World Energy Outlook 2006: Mapping a New Energy Future

Friday, November 17, 2006

Speaker

Fatih Birol

Chief Economist and Head of the Economic Analysis Division, International Energy Agency

Presider

Jad Mouawad

Energy Reporter, The New York Times

JAD MOUAWAD: Ladies and gentlemen, may I have your attention, please? Good afternoon, ladies and gentlemen. Welcome to the Council on Foreign Relations. My name is Jad Mouawad. I’m with The New York Times.

Before we begin, I was asked to remind everyone to please turn off your cell phones, and also this meeting will be an on-the-record meeting.

With us today is Dr. Fatih Birol, who’s the chief economist at the International Energy Agency and the author of IEA’s yearly World Energy Outlook.

This year the publication makes a few sobering points. Basically, it shows that without a radical change in policy, energy consumption is set to soar in the next three decades. Paradoxically, the IEA warns that there’s no assurance that the massive investments needed to meet this soaring demand will be made in time.

The report also says that the growth in consumption is going to lead—might lead to the development of so-called dirtier energy sources—coal, heavy oil, more tar sand and perhaps shale oil—sorry—oil shales. So just as the debate on climate change heats up, we’re going to be getting more dirty fuels.

All this points to a contradiction. Energy security and environmental security seem to be pulling us in different directions.

In its report, the IEA says the world is facing twin energy-related threats: that of not having adequate and secure supplies of energy at affordable prices and that of environmental harm caused by consuming too much of it.

Dr. Birol, the floor is yours. (Applause.)

FATIH BIROL: Thank you very much for the kind introduction.

Good afternoon, ladies and gentlemen. It’s a great pleasure again that I have the opportunity to share the views of the International Energy Agency with you.

We have last week published the World Energy Outlook 2006, in London, and we look at the global energy trends and the resulting challenges for all of us for the next two and a half decades.

In doing so, we outline two different visions of our energy system, global energy system. The first one: if we stick to our current policies, we see an energy system which is vulnerable in terms of security of oil and gas supply, dirty in terms of environment, and expensive in terms of investments. And we think this is a trend which is unsustainable, and we need to change these trends. And therefore we build another vision, which we call the alternative policy scenario, and I am going to discuss this—both of these scenarios in a nutshell, with yourselves, and afterwards we will be very happy to have your questions and remarks.

So first of all, with the current policies, where are we heading at? With the current policies in place, oil demand is coming strongly, mainly driven by China and India, which are responsible—more than 50 percent of the growth in the global oil demand between now and 2030, and the main driving sector will be the transportation sector—cars, trucks and jets.

Coal is coming strongly—I will elaborate in a minute, but coal’s growth is very impressive.

Gas also grows in a substantial manner, but our expectation for gas this year are a bit lower than what we had last years, mainly as a result of high gas prices.

Biomass, mainly coming from developing countries; nuclear power, with the current policies in place—I again underline this—with the current policies in place, as of 2006, is going to lose market share, as there—lots of retirements in the OECD countries.

Renewables are growing but still making a small share in the global energy mix.

So this very picture will have major implications for our energy system—the very first picture.

The first one and the most critical one for the International Energy Agency is on the oil security front. The growth in oil demand will need to be met from a very few number—a number of countries in the future. Number of suppliers will be less and less, mainly as a result of declining oil production levels outside of the OPEC countries. We expect that the non-OPEC production will reach a peak before 2015, within the next 10 years of time, and therefore the demand will be met more and more by few number of countries, mainly coming from OPEC.

Three countries are key here, mainly Saudi Arabia, Iran and Iraq.

In terms of Saudi Arabia, as you know, the Saudi investment climate is very different than what we used to see in Gulf of Mexico and North Sea. The decisions, in terms of the investments and production capacity growth will be made by their national oil company and, of course, looking at the market conditions. But market conditions may not be the only factor that they look into.

In terms of Iraq, we know there are question marks and big potential. But there a lot of question marks in terms of the political stability of Iraq and when they will be increasing their oil production.

Iran—lots of oil and lots of gas, but again, as much as those, there are question marks about the investment climate, and moreover, the political situation Iran is in.

So we also expect some non-conventional (?) oil, mainly from Canada, to come to the market. But this will not change the main picture, that the bulk of the growth in the oil demand in the future will need to be met from very few number of countries, mainly focusing in the Middle East region. And this is a concern that the number of suppliers is decreasing, from our perspective.

