Energy and the access to it has altered global conflict, helped advance improvements in manufacturing, brought mass transportation to individuals, and heating and cooling to homes. Coal was the first mass energy source, followed by oil, natural gas and nuclear. We now live in an age where fossil fuels still dominate, but renewables like solar, wind and bio-fuels are growing in use. As such, I thought I would take a look at where the future of energy is headed. Will renewables ever dominate? Is coal in permanent decline? Is natural gas the fuel of the future? Will the United States ever be energy self-sufficient? These and a few other questions I hope to answer in this article.
The world population has grown steadily since the 1300s and is now estimated at 7 billion people. The rate of population growth has slowed recently to about 1% a year, or about an additional 70 million people a year. In June, the United Nations forecast the world population would grow to 8.1 billion people by 2025. That's another billion inhabitants of earth in the next 12 years. The countries that will see the largest population increases are India, China and Nigeria.
Not only will the world population grow, the number of people entering middle-class lifestyles will also increase. It is estimated approximately 28% of the global population is currently in the middle class. However, by 2022 the Brookings Institution estimates more people will be "middle-class" than are poor. This chart shows the rate of growth in the global middle-class.
The formula of a rising world population plus a growing middle class results in an increased demand for energy. Although the developed countries have seen a decline in energy consumption due to increased efficiencies, the developing world's rapid increase in energy consumption will exceed the savings being seen in the developed world. The increasing demand being made by the growing world population, rising middle class, and the urbanization/industrialization of the developing countries will result in rising global energy consumption for years to come.
According to the BP Statistical Review [pdf] of Energy, world energy consumption in 2012 rose 1.8%, which was below the 10-year average of 2.8%. As one would expect, developed countries saw consumption fall by 1.2%, while in emerging countries consumption rose 4.2%.
Looking at energy use by product:
- Global oil consumption grew by 890,000 barrels per day (bpd). That growth was the slowest of all fossil fuels. Oil makes up 33.1% of all global energy consumed.
- Global natural gas consumption grew by 2.2%; natural gas now makes up 23.9% of global energy consumption.
- Global consumption of coal grew by 2.5%, making coal the fastest growing fossil fuel. China accounted for almost all of the growth and now makes up half of all world coal consumption. Coal's use may be declining in the United States, but in the developing world, coal is still king. Globally, coal still accounts for 29.1% of energy consumed.
- Global nuclear output fell by 6.9% and now makes up only 4.5% of all worldwide energy consumption. Japan accounted for the majority of the decline in nuclear output.
- Hydroelectric power grew by 4.3%, with China accounting for much of the growth. Hydroelectric power now makes up 6.7% of global consumption, higher than nuclear.
- Global biofuels fell by 0.4%, due to a decrease in the United States of 4.3%.
- Wind and solar energy saw nice increases, with wind growing 18.1% and solar growing 58%. Keep in mind, the growth rates are from a much smaller base than fossil fuels. Renewables now account for 2.4% of global energy consumption and 4.7% of global power generation.
2012 Energy Consumption by Source
Looking at those numbers we see consumption of every major energy source rose, with the exception of nuclear and biofuels. They rose despite the fact much of Europe is in recession, the United States is coming out of recession at a snail's pace, and China is seeing its own slowdown. If the world economy was humming along, imagine what consumption would look like.
We also see fossil fuels made up 86.9% of all energy consumed.
So Where Are We Headed?
The facts everyone can accept are the world population is growing and energy consumption is increasing. These facts are likely to continue for the foreseeable future.
What is often debated is what will the future of energy consumption look like? Some believe a future made up of primarily renewables can supply the world with power. For a number of reasons, I do not share that belief. Renewables will continue to grow their share of the energy market, but will still be a small slice of the pie for as long as I can see.
What the Major Forecasts See.
There are three entities that issue yearly world energy forecasts, the International Energy Agency (IEA), BP and Exxon Mobil (XOM). In general, all three of these forecasts agree that for the next 20 years, fossil fuels will continue to provide the majority of energy. There are also several other consistent themes found in all three reports.
