Baker Institute presentation chronicles energy’s wild ride in 2008

BY FRANZ BROTZEN
Rice News staff

2008 was an extraordinary year in the world of energy, not just because of the dramatic rise and fall of fuel prices but also because energy consumption in the developing world exceeded consumption in the industrialized countries for the first time.

	Reflecting on the tumultuous year, Mark Finley, BP America’s general manager for global energy markets, told a June 16 audience at the James A. Baker III Institute for Public Policy, “Energy remains a cyclical commodity.”

Reflecting on the tumultuous year, Mark Finley, BP America’s general manager for global energy markets, told a June 16 audience at the James A. Baker III Institute for Public Policy, “Energy remains a cyclical commodity.” Finley was presenting the 58th annual BP Statistical Review of World Energy, which appears every June.

“Everything (oil, natural gas and coal prices) went up when the world’s economy was growing and fell precipitously when the world’s economy entered into a contraction in the middle of last year,” Finley said. Oil prices peaked in July 2008 and fell by 75 percent over the next six months, while natural gas and coal prices dropped by 60 percent. The lower prices coincided with a “pronounced slowdown in global energy consumption last year,” he said.

That slowdown was most evident in the countries that make up the Organisation for Economic Co-operation and Development (OECD), especially the United States. Oil consumption dropped by 6.4 percent in the U.S., Finley said. Despite the drop, the United States remains the world’s top consumer of oil. “In September of last year,” Finley said, “U.S. consumption declined in a volume that is equivalent to all the consumption of India.”

Still, the overall decline in energy consumption by the OECD countries was partially offset by a rise in parts of the developing world. Finley gave particular attention to the split between countries that subsidized energy use and those that sought to limit fuel consumption, usually through some sort of taxation. “Last year, subsidizing countries accounted for all of the growth in oil consumption,” Finley said, “and all of the net decline came out of the countries where oil is taxed to some degree.” As a general rule, countries that subsidize energy are themselves energy producers, although there are some exceptions.

In her opening remarks, Amy Myers Jaffe, the Wallace S. Wilson Fellow in Energy Studies at the Baker Institute, spoke of different scenarios for a growth in U.S. energy demand. But she concluded that the demand trend is likely to remain low over the next year, and she discounted the notion that demand from China and India are sufficiently high at present to drive the price recovery currently seen in the market.
 
In his analysis of the boom and bust of 2008, Finley cited the basics of supply and demand. “In 2007,” he said, “worldwide oil supply fell and demand rose,” causing a predictable rise in prices. But the following year saw an effort by OPEC — especially Saudi Arabia — to raise production levels just as the global economic crisis hit, leading to increased inventories at the same time demand for energy was plunging. The result was a drop in the price of a barrel of crude oil from almost $150 to less than $40.

Turning to natural gas, Finley said global consumption rose by 2.5 percent, reaching 24.1 percent of total energy use — its highest share ever. Similarly, production grew by 3.8 percent, due in part to the “spectacular growth of U.S. production” as well as increased linkage of regional markets via pipelines and the growing trade in liquefied natural gas.

Coal consumption, meanwhile, grew by 3.1 percent, a smaller increase than the previous year. “The coal story is always primarily a China story,” Finley said, with China accounting for 43 percent of world consumption. China’s 6.8 percent increase in coal consumption accounted for 85 percent of global growth.

Renewable energy sources saw dramatic growth in 2008, according to the BP report. Wind generation grew by 30 percent and solar grew by 69 percent worldwide. However, wind, solar and geothermal energy currently produce just 1.5 percent of the world’s electricity. It will take decades before these sources are the scale of fossil fuels, Finley said.

The message from the turbulent energy market of 2008, Finley concluded, is that “energy is a capital-intensive business with long lead times. But demand does react both in terms of changes to the economy as well as to prices.”

To view the 2009 Statistical Review of World Energy, go to http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622.

The event was hosted by the Baker Institute Energy Forum and the United States Association for Energy Economics.