The picture in terms of gas is not very different. Gas demand is growing, gas trade is growing, and the bulk of the growth in the gas demand will need to come (from) Russia, Iran, a very few other MENA, Middle East\North Africa, countries. There’s a concentration of reserves also here. Just to put in a context, perhaps, Russia plus Iran make about 50 percent of the proven gas reserves—two countries which are in the headlines of the newspapers for energy and non-energy related reasons.

The third field I would like to discuss with you is coal. One of the messages coming from the World Energy Outlook 2006 is that coal is coming back. Coal is coming back with all its consequences, positive and negative; positive consequences in terms of the enhancing the security of supply, having resources throughout the world dispersed in an equal manner in Australia, China, U.S., Canada, South Africa and elsewhere; but in terms of the CO2 emissions, carbon dioxide emissions, this is a major problem.

The growth—what we have seen in the last three years in coal globally—2003 plus 2004 plus 2005—is equal to the growth what we had seen in the previous 23 years. So such a huge growth coming from coal, mainly driven by China, as well as driven by the high natural gas prices, switch from gas to coal in many examples.

As I said, it is important to note that the increasing coal demand has implications for the CO2 emissions. And in general, carbon dioxide emissions increase 55 percent between now and 2030. And a bulk of this increase is coming from China plus India, which make more than 50 percent of the emissions. And perhaps a good news—“good” in quotes—for the U.S. colleagues here— China has taken over the United States as the biggest emitting country of the world in 2009, if not earlier. And other developing countries are also increasing their emissions a lot. More than two-thirds of the emissions, growth of emissions coming from the developing countries.

However, one shouldn’t blame China here. One should see that in the population that China has, in terms of per capita emissions, China still emits less CO2 emissions than the OECD person in the OECD in 2030. However, this brings to the picture that if we want to have effective solutions to the climate change problem, we shouldn’t afford not to have China, India on board for the future environmental architectures that we may propose.

The very first picture I show you in the global energy mix, how the different energy perhaps are growing, ends up with substantial requirements in energy investments. We expect that there is a need to build new power plants, transmission lines, distribution lines, oil fields, gas fields. About $20 trillion needed between now and 2030; a bulk of it for the electricity sector—building power plants, transmission lines and distribution lines.

In terms of countries, China alone would need $4 trillion for its energy sector. Just to put it in a context, if China grows every year, China electricity sector, equal to the one U.K. electricity sector, the growth in China equal to U.K. each year, and it grows in that level.

For the OECD countries put together, we need about $8 trillion. It may sound a bit contradictory that even though the bulk of the growth in energy demand is coming from China, you need more money for the OECD countries. The reason here is the demographics, demographics of the energy infrastructure; namely, in the OECD countries we need to make investments not only—and not mainly in order to meet the growth in the energy demand, but in order to replace the existing structure which is going to retire within the next two decades. So we need more money to replace the retiring infrastructure, retiring power plants, declining oil and gas fields, and so on, more than meeting the demand.

One of the major problems that the global economy is facing today, as we believe at the IEA, is the high oil and gas prices. In terms of oil prices, when we look at the current investments discussed by the international and the national oil companies, we look at it on a project-by-project basis, how much oil and gas we can realistically expect to come to the markets within the next five years so that the prices will affect it accordingly.

First we look at the past five years to see whether or not in the last couple of years the high prices end up with higher investments in the upstream sector in the oil production. And when we first looked at these trends, we were very happy to see that the investments in the oil sector increased substantially between 2000 and 2005. However, looking at the cost inflation, which is the increasing cost of rich material, skilled labor, if we adjust this, if we look at it in real terms, in terms of real spending, the investments were more or less flat between 2000 and 2005, a major cost inflation aspect.

And looking at the future, we look at all the projects, sanctioned projects, on a field-by-field basis. And what we have seen is that if all the sanctioned projects see the light of the day by 2010, the current spare production capacity, which is about 2 million barrels per day, may increase slightly higher than 1 million barrels per day, and the current—and the spare production capacity in 2010 may be a bit higher than 3 million barrels per day, which means that we are far from having a comfortable oil market. In other terms, if some of these projects for some reasons, if there are some slippages, some delays, as a result of the factors that we had not foreseen—it may be climatic reasons, it may be as a result of geopolitics or other reasons—the spare production capacity may be even lower, therefore significant impacts on the prices.

