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World Energy Outlook 2009

Speaker: Fatih Birol, Chief Economist and Head of The Economic Analysis Division, International Energy Agency
Presider: Rodney W. Nichols, Chair, India Science And Technology Partnerships
November 23, 2009, New York.
Council on Foreign Relations

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RODNEY NICHOLS: Good afternoon, ladies and gentlemen. Thanks for braving the cool, wet weather. My name is Rod Nichols.

This meeting is on the record, and so is the book, if any of you have the muscle power to lift this 500- -- 700-page encyclopedia. You were spared -- all you got was six or eight pages -- but you may decide to order it from Dr. Birol, and he has a colleague here who'd be glad to give it to you.

Please turn off your Blackberrys and Motorola Razors, portable fax machines, whatever you have out of respect for each other and a sense of civility.

We are very proud and happy to have Dr. Fatih Birol with us today. He is the chief economist of the International Energy Agency in Paris; he's been the chief economist there for quite some years. He's been decorated by a number of governments -- Russia, the United States government, and most recently Germany -- for his really pioneering work in pulling together all of the most authoritative data affecting energy trends around the world. He will be making a PowerPoint presentation that I'm sure will be compelling for 20 or 25 minutes and then we'll have open questions and comments from you. Thank you.

Dr. Birol.

FATIH BIROL: (Applause.) Thank you.

So, good afternoon, ladies and gentlemen. It's a great pleasure and honor for me to come back to CFR to share with you some of the findings of our latest World Energy Outlook.

As you will see there is a lot of emphasis on climate change this year I'm going to share with you. The main reason for this is the Copenhagen meeting coming very soon; and if not in that meeting, perhaps six months to one year later I hope to see a framework -- how to adjust to climate change. And energy sector will be definitely substantially affected from any decisions which we'll be taking in order to address the climate change issue.

Now, what I'm going to do today is, first, I will share with you some of our findings of what happens if there is no deal in Copenhagen and afterwards, which we call the reference scenario, or so-called "business as usual" -- in fact to underline why we need a deal for Copenhagen. And then I will discuss with you a scenario that we have developed -- how can the energy sector contribute towards a solution to address the climate change and what needs to be done in the energy sector.

Let me start with our reference scenario with the policies in place. A key message that, in fact, I tried to already share with you last year when I was here that the oil demand in the OECD countries, I said, has already peaked. In fact, in 2007 with about 49.5 million barrels per day of oil consumption -- the OECD countries as a group -- and as of today, we have 45.5 million barrels, but there's a 4 million barrels per day of a decline. This is mainly as it is out of the financial crisis, but not exclusively. There are many policies and measures which are put in place in many OECD countries, including U.S., Europe and Japan, in order to slow down oil demand growth, especially on the transportation sector.

Almost all the growth will come outside of the OECD -- in the energy sector in general, in oil in particular. Not only oil but coal use has also peaked in the OECD counties. The main driver of the global energy demand will be China. About 40 percent of the global energy demand growth will come only from China, therefore each decision which will be taken or not taken in China will have implications for everybody, not only for Chinese.

Talk a little bit more on oil, let me share with you one of the concerns. I will refer a couple of things I said last year to come back to this year. At the end of last year when I came here -- and when me talk about the investment issues -- oil investments -- I said that we need more investments to see in the -- (inaudible) -- sector in 2008, and we were expecting to see higher investment numbers. And what we see today based on our company-by-company analysis, investments are not increasing as we wanted to see, but they are in fact declining -- declining substantially, mainly as a result of the financial crisis, but at the same time the rate of global price in the first half of this year.

I think this is bad news, especially if it is combined, this declining investments -- if it continues and if it is combined with the growing demand in oil coupled with the recovery in many countries, it may lead to some tightness in the markets, which I think may in turn lead to higher prices -- what -- even higher than what we see today, which in turn may be bad news for the economic recovery, which will be still very fragile for some -- several quarters to come.