Global Energy Demand Grows
The IEA forecasts global energy demand will grow by more than one-third over the period to 2035.
BP forecasts world energy consumption is projected to grow by 1.6% per annum, or 36% by 2030.
Exxon Mobil forecasts energy demand will grow 35% by 2040.
All three forecasts see global energy demand growing by approximately 35% over the next 20 years and all point to the developing countries as the reason for the growth.
Power Generation Grows Fastest
The IEA forecasts electricity demand grows twice as fast as total energy consumption
BP sees energy used for power generation growing by 49% by 2030, also stating power generation will account for 57% of global primary energy growth.
Exxon Mobil sees growth in electricity generation growing 50% by 2040.
All three reports predict power for electricity generation will grow fastest, which is logical since as countries develop electricity is the most coveted power. Electricity for light, fans, heating, cooking and other modern conveniences is desired by populations everywhere.
Oil Demand Grows, but Slowly
The IEA sees oil demand reaching 99.7 million barrels a day (mbd) in 2035, up from 87.4 mbd in 2011.
BP sees oil demand rising only 0.8% per annum, or approximately 14% by 2030.
Exxon Mobil states oil will remain the number one global fuel, but will grow slowly.
Renewables Grow Quickly, Especially for Power Generation
The IEA states renewables show a steady increase with hydropower and the expansion of wind and solar power becoming an important part of the global energy mix; by 2035, renewables account for almost one-third of total electricity output. Solar grows more rapidly than any other renewable technology. Renewables become the world's second-largest source of power generation by 2015 (roughly half that of coal) and, by 2035, they approach coal as the primary source of global electricity. Consumption of biomass (for power generation) and biofuels grows four-fold, with increasing volumes being traded internationally.
BP states renewables (including biofuels) will be the fastest-growing energy source averaging 7.6% per annum, which is more than double by 2030. Renewables will reach a 6% share of global primary energy by 2030.
Exxon Mobil predicts wind power energy grows by 7 times and solar power generation grows by 20 times.
Renewables grow quickly, but starting from such a small base, they do not become a dominant fuel source. Renewables are hurt by several factors. The wind doesn't always blow and the sun does not always shine, thus renewables require constant back-up power (natural gas usually) to even out the power supply. Renewable power is significantly more expensive than fossil fuels. Developing countries need cheap power and thus they migrate to fossil fuels.
Coal Is Not Dead Yet
The IEA states China's coal demand peaks around 2020 and is then steady to 2035; coal use in India will rise and, by 2025, it overtakes the United States as the world's second-largest user of coal. Coal trade continues to grow to 2020, at which point India becomes the largest net importer of coal, but then levels off as China's imports decline. Coal remains the leading global fuel for power generation. The growth in China's electricity demand through 2035 is greater than total current electricity demand in the United States and Japan. China's coal-fired output increases almost as much as its generation from nuclear, wind and hydro-power combined.
BP predicts coal consumption declines in developed countries by 14% by 2030, but grows in the developing markets by 38%. China's coal demand grows 3.6% per annum through 2030. India's coal demand grows 3.6% per annum through 2030.
Exxon sees coal growth slowing and then declining, but still a significant contributor to global power generation in 2040.
Reading the detailed analysis of coal's future, the consensus is coal will continue to grow through about 2025 and then start a slow decline.
Natural Gas Will Be the Fastest Growing Fossil Fuel
The IEA stated natural gas is the only fossil fuel for which global demand grows, but the outlook varies by region. Demand growth in China, India and the Middle East is strong: China's consumption grows from around 130 billion cubic meters [BCM] in 2011, to 545 bcm in 2035. In the United States, low prices and abundant supply see gas overtake oil around 2030 to become the largest fuel in the energy mix. Europe takes almost a decade to get back to 2010 levels of gas demand: the growth in Japan is similarly limited by higher gas prices and a policy emphasis on renewables and energy efficiency.
BP predicts total natural gas production will grow by 2% per annum reaching 459 Bcf/d by 2030. Natural gas will replace coal for power generation in developed countries.