Looking at the long term, I think this is the picture that I would choose as the most strategically important picture for the oil industry to come, which says that looking at the proven reserves both by distribution and investment climate, in many countries where we have a lot of oil, the foreign investment cannot flow freely and go and invest there, such as Saudi Arabia. So this is a completely new structure that we used to see in the oil industry. In the past when the prices went up, we have seen volumes coming from North Sea, Gulf of Mexico, as a response to high prices. However, in the future the decisions, again, will be made by the national oil companies, and again, the main reason for the investments may not be the international oil prices. Those companies may well have other considerations than the international oil prices. So this is a new picture that there is a big problem for the international oil companies to have access to reserves and to invest. So they have to see what they are going to do in that situation, looking at their perhaps medium- and long-term strategies.

Up to now I have discussed with you the issues related to the rich people, about the OECD countries and the others. There is an issue which is not very typical, perhaps, for the energy meetings, but I still want to share with you.

According to our analysis, today 2.5 billion people in the world, which is about 40 percent of the global population, is using—for the cooking at home is using so-called dirty biomass; namely, agriculture waste, animal waste, dung, and similar things in order to cook in the stoves they have, which are very primitive. And this has several implications. One of the implications is, as a result of the indoor emissions coming from these cookstoves, and the respiratory diseases it results, in every year, according to World Health Organization, 1.3 million women and children die prematurely. And this compares with the 1.2 million people dying from malaria.

There are some other implications of this, in terms of deforestration, in terms of implications on the women and others. And we have seen that if we do not do anything, despite the economic growth worldwide, despite the technological innovation worldwide in the next 25 years, despite the so-called globalization, there will be still 2.7 billion people in 2030 using this type of fuel and having the consequences of it.

So we think this is unacceptable. And we have seen—we just made a work, and we have seen that if half of these people, in line with the Millennium Development Goals, were to go to clean energy services, the money we would need for that would be (literally ?) peanuts.

Now, let me just put together my thoughts in terms of the reference scenario if we do not change our policies. Our security of oil supply will be more and more at risk. Gas security will be along the same lines, with the growing demand and the diminishing number of supplies both in the oil and gas side.

One important issue coming from our work is the fact that next 10 years are very crucial for the global energy and environmental system. Let me explain very briefly why. China and India, we talk about them a lot, and we try to give the order of magnitude how important they are. They are going through an economic boom, both of these countries, and during this economic boom, they are making major energy infrastructure investments. They are building power plants, refineries, transmission lines and so on.

And if they build a power plant today in China and elsewhere, it has a lifetime of 60 years. And it will be very difficult—it will be very difficult—to shut down their power plant after 10 years and so before its economic lifetime is over. So there are going to be lots of decisions taken in China and India which will determine the next 50, 60 years of their energy patterns, and at the same time will have major implications for the global energy and environmental picture.

The second reason why it is important for the OECD countries next 10 years is that in the OECD countries, bulk of such investments, major investments, were made just after the Second World War, when the economy was booming. We built a lot of power plants, transmission and distribution lines, and most of them are in the phase of retiring within the next 10 years. So we are going to replace them within the next 10 years, and we have to again think what kind of technologies, what kind of fuels, what kind of design we want to put together.

So next 10 years is key to have sustainable solutions to our energy problem, which is discussed in the reference scenario, which ends up with the two interests, security of supply and increasing environmental risks.

The second vision I wanted to share with you is the alternative policy scenario. G-8 leaders in Gleneagles in 2005, and again in 2006 in St. Petersburg, asked the IEA to provide an alternative scenario to look at the implication of policies which are not yet legally enacted but under consideration. There are many discussions about the new policies in terms of increasing energy efficiency, more renewables, more this and that. They are not yet legally enacted, but they are under consideration in all the governments of the world, mainly driven by security of supply, and sometimes climate change concerns, but at the same time, high energy prices give a momentum to the governments to consider such new policies.

We have chosen 1,400 policies on a country-by-country basis, sector-by-sector basis. If you just look at the IEA website, you will see them one by one. And we said if those policies which are under consideration—which are by no means revolutionary policies, these are policies discussed in the corridors in Washington or in Brussels or in MITI in Japan or in China and India—if they were to be introduced, how would they change the unsustainable trends I just showed in the reference scenario.