Another point I wanted to -- or I highlighted last year, and I think it is becoming more and more important -- lots of discussion -- namely decline in existing fields. What I said at that time is if we want to keep current production level, which is about 85 (million), 86 million barrels per day, where it is in 2030 just to compensate the decline and stay where we are, we have to -- in the next 22 years, we have to find four new Saudi Arabias building into the production -- four new Saudi Arabias -- about 45 million barrels per day.

And this is a huge challenge. And this is -- only and only -- I want to highlight this -- this only and only to stay the production level where we are. If the demand increases, oil demand, which I think it will, the amount of oil we will need will be more than four Saudi Arabias just to meet the growth in the demand. So, therefore, there's a huge challenge geologically, investment-wise and political.

And again, last year, some of you may remember, I finished my presentation by saying -- it was November, end of November in fact -- that the era of cheap oil is over. And after here, as I do, I went to many countries -- the more I said, "The cheap oil is over," the more the oil prices went down, it went to $30, finally. (Laughter.) But I continue to say the era of cheap oil is over because I talked the fundamentals -- medium- and long-term fundamentals which push us to a higher price levels, and I still maintain the idea we have today, $80, and we shouldn't be surprised if the prices will still go upwards, especially in the absence of investments forthcoming in the upstream sector.

Couple of things on natural gas. The issue of decline applies to natural gas as well. We made a special analysis of natural gas in this year's book. Just to make it very short, the decline issue in natural gas -- today we produce about 3 Tcm worldwide, and half of this production from existing fields will be lost in 2030. So, again, in other words, in 2030, 60 percent of the production will need to come from fields which are not producing today. So a lot of fields to be discovered and developed -- and, again, in order to meet the growth in the demand and meet the decline in the existing fields, we need this time four-times Russia. So four times Saudi Arabia there for oil and four times Russia here -- a huge challenge.

We made a substantial analysis, we believe, on the U.S. gas markets and its impacts. And, as I say, around the -- there is a silent revolution taking place in the United States, so silent that nobody's aware of it, especially in Europe. This is a very bad thing because when something bad happens, it's always in the newspapers, but something good happens, we don't hear a lot about this. And this phenomenon, the boom of unconventional gas in the United States has far reaching impacts.

First of all, couple of words about gas -- what we believe our analysis show -- that we take $5 in real terms MTBU gas price, the unconventional natural gas boom can continue significantly and the amount of net imports in terms of LNG and others to the U.S. will be a minimum. And this is very much the opposite of what many people thought in the past. Who are those many people? They range from the U.S. administration to major gas exporters.

So why major gas exporters? Because there are many gas-exporting countries who prepared many projects with the idea of selling LNG to the United States, and now their gas is in their hands, but they don't know what to do with that gas. Plus global gas demand, as a result of the financial crisis mainly, plunged. We expect the global gas demand to be around minus-4 percent this year.

Putting these two things together -- major decline in the global gas demand, plus the -- a lot of LNG in the markets -- we expect to see a gas glut 2015 developing -- could come around 200 bcm. And this is more than three times what we have seen in the last normal year, which is 2007. And this has major implications, ladies and gentlemen. This is beyond the United States.

What is the implication? The implication is the following. This glut will put a lot of downward pressure on the gas prices as a commodity, one. At the same time, there is a gas price which is linked in the long-term contracts to oil prices, and oil prices being high, there is a growing divergence between the gas sold in the market and gas indexed to oil prices in long-term contracts, and many countries and companies are now knocking the door on the gas exporters in order to see whether or not their terms can be renegotiated and whether or not they could reflect a market that is better. So this is the impact of the -- mainly driven by the U.S. gas boom.

Another point I wanted to bring to your attention is the impact of oil prices on the economy, and I feel very strong about this. Now, in the past -- I'm looking at the last 30 years or so -- the oil and gas import bills in different countries played a significant role -- not a major role, but a significant role -- in the market economies. For example, now you look at the United States, on average, in one year -- on average in one year, U.S. paid about $120 billion, which was about 1 percent of the U.S. GDP, on average, in the past 30 years. But looking at the next 22 years, we expect, as a result of the higher prices expected -- and I can tell you our price assumptions are not that high, they are very moderate compared to many people talking and thinking -- the share of -- in all the important regions, the share of oil and gas import bill to GDP ratio will increase substantially.