Exxon Mobil sees natural gas becoming the number one source for electricity generation by 2030. Generating 60% less emissions than coal, natural gas will make up 30% of global electricity generation, up from 20% today.
Nuclear Powers Growth is Slow
The IEA sees nuclear power use scaled back as countries review policies in the wake of the 2011 accident at the Fukushima Daiichi nuclear power station. The cost competitiveness of nuclear power in the United States and Canada is being challenged by relatively cheap natural gas. Nuclear output still grows in absolute terms, but its share in the global electricity mix falls slightly over time.
BP predicts nuclear power will grow in developing countries, but decline in developed markets.
Exxon sees faster growth, predicting nuclear power doubles by 2040.
A Couple Charts
Below are charts from Exxon and BP showing what they believe the fuel consumption mix will look like in 2030 and 2040.
Growth in Energy Consumption by 2030 - Chart courtesy of BP
Chart courtesy of Exxon Mobil
As you can see from these two charts, fossil fuels remain the dominant energy source. Although the IEA did not have a chart, its forecast shows much the same results.
Anytime you forecast the future, you risk being wrong. It is possible all of these reports could be wrong to some degree, but it is highly unlikely they will be completely wrong. Energy is such a huge part of civilization that trends take a long time to change. Any technological advancement takes years, perhaps decades to ramp up. Almost 87% of all the energy used in the world in 2012 was from fossil fuel. Cars, trucks, ships, factories, power plants and more all run predominantly on fossil fuels. Add in the fact, the world population is growing, making more demands on the energy markets and that developing countries are looking for cheap energy to power their growing economies, a person can see why fossil fuels will dominate for years to come.
The alternatives to fossil fuels are few and limited. Nuclear power is finding resistance in many countries. Japan has greatly reduced its nuclear generation and Germany is planning on phasing out all nuclear power by 2022. In the United States it takes 10 years from permit application to construction completion to build a new plant. Four new reactors have recently been approved for construction in the United States, however, four existing reactors were recently closed and Entergy has announced it will close its Yankee Nuclear Plant in Vermont. Other existing reactors may have to be closed due to their age as most nuclear plants in the United States were built in the 70s.
Renewables will continue to grow and will continue to grow share in electricity generation, but their overall share of the energy market will be limited. The infrastructure is currently not in place to make wind and solar a dominant energy source and the cost of generation from renewables are significantly higher. The Energy Information Agency [EIA] in its Outlook to 2040 had this to say about the growth of renewables in the United States.
The share of U.S. electricity generation from renewable energy grows from 13 percent in 2011 to 16 percent in 2040 in the Reference case. Electricity generation from solar and, to a lesser extent, wind energy sources grows as their costs decline, making them more economical in the later years of the projection. However, the rate of growth in renewable electricity generation is sensitive to several factors, including natural gas prices and the possible implementation of policies to reduce GHG emissions. If future natural gas prices are lower than projected in the Reference case, as illustrated in the High Oil and Gas Resource case, the share of renewable generation would grow more slowly, to only 14 percent in 2040. Alternatively, if broad-based policies to reduce GHG emissions were enacted, renewable generation would be expected to grow more rapidly.
If the EIA forecasts only a 16% share of renewable electricity generation in the United States in 2040, it is difficult to believe renewables will power "the world" in our lifetimes.
I believe every investor should have some exposure to energy. Energy is a huge part of our world and will continue to be a huge part for years to come. Below are some ideas for possible investments.
Integrated Oil Companies - Exxon Mobil, Chevron (CVX), Royal Dutch Shell (RDS.A) and BP are examples of large international integrated oil companies. These companies have international operations that include upstream operations, oil and natural gas exploration as well as downstream operations, refining, chemicals and products. All these companies would be considered slow growing, but all pay nice dividends and all can be expected to grow their dividend. In my opinion, XOM and CVX are the two best. Both companies are excellent operators; both pay nice dividends and both have excellent balance sheets. BP continues to be plagued with legal claims from the Gulf of Mexico disaster and Shell has had several operating issues over the last few years.