And in terms of oil imports, for example—this is the reference scenario—we see the oil imports growing significantly. In the alternative scenario, oil imports are coming down significantly within the OECD. The trend is changing substantially. This is mainly as a result of increasing fuel efficiency in the OECD countries and making more use of biofuels in some cases.

Another implication is on the gas and the security of gas supply questions. This is the gas imports in the U.S., EU and Japan. And in the reference scenario with the current policies in place, there’s a huge increase; but in the case of the alternative scenario, there is a decline in the gas imports in all regions, again driven by using electricity more efficiently at home and in the industry. Therefore, less electricity demand; therefore, less power plants; therefore, less gas-fired power plants.

The second one is using more renewables, replacing gas, and the third one is using more nuclear, replacing gas.

(With ?) the CO2 emissions, the second challenge that the reference in our report has asked—that we can bring CO2 emissions in a much (sic) reasonable levels. They can stabilize around 2030.

And this stabilization takes place as a result of three major policy pillars. The first one is on the increasing energy efficiency, mainly fossil fuel increased efficiency. This is the transportation sector, mainly coming from the cars, trucks and jets, using them more efficiently.

This second one is using electricity at home—the refrigerators, washing machines, TV sets and others—more efficiently.

And the third one is in the power sector, to increase the efficiency of the power plants worldwide. This is the first pillar, and the main one.

The second one is increased use of renewables, mainly wind, biofuels, hydro, geothermal and others, and third one, increased use of nuclear in the countries where it is accepted.

To give you more of a flavor of the policies we have chosen, just to tell you that there are twelve policies out of 1,400 we have put together. We call them “the clean dozen.”

And here, just to give you some examples what do they mean—for example, in the case of U.S., the tighter CAFE standards would help a lot. And what does it mean? It means that the current—or it means that U.S. average vehicle fuel efficiency in the year 2030 will reach the current level of EU today—so this sort of very (adventurous ?) assumption. And I know that in Washington there’s a lot of discussion among the colleagues to draft—to look at the CAFE standards and to revise them in terms of the fuel economy.

Or in China, increased efficiency of coal-fired power plants—this is an important thing. And what we assume there—and it’s in line with the government’s considerations, in fact—to bring the Chinese coal-fired efficiency in power plants to the level of EU—current level of EU in the year 2020—so again, a major improvement we can get from—on this.

So in that respect, these policies can have a major impact on the CO2 emissions and therefore on the global picture.

So just to tell you that since (yet is working ?) around, which leads—this is the third message that I wanted to give today—is that alternative policies not only bring the costs—not only bring the oil import dependency down, which is a good message for the energy security; not only brings the CO2 emissions down; but they are cost-effective.

Let me give you one example to you here in the electricity sector. If there are two television sets—one is $10; the other one is $11—and if the $11, with the same quality, is a bit more efficient than the $10 one; if I as a consumer go and buy that $11, it ends up—this efficiency savings—of avoiding building new power plants worth of $2.2. So demand side investments in the first instance ends up with a bigger savings on the supply side.

And the best use of the best power plant, the cheapest power plant, the cleanest power plant is the power plant you don’t need to build. So it is the reason that there’s a big room there for improvement. And we have calculated that we need less money for the alternative scenario than we need in the reference scenario.

So let me finish my presentation telling you that we made a major analysis to my—(inaudible)—on the nuclear power and on biofuels—perhaps we can cover them during our Q&A session—and to say that with the current policies in place, if we do not change the reference scenario, the situation is rather serious. We are going to end up with an energy system which is vulnerable, dirty and expensive. As we try to make out here, we have all the means that we can build an energy system which is cleaner, cleverer and more competitive. And we have—we can do all of these things if the governments would take it seriously and provide clear incentives to change the existing investment patterns.

So with this, I’ll stop here. Thank you very much for your attention. (Applause.)

(Pause.)

MOUAWAD: Can you hear us? Great. Thank you.

Before I open the session for about half an hour to questions and answers—and there’s a lot of people, so I think I will keep my remarks and my questions very, very brief.

But you left us with the cost issue, and obviously, a lot of the debate over the alternative view is one of cost. And can you maybe just give us a little bit more detail on this whole cost structure? The Stern Report in the U.K. a few weeks ago said that the cost of inaction in terms of climate change was higher, much higher than the cost of action, which they put, I think, at something like 1 percent of GDP. That’s still a lot of money. So how do you square that?