And this is very important, because not for the OECD countries that much, but mainly in the developing countries. And I can tell you that this 2 percent in the OECD countries -- the share of oil and gas import (per ?) the GDP is a dangerous one.

I do not think that the oil prices were completely innocent in the run-up to the financial crisis. They were not perhaps the major driver but by -- (inaudible) -- the trade balance by having a negative impact on household incomes, it created a major problem. And in that year, 2008, when we had the financial crisis, oil and gas imports to GDP ratio was 2.3 percent. So it will be 2 percent for several years to come. And, again, our numbers are assumptions -- price assumptions may well be on the lower side with major implications.

So -- and I can tell you if some countries, like China -- if they are looking for alternative technologies, alternative policies -- as I will tell you in a minute in the context of climate change -- it is not driven by the climate change reasons but it is mainly driven by energy security reasons and $147 traumatized many oil-importing countries in terms of their reliance on oil. So this is the reference and -- I will say risky consequences.

Now, we at the IEA, in the context of World Energy Outlook also developed -- we call it a 450 Scenario. What does 450 mean? Four-fifty is the concentration of carbon in the atmosphere which would bring us to a more sustainable energy future. With the reference scenario, with the current policies in place, we come to a temperature trajectory which can bring us to the raise of the temperature up to 6 degrees Celsius, and 450 will limit the temperature increase to 2 degrees Celsius. So this is 6 degrees, the bad one in the reference scenario, and 2 degrees -- in other words the 450 is the better one, which limits the temperature increase to 2 degrees.

How can we do that? We need the agreement in Copenhagen. And discussing with many parties involved in Copenhagen, we have provided a pragmatic framework. It works like this. We have divided the countries into three groups -- OECD countries; other major economies such as Brazil, China and Middle East; and two countries -- African countries, mainly, and India -- with different historical responsibilities and with different affordability contexts. And we thought that there's a need for an integrated approach that the -- but the must is OECD countries, including the United States, have to have checked a target commitment for 2020, a medium-term target, in order to give the right signal to the energy sector.

Then after 2020 we would expect China and the others to set commitments and targets for 2030. But between now and 2020, China and others would still reduce the emissions based on their national policies and measures, and the poor countries will not have major binding targets. And the must here is that the -- we need a signal -- financial signal the energy sector. Without the financial signal nothing will change. It will not change by writing such heavy books as the -- as you wrote and as Mr. Chairman said; it is about 1.6 kilogram -- it doesn't change the picture. What would change the picture will be a carbon price, a financial signal to the investors. And on top of that -- on top of that, we will need OECD countries to co-finance some of the projects in the non-OECD countries -- more efficiency, more renewals, and others.

So what will happen if such a signal comes to such a framework? First of all, fossil fuel moves -- oil, gas and coal together -- they have to peak around 2020 as a group -- coal much earlier, gas is still increasing, oil is increasing very slightly. But as a group table they will have to peak around 2020 in order to come to a 450 trajectory or a 2-degrees trajectory. And the zero-carbon fuels -- renewables, nuclear -- their share, which is about 18 percent today, needs to double in 2030. So big revolution, big transformation needs to take place in the energy sector.

Now, when we discuss this -- some of you perhaps are familiar with the discussions in the negotiations. One of the groups which has a major reluctance on the climate change and agreement is the oil-producing countries. They say, "If such an agreement happens, we will lose a lot of money." And we wanted to test if it is true or not, that they are going to lose a lot of money. And we'll look at the OPEC oil export revenues in different contexts.

First of all, if there is no agreement in Copenhagen, if there's a reference scenario, business-as-usual, we are using our oil very strongly, oil demand is growing, OPEC revenues between 2008 and 2030, in cumulative terms, is about $28 trillion U.S. If there is an agreement because of the lower oil demand growth, because of this -- all this efficiency and alternative technologies, OPEC revenues go down to $24 trillion U.S. -- still, very handsome amount of money -- $24 trillion U.S. -- 1 trillion (dollars) more or less each year. They are definitely losing compared to reference scenario, but they are the part of the solution here.