Exploration Companies - Some investors prefer to only invest in the upstream, exploration, part of the oil/gas business. Companies like Apache (APA), Anadarko (APC), Marathon Oil (MRO), Occidental (OXY) and ConocoPhillips (COP) would be examples. These companies operate in the higher margin exploration part of the business. The key to these companies is having long-term assets from which to produce crude oil and natural gas. Currently, the companies with the more "oily" assets are the better investment choices. Occidental and Marathon are two exploration companies that have a high percentage of oil/liquids production.
Refiners - Once the oil is out of the ground, it has to be refined into finished product. Several companies focus their business on the refining of oil and the selling of refined product. These companies can be volatile investments as they are largely held hostage to "crack spreads" and thus, in my opinion, do not make for good long-term investments. But, they can make for great trades. Crack spreads refers to price differential between the price of crude oil coming in to the refinery and the price of the product going out. At times, these spreads can be huge and at times they can be miniscule. Recently, the mid-continent refiners, like Holly-Frontier (HFC) were making money hand over fist because Bakken crude was selling for far less than other crude oil. They were able to buy the cheaper oil and sell the product for about the same price as everyone else was charging. The problem is, this never lasts for the refiners and thus, they are more of a trading vehicle, than a long-term investment. Other refining companies include, Valero (VLO), Phillips 66 (PSX), Marathon Petroleum (MPC) and Tesoro (TESO). If you hear reports of "crack spreads" growing you might want to take a look at the refiners, but be ready to get out quick.
Pipelines/Midstream Companies - Another area that I believe is an excellent way to benefit from energy is with the pipeline/midstream companies. These companies, normally, have little product pricing risk; they get paid to process and transport the product. Many of these companies are Master Limited Partnerships, which have special tax structures. I do not want to get into the deep weeds on partnerships as that is an article of its own. So I will focus on their operations and name a few I think are suitable for further research. Pipeline/midstream companies have pipelines that transport product to various markets. They also may have terminal operations and processing plants. These companies enter into long-term deals with producers to transport, store and in some cases process the oil, natural gas liquids, natural gas and finished product they produce. The more product that is stored and/or transported the more they make. North America with its energy renaissance and booming production will benefit the pipeline companies greatly. The majority of these companies pay large dividends, which makes them popular with income investors. In my opinion, the three best pipeline/midstream companies are Kinder Morgan (KMI), which is the general partner, or Kinder Morgan Partners (KMP), Enterprise Products Partners and Enbridge Partners (EEP). I discussed KMI/KMP and EPD more in depth in this article. Potential investors should note, if interest rates rise, there is some risk that MLPs could see some selling pressure.
Energy Service Companies - Oil companies often hire service companies to perform drilling operations for them. These companies can supply personnel, equipment and engineering service to the oil companies for a fee. The service companies often have different areas of expertise. Some are deep water experts, some are fracking experts, some are strictly equipment providers, others provide labor and engineering, some have vast international operations and some operate in North America. Much like refiners, I don't believe these companies make good long-term investments. The majority, not all, of the companies have small dividends and operate in a very competitive field. The dominant names in the business are Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BHI) and Transocean (RIG). There are many more, but those companies are some of the better known ones. During economic slowdowns, when drilling activity subsides, these companies will likely decline as fewer rigs running means fewer profits. However, coming out of a slowdown when the world economy is growing, or during boom times, when drilling activity increases or is going full throttle, these companies can make good investments.
LNG - I want to briefly mention I believe LNG will be a growing part of the energy market in the years ahead, as countries with natural gas will look to transport that gas to countries that do not have it. I wrote a previous article on LNG here, that looks at who the possible winners will be as LNG grows.
Conclusion - The world runs on oil, gas and coal. That fact is not going to change anytime soon. As renewables grow so will the world demand for energy and the growth in renewables will not be able to keep up with the growth in energy demand. To provide energy to the world, we will need every energy source. Fossil fuels will continue to power the world for decades to come and every investor should have some exposure to this sector.