BIROL: So, first of all, a big difference between our report and the Stern Report is that we have not all of these savings. We have not assumed—including a carbon tax. All of this savings are done in a manner and it is with the current existing mechanisms, government just providing some—changing the existing investment patterns and providing some incentives. This can be in terms of, in some cases, subsidies; in other cases, it can be tax breaks and this and that. But we do not need a carbon tax, as was the case in the Stern Report.

And the second one is that we did not look at the impact of increase in the climate temperature. This is beyond our expertise, and there have been uncertainties there. But what we have—what we say—as the U.K. report says—it is important to act now. And plus, we go one step further and a bit more precise, the next 10 years are key in terms of, A, that we have the opportunity to change the game; and, B, if we don’t do it within the next 10 years, it will be much tougher in the future to change the trends, because major investments will be made in the developing countries and the OECD countries. It will be very difficult, then, to reverse those trends. The next 10 years we should make use of that.

MOUAWAD: Well, you mentioned China. And without pointing the finger at China, how do you convince China and other developing economies not to use coal, which they have in abundance? They also are confronted to difficulties in accessing oil and other resources. What are the alternatives?

BIROL: I mean, in the case of China, I do not think that there are any significant incentives now for China to switch from coal to another energy source except for their own local pollution considerations. I do not think that China should be blamed for the climate change issues. First of all, it would be unfair. As I told you, on a per capita basis, China still emits much less than in other countries.

And the second, to begin on the fair side, this climate change issue is a concentration of carbon in the atmosphere, and many OECD countries got rich in the last hundred years in the Industrial Revolution by using a lot of coal and sending a lot of carbon to the atmosphere, and it shouldn’t be now the case for China or India, poor countries during the development process to clean it up. We should—if there are no significant incentives for China and India—economic incentives for them—I am not talking about the moral or ethical statements—but if there are no economic incentives for them, I do not think that China and India would switch from coal to another fuel, at least for their power sector. And unless a major technological breakthrough happens—which we don’t think it will happen in the next year—this use of coal will have major implications under global CO2 emissions, a major concern for us.

MOUAWAD: We’re going to open it up to questions. I would just urge you to keep your questions very short so we can accommodate as many questions as possible, and perhaps also your answers very short.

BIROL: Okay.

MOUAWAD: We have one—we’ll start with the front of the room and we’ll work our way back.

QUESTIONER: I’m Kenneth Bialkin. Thank you very much for those very interesting things.

My question has to do with suppose—how much would your economic recommendations and analysis change if it should happen that either because of political reasons—let’s say China and India don’t go along, and everybody else doesn’t go along; or it should be determined, after further study, that global warming is not anything anyone can do anything about because it’s not caused only by carbon emissions, how would your estimates and prognostications change if global warming were not a factor in the predictions and calculations you made, but other things were; namely, it’s wise to stop using hydrocarbons just because of pollution and other consequences other than carbon dioxide.

BIROL: If global warming was not an issue, I think our recommendations wouldn’t change much, because most of our recommendations are related to increasing, improving energy efficiency. It is much better to use less oil, less gas, for energy security reasons as well. What is wrong with the—in the United States increasing the vehicle fuel efficiency and, therefore, using less oil; and therefore, having less dependence on a very few number of countries? This is good for the economy, good for the energy security, but good for the climate change.

And in China and India, well, when it comes to those countries, coal is a major problem for the CO2 emissions, but even if it was not the case, if global warming was not a major problem, it is important for the local pollution as well. I don’t know if anybody visited Beijing or other Chinese cities recently, there’s a major pollution, air pollution, all over Beijing which is not a good thing for the Chinese and for others.

So, the picture would not change much, even if global warming wouldn’t be one of the major causes because in the developing countries, many developing countries, air pollution is a major problem, first of all. Secondly, perhaps more importantly, all of these policies we suggest is good for the energy security, enhancing energy security, reducing the oil and gas import dependence of key—(word inaudible)—countries on a very few number of unstable producers.

MOUAWAD: We had a question here, and then we’ll go over there.