But we also did something else. We looked at the same time periods in the past 22 years and we compared their revenues -- what they have been earning in the past 22 years, compared to the next 22 years, and their revenues in real terms will increase more than four times.

So, of course, this is of course a choice for the OPEC countries if they want to go through this or not; if they want to be a part of the solution or not. But I believe, noting the role that the many Middle East countries played in order to find a positive solution to global issues and noting that the Middle East and North Africa will be two of the regions which will be very badly affected from the climate change consequences, I am hopeful that they will be on the part of the solution side.

Let me tell you a couple of things on the United States and then finish my intervention (sic). What needs to happen in the United States in a 450 or a 2-degrees context? Even in a -- you see the red color is the reference scenario -- even in the reference scenario, the U.S. emissions are flipped, we would see, in a 450 context, major improvement on the efficiency, higher renewable use, and lots of nuclear and carbon capture and storage, and about more than $1 trillion U.S. additional investments in order to come to the 450 -- significant amount of money, but needed in order to bring the U.S. to significant reductions.

If you look at it on a country-by-county basis, there are four countries which are key to find a solution to climate change, namely, India, Europe, U.S., and China, plus one with -- (inaudible) -- on U.S. Given the U.S. historical responsibility, affordability and opportunties the U.S. has, we think the amount of CO2 emissions in the United States needs to happen is, I would say, about -- in terms of domestic reduction -- about two times what this bill discussed today in the United States. So the current bill, about 18 percent -- we don't know how much of it is domestic reduction; how much is the trade, but making an educated guess there, U.S. needs much more domestic abatement than perhaps it is foreseeing for the time being.

But my main message is on China. China may well be the champion fighting against climate change. And, again, this is in the nation policies you see here, what we have done is the following -- how we came to this idea or this result, I should say. China has a lot of policies which they are putting in place. For example, in 2020 they want to increase the share of the numbers by this percent in this generation. They want to build this amount of nuclear power plants by 2020. They want to improve the efficiency standards in buildings by this percent. All of these targets they have for 2020.

We looked at all of these targets and translated them into CO2 emission reductions -- what does it mean? And it means that China may reduce more than 1 gigaton of CO2 emissions if they reach their targets and 1 gigaton is more than 25 percent of what we have to do globally. So China can do it alone -- 25 percent of what we want to do globally. Whether or not China will reach those targets, we do not know. But looking at their past performance since setting a target and reaching them, I am very hopeful. They are much better than many of the OECD countries, many IEA countries. And when you look at their past, they set the targets for population growth control; they were successful; economic growth targets, reaching them, they were successful.

They were successful in bringing, in 11 years, electricity to 500 million people, half a billion people -- they set a target and they went from -- (inaudible) -- and they did it. So there is no reason not to believe that China will not do it, but still, if they do it, they will be the champion of fighting against climate change. And, again, this is very important -- and, again, China will not do this because of climate change. China is putting these targets in order to address energy security. But at the end of the day as a co-benefit, it helps to reduce the CO2 emissions. So it is of course very important to note that China has these ambitions.

The last two points I wanted to mention before going into the discussion -- a major shift needs to take place in the United States in two sectors -- one in electricty generation; the second I will mention in the car manufacturing.

In the electricity production, today in U.S., we have about 330 gigawatts of coal-fired power plants, and more than half of it will retire within the next 10 to 15 years. And we expect that there will be a lot of replace of coal by natural gas, first of all. And second, the renewables will play a growing and more important role. According to our calculations, if we have to invest -- if we are going to invest -- in a 450 context in the electricity generation in the U.S. -- about $100, $52 need to go to renewable energy-related power generation investments.

