseincluding a new analysis of over 800 oil fieldsshows ample physical resources below ground. The politics above ground is a separate question.
But two new factors are now fueling the debate. One is the way in which oil has taken on a second identity. It is no longer only a physical commodity. It has also become a financial asset along with stocks bonds currencies and the rest of the worlds financial portfolio. The resulting price volatilityfrom less than $40 in 2004 to as high as $147.27 in July 2008 back down to $32.40 in December 2008 and now back over $70has enormous consequences and not only at the gas station and in terms of public anger. It makes it much more difficult to plan future energy investments whether in oil and gas or in renewable and alternative fuels. And it can have enormous economic impact; Detroit was sent reeling by what happened at the gas pump in 2007 and 2008 even before the credit crisis. Such volatility can fuel future recessions and inflation.
That volatility has become an explosive political issue. British Prime Minister Gordon Brown and French President Nicolas Sarkozy recently called in these pages for a global solution to destructive volatility although they added that there are no easy solutions.
The other new factor is climate change. Whatever the outcome of the upcoming mammoth United Nations climate-change conference in Copenhagen this December carbon regulation is now part of the future of oil.
But are big cuts in world oil usage possible? Both the U.S. Department of Energy and the International Energy Agency project that global energy use will increase almost 50 between 2006 and 2030with oil still providing 30 or more of the worlds energy.
The reason is something else that is newthe globalization of demand. No longer are the growth markets for petroleum to be found in North America Western Europe and Japan. The United States has already hit peak gasoline demand.
The demand growth has now shifted massively to the fast-growing emerging marketsChina India and the Middle East. Between 2000 and 2007 85 of the growth in world oil demand was in the developing world. This shift continues: This year more new cars have been sold in China than in the United States. When economic recovery takes hold what happens in emerging countries will be the defining factor in the path for overall consumption.
There are two obvious ways to temper demand growtheither roll back economic growth or find new technologies. The former is not acceptable. Thus the answer has to lie in technology. The challenge is to find alternatives to oil that can be economically competitiveand convenient and reliableat the massive scale required.
What will those alternatives be? Batteries and plug-ins and other electric carstodays favorite? Advanced biofuels? Natural-gas vehicles? The evolving smart grid which can integrate plug-ins with greener electric generation? Or advances in the internal combustion engine increasing fuel efficiency two or three times over?
In truth we dont know and we wont know for some time. For now however it is clear that the much higher levels of support for innovationand large government incentives and subsidieswill inevitably drive technological change.
For oil the focus is on transportation. After all only 2 of Americas electricity is generated by oil. Until recently it appeared that the race between the electric car and the gasoline-powered car had been decided a century ago with a decisive win by the gasoline-powered car on the basis of cost and performance. But the race is clearly on again.
Yet whatever the breakthroughs the actual impact on fuel use for the next 20 years will be incremental due to the time it takes to get large-scale mass production up and running and the massive scale of the global auto industry. My firm IHS CERA projects that with aggressive sales volumes and no major bumps in the road (unusual for new technologies) plug-in hybrids and pure electric vehicles could constitute 25 of new car sales by 2030. But because of the slow turn-over of the overall fleet gasoline consumption would be reduced only modestly below what it would otherwise be. Thereafter of course the impact could grow perhaps very substantially.
But in the U.S. at least for the next two decades greater efficiency in the internal combustion engine advanced diesels and regular hybrids combined with second-generation biofuels and new lighter materials would have a bigger impact sooner. There is however a global twist. If small low-cost electric vehicles really catch on in the auto growth markets in Asia that would certainly lower the global growth curve for future oil demand.
As to the next 150 years of petroleum we can hardly even begin to guess. For the next 20 years at least the unfolding economic saga in emerging markets will continue to make oil a global growth business.
Mr. Yergin chairman of IHS CERA is author of The Prize: the Epic Quest for Oil Money and Power (Free Press) out in a revised edition this year. His article on the future of oil appears in the most recent issue of Foreign Policy.