QUESTIONER: Thank you. Jack Hidary. This past Tuesday, DaimlerChrysler and GM met with the president in the White House, proposing that they would have 50 percent of their production of cars be flex-fuel cars by 2012. As you know, in this country we buy about 16.5 million cars per year, and so that would be about 8 million cars. We have an incumbent base of 230 million cars and growing, because cars last longer and longer. You mentioned increasing CAFE standards obviously would help as well. But without addressing a mandate or some other structure for creating a base for the automobile availability of flex fuel, both in terms of new production as well as retrofitting with an EPA-certified mandate in terms of the 230 million, if you can apply that to also the EU, and also, as you mentioned, China, part of the significant is transportation, and certainly, again, mileage standards are important, but availability of biofuels, and then the mandating of that in the cars are critical as well.

What are your thoughts in terms of policy, both China, EU and U.S., when it comes to the flex fuel for that? Thank you.

BIROL: In fact, this is a very key issue, the transportation sector, because as I tried to mention, the oil demand is mainly coming from the transportation sector. And why it is important, transportation sector—and I believe transportation sector is our current economies’ Achilles’ heel, because we are very vulnerable there because we do not have available alternatives to oil. In ‘73-‘74, ‘79-‘80 we had high oil prices. At that time we were using oil, for example, to produce electricity worldwide. But we were able to switch from oil to nuclear or coal or renewables and something else. We were using oil also at home for heating, and we were able to switch from oil again to natural gas or other things.

But when it comes to the transportation sector, there are not readily available alternatives. So the consumers are in a very rigid station and the room of maneuver is very, very limited. And this is one of the reasons why the high oil prices did not have a major impact on the demand. But this is another story.

So, having this in our minds, having identified this as the Achilles’ heel of our energy system, or economic system in general, we have three major recommendations to our governments, as you will see, and the others, in our book. The first one is increasing the current efficiency standards in the U.S., in the EU as well, including China. But I should tell you that China is much more active in increasing energy efficiency standards than some other big countries in the OECD region.

The second one is the flex fuels, as you mentioned, and new cars and new car designs. And this may well be done in cooperation with the car manufacturers. There are examples here within the EU. And we believe that—I didn’t have time to talk about cost a lot, but one dollar of additional expenditure in the transportation sector to save oil ends up with saving 2.4 dollars of oil import bill of that given country. So why we need governments, among other reasons, in the energy sector is the—this was the—(inaudible)—question, it was just I was—(inaudible)—complete my sentence. (Laughter.) So this is the—they have to find ways to transform the savings on the supply side as an incentive on the demand side so that people go and buy the more expensive version of the flex cars, which can be more expensive, or they can have the producers in order to go at—go this more higher efficiency standard cars and the others. So this is the second option, the flex fuels and—(inaudible), and the first one was increasing efficiency.

The third one is biofuels. We have a special study on biofuels this year, and we think that the biofuels can play a significant role. But to put it in a more realistic context, we talk about biofuels all the time, but the current share of biofuels in the total global world consumption is less than 1 percent, as of today. And what we see in our—(word inaudible)—scenario, when there is so much push, support, coming from the EU, U.S. and elsewhere, it can come up 7 percent in the year 2030. But there are some also barriers in terms of biofuels, in terms of the arable land requirements. In the 1 percent case, you need arable land equal to the arable land of France. In the 7 percent, 2030, you will need, with the current technology, arable land which is equal to the current arable land of Australia, Japan, Korea and New Zealand all put together. So we had a big implication there, with implications, of course, on the agriculture sector as well. If there are no major technological breakthroughs there, such as—(word inaudible)—we may not be able to see major, let’s say, breakthroughs in the share of biofuels, and the first two are very important as well—efficiency and new car designs—together with biofuels. These are the three (policy ?) options.

MOUAWAD: Over there.

QUESTIONER: Helima Croft, Lehman Brothers. In terms of your recommendations, how much emphasis do you put on reducing fuel subsidies in the developing world in terms of curbing demand?

BIROL: In fact, this is one of the key issues we have done this year. We have looked country by country, and sector by sector, and fuel by fuel—(inaudible)—subsidies in developing countries. And the amount of subsidies developing countries pay, as of 2005, is $250 billion. It’s a huge subsidy. And just put it in a context, $250 billion is more or less the money they need, those countries, each year in order to finance their all electricity-related investments—meaning power plants, transmission, distribution lines.

So we are definitely in favor of the phasing out of subsidies in the developing countries, which would help those countries to reach to get better technologies in terms of energy use, therefore increasing their energy efficiency.

In China, India, other developing countries, there’s a big room for the increasing energy efficiency that will slow down the