My last point is, again, a major change needs to take place in the transportation sector. Today in the U.S., if 100 cars are sold today, 99 cars are so-called internal combustion engines -- the conventional cars -- and one car is either hybrid car, electrical vehicles, or a plug-in hybrid car. In order to come to 450 context or 2-degrees context, in the United States in 2030, we need to see, a) 60 cars out of 100 cars to be advanced technologies, electrical vehicles, again, hybrid cars, and so on; two, the efficiency of the internal combustion engines -- conventional cars -- will need to increase substantially; and third, as is foreseen, the second generation biofuels should play a more important role. So as a result of that the CO2 intransitive, as we call, in the transportation sector will come down substantially.

I will not go to -- make -- try to wrap up the my words, but just to mention two final things. One, because after we make this book I am touring many countries, and I can tell you that in many developing countries from where almost all the emissions go up will come in the future, energy security is much more important than climate change. But, thanks God, it is -- most of the measures that those countries are taking in order to address energy security helps reducing CO2 emissions. So I call this 450 Scenario, but for me in the developing countries context, it is 450+147 Scenario -- 147 being the price tag which symbolizes the energy security in the eyes of many countries.

The second point I wanted to make is that all this transformation in the energy sector -- the 450 context -- more renewables, more nuclear, electrical cars, and so on, worldwide, would cost between now and 2030 about $10.5 trillion U.S. -- a huge amount of money. But more importantly, each year we do not have an agreement, we do not give a signal to energy sector, the cost increases by half-a-trillion U.S. dollars. The delay of having a agreement brings the cost half a trillion (dollars) more, which makes the cost higher and at the same time which makes an agreement perhaps less likely because it is more costly. And this would have major implications, therefore, it is very important, that I believe Copenhagen -- or just after the Copenhagen -- this gives the right signal to the energy sector so that we make the right investments as soon as possible.

Thank you very much for your attention. (Applause.)

NICHOLS: Thank you, Dr. Birol, for a wonderfully quantitative and clear presentation. It was really quite good.

I'm going to take the moderator's privilege and ask you the first question. You didn't say very much about nuclear power, and as everyone in this room I think realized, we may be having a so-called nuclear renaissance now in the United States and other parts of the world. Talk a little about either the data or your impressions of the nuclear renaissance.

BIROL: A nuclear renaissance is something that I very much would like to see. And I don't know if I'm going to use the right tense in English -- I would have liked to see this renaissance since four or five years. But it is not coming, unfortunately, for the time being.

But what I can tell you -- there is a change in the moods. Let me give you a couple of examples. In Europe there are some countries which decided to phase out nuclear power, which decided to -- not to prolong the lifetime of the existing nuclear plants, and they are changing their minds one by one. Sweden, Belgium -- very soon I expect in Germany. So this would give a significant elan to the nuclear industry -- plus Italy, which banned use of nuclear power with the referendum of 1992, now decided to go for nuclear power.

When we turn to Asia, we see that China, India and Russia are very aggressive to have a nuclear industry, and plus, even in some Gulf countries such as United Arab Emirates there is a growing interest in looking at nuclear.

Here the drivers are different. In Europe it is driven by the economics of it, plus the -- not too much dependent on gas as a fuel for power generation. And plus nuclear is a technology which provides bulk electricity generation without emitting CO2 emissions. In China, India, they need electricity. They are growing, and they are too much dependent on coal. And in the Gulf region, again, diversity is a key issue.

So these are all good things, but at the same time we know that a medium-sized nuclear power plant is about -- in the OECD countries it's about $4 billion U.S. -- a huge downpayment. What kind of model is going to be followed and how the investment will be carried out is a key issue. But I think, again, if there is a carbon price in the energy sector, this would definitely help further to nuclear energy. I certainly believe nuclear belongs to the integral -- with the integral part of our energy mix if we want to address both energy security and climate change issues.

NICHOLS: Thank you.

Open it up for your comments, questions. Lovers of climate change, haters of climate change, the 450 Scenario -- welcome to hear from any of you. I think there are mikes there. Let's see, there's -- yeah. In the front row, here? If you could pass the mike over. Would you identify yourself, please, and keep your questions brief?

QUESTIONER: Yeah. Ed Cox, chairman of the New York State Republican Committee. If there's any black swan event in this area, it's been the development of horizontal drilling for gas in shale together with fracking, and it's produced this decreased price of gas, and it's fairly inexpensive to do this. Do you feel confident that in your estimates you've taken into account not only in the United States the increased use of gas because on a BTU basis compared to oil it's lower cost, which will even grow greater pursuant to your analysis -- and also in Europe, the development of the technology there that's only beginning?

BIROL: I can take a couple of those questions, or --

NICHOLS: Well, let's do a few individually and then we'll -- we may group some towards the end.

BIROL: Okay.

Now, I think in -- first of all, what we see is the gas in the U.S. -- first of all, decline rates are huge. Declines are huge, and we need a lot of investments. It is something like a bicycle. If you don't turn the pedal, you fall down because the -- (inaudible) -- are so huge. That would mean a lot of investments. We need a lot of qualified mobile rigs to address the issue. But I think our numbers show that with a $5 gas price and a 10 percent return, there will be an increasing contribution of unconventional gas in the U.S. markets. Today it's about 50 percent of current production, and we think it can be even up to 60 percent in 2030.

Outside of U.S., where can we get unconventional gas? There are areas that there is a lot of interest activity -- China, Australia, Baltic Sea, Poland, different places in Europe, and they are all looking for that. When Mr. Obama was in China last week or the week before, where you look at the communique between China and the United States, one of the areas was that they will -- one of the very few areas for cooperation, for agreement was U.S. will help China to look for unconventional gas. But there is a definite potential there. But none of them outside of the United States is at the level that it is -- we are start to drill, we are ready to start to drill, we are ready to look for concrete projects. It is still in the phase of assessment, appraisal. We are not there yet.

Just one word on the gas demand worldwide. Whatever the -- I tried to present two scenarios, one reference scenario with no carbon constraint and then one, 450, with the carbon constraint world. In both of them natural gas will play a key role compared to today. In 2030, even in 450 context, natural gas use will be higher than today, and natural gas can well be a transition fuel to the longer term, much lower-carbon technologies.

NICHOLS: Question toward the back, second -- right there, mm hmm. Yes. Thank you.

QUESTIONER: Kenneth Bialkin, Skadden, Arps. Today's Wall Street Journal had an article which described a dispute between the climate change activists and the climate change skeptics. The point of the story was that the activists are suppressing scientific discovery and discussion by the skeptics who contend that the carbon dioxide issue is overstated either because it's not anthropogenic or because it's unrealistic.

Have you done any studies as to what would be the economics or the change in energy analysis and energy policy because pollution and emissions and other hydrocarbon consequences would be important whether or not CO2 is a pollutant and is evil? But as you -- have you done any calculations about if the CO2 issue dropped out of the energy equation and the costs and the direction of policy implications, if it should turn out that the skeptics might not be exactly wrong?

NICHOLS: That's a good question.

BIROL: It is a good question and a long-lasting question. I am not a climatologist, and I think the -- as far as I know, overwhelming number of scientists worldwide are indicating since long time the global warming and the climate change is taking place and will take place. We are following them.

However, I should tell you the following. I -- as a result of our 450, which means addressing the climate change issue, I made some recommendations -- more efficiency, more renewables, more nuclear, more electrical cars.

I can tell you, if there was no climate change -- even those skeptics were right that there is no climate change problem -- I think at least 90 percent of those recommendations I will still make, as I believe energy security, the limitation of the resources we have, especially in terms of oil and others -- I will still make those recommendations because we have to find a way to run the world when we do not have enough oil. So I think even though I am not a scientist, I would definitely go for 450 in order to address the energy part of the equation. And as I've tried to say, many of the developing countries are pushing alternative policies, alternative technologies not for climate change reasons but mainly for energy security reasons and for another environmental question, which is local pollution, which is a very concrete, very imminent question in many developing countries, the air pollution issue, especially in the cities.

NICHOLS: Other comments? Yes, sir. Here on the aisle.

QUESTIONER: I'm Paul Richards from Columbia University. And I ask, to what degree is the IAEA -- excuse me, IEA -- still relying upon the U.S. Geological Survey's 2000 World Petroleum Assessment? I think it was used for many years by the IEA, and it's a question I ask because of recent reports that that particular assessment was subject to all sorts of pressures to come up with numbers that today perhaps may not be defensible.

BIROL: USGS is a very respectable organization and its data is used by many people. But in fact when you look at our work on 2008 World Energy Outlook, if you have had time to look at it, we have used for our reserves number IHS data, which is used by almost everybody in the industry, such as the oil executives, such as research institutions and others, which is the most reliable data we have.

Now, I know that some people think that the numbers that I show -- there's a need for four Saudi Arabias -- are not alarming enough. So this is very surprising for me. And they think it is even worse than that. And for respect to those colleagues, I would -- and they make it so much e-mailing and Internet work -- so just for their respect, to credit them, I can easily say that we need four-and-a-half Saudi Arabias, if it makes them happy, because I think the challenges there -- whether four Saudi Arabias or four-and-a-half Saudi Arabias, it doesn't change at all there's an immense challenge in terms of geology, investment and production policies.

And perhaps I can link these two questions together -- the previous question -- it is the reason why we need alternative technologies even though there was not a climate challenge we are facing in order to address this energy security, oil security issue.

NICHOLS: Yes, in the back?

QUESTIONER: Thanks. Adam Wolfensohn. Kind of a flip to that last question -- I'm concerned about the emphasis on energy security. For instance, in China, is it not the case that they've got so much coal that if they were solely interested in energy security they'd be doing coal-to-liquids without CO2 capture, and if they were solely interested in local air quality, they could clean up their coal plants without doing CO2 capture? And so is the incentives not completely aligned there?

BIROL: I --

NICHOLS: And while you're talking about China, you acted as if you think China will enforce its policies. What makes you think they will? You gave examples of population and economic growth, but what makes you think they're going to enforce your 450 Scenario when they need the kind of energy from coal, for example, tomorrow, the next day?

BIROL: Yeah. First of all, there are a couple of questions involved in that. When we talk about energy security, there is no question of -- at least as far as I know, coal security at least. There is a -- we have a huge amount of coal resources, which will come. When we talk about energy security we mean oil security, and I do not think at all that coal has the capacity to replace oil because when we look at oil demand trends in China and elsewhere, more than 98 percent of the growth in oil demand comes from the transportation sector, from cars, trucks and jets.

Coal-to-liquids is a very, very -- has very limited chances even to replace one small fraction of oil that we have today. So I think in terms of China -- but what China is doing, which is perhaps not necessarily -- it may seem so logical in many cases, is not CTL -- coal-to-liquids, but they are trying to access the new resources outside of China, in Africa and other countries. Some of those projects may not be very profitable as our Chinese colleagues think.

So therefore, I believe China has all the legitimate concerns. And they're a sovereign country -- they will of course do what they think is the best for the oil security. And another thing what they are doing is to increase their stockpiles in order to address the oil security when it is needed to be used.

Second, why do we think China will enforce 450? China will not reinforce 450. And when I went to China and presented this work to the Chinese decision-makers, they didn't like the 450 context because they were very careful. But when I went one step further, told them that this is your policy on increasing the nuclear power from this level to that level, 2020 -- this is your target -- increasing the share of renewables from this target -- this terawatt hour to that terawatt hour, increasing the efficiency from this to that in buildings -- all of these policies, several policies they have -- we studied all of them one by one -- we said, "If you reach those targets, then you come -- in one you have to make a reduction, and this is very much in line with our 450 Scenario." So again, the driver is not 450 or climate. The driver is energy security. They do not want to rely too much on the other countries for their oil imports, and this is what they are doing.

I am not sure that they will reach their targets, but I trust them more than many of the governments that are members of the IEA, that I can tell you. We look at the -- we say in Turkish, the mirror of a person is what he did in the past. So this is the mirror, when you look in the past. They were -- when they set a target, they always reach it, so -- unlike some others.

NICHOLS: Other comments? Yes. Here, in the second row.

QUESTIONER: (Off mike).

NICHOLS: Wait for the mike.

QUESTIONER: I'm Tina Vital, Standard and Poor's Equity. If U.S. engineering technology and coalbed methane could be transferred to China, what sort of reduction in coal usage do you think might come from their coalbed methane extraction?

BIROL: There is a very strong potential there, but it will depend how successful this production of coalbed methane will be. If we see a success, a boom like we have seen in the United States in unconventional gas, it can definitely be a game-changer. But I think we are currently unfortunately far from that.

Having said that, China is, as I said, putting a lot of money and political will in the alternative sources such as coalbed methane, but we cannot for the time being consider coalbed methane as a major substitute to coal. It's very premature for the time being.

NICHOLS: Yes, sir?

QUESTIONER: Nick Bratt from Lazard Asset Management. In your forecast out to 2030, could you tell us a little bit about the relative importance played by solar as opposed to wind?

BIROL: When we look at the alternative, especially in the 450 climate-driven scenario, among all the renewables, wind is the leader. Wind is the leader mainly because of its cost of production and the maturity of the technology. However, the winner in terms of the absolute volume. But in terms of the growth rate, solar is the highest -- has the highest share as it starts from a low basis. And we expect, especially after 2020, the cost of producing solar will go down substantially because of learning by doing, and we'll have a growing market share. But still, in terms of the absolute contribution to the global energy mix, wind will be higher than solar.

NICHOLS: Which one of the two do you think the private sector is most likely to invest differentially in the most?

BIROL: Wind. Wind. Currently, wind. I mean, there's a lot of money going to wind, not only in Europe and in the United States, but more importantly in China, India and ASEAN countries.

NICHOLS: So governments ought to get out of the business of subsidizing wind?

BIROL: Slowly. Not immediately, but slowly, because according to our analysis, oil price, equivalent gas price -- the oil price is about 60 (dollars), $70, for example, in Europe -- the equivalent gas price, vis-a-vis wind -- wind is profitable if the oil prices stay at that level, which we think it will.

So in terms of solar, there is still a need for support.

NICHOLS: And as an economist you think those subsidies are worth it?

BIROL: Are they -- in most cases -- not in all cases but in most cases, yes, especially as cheap oil subsidies.

NICHOLS: We have time for about one more question, if anybody's got -- yes, in the very back of the room. Yes, sir?

QUESTIONER: (Inaudible) -- Switzerland business newspaper. Could you tell us a little bit more about the potential of efficiency gains? What has to happen and where does it have to happen?

BIROL: I think it's also a very good question. We talk about the different technologies from -- about nuclear, about renewables and the others, but when we look at what are the technologies which would help to reduce CO2 emissions, the most important one is energy efficiency improvement. It needs to take place in three different areas, namely, first of all, households, ranging from refrigerators to computers, laptops and everything, and insulation as well -- how we construct the buildings. Let me give you perhaps, if you have a minute --

NICHOLS: Not much more than that.

BIROL: -- we don't? We don't. Okay. I won't give the example. Then the other one is industry -- the boilers, especially. There's a big room of improvement there. And key one is in the transportation sector -- cars. Let me give one example here since -- about United States. United States is now a target in order to improve the efficiency in the cars in 2016 substantially, and this was a big news. And if U.S. doesn't reach this target, it is still much, much more modest than China has today. So just to put that in the context.

So this will happen, and it will happen -- it can happen two ways. One is the government regulations, standards and norms, and this is in -- this can be easily transferred from the OECD countries, which has a lot of experience there, especially in Europe and Japan, to bring it to the developing the countries, just putting a standard in this type of -- (inaudible) -- will be solved, full stop. This will change a lot.

Second, and more importantly, there is a need for a price signal. And the price signal will be -- especially in the OECD countries, a CO2 price would definitely help to drive the efficiency improvement. And in the developing countries, for the time being, it is very important to eliminate the subsidies, which is more than $300 billion on the energy product, especially oil, coal, gas and electricity. This would definitely help to give the right signal and people to use energy much more efficiently.

NICHOLS: Please join me in thanking Dr. Birol. (Applause.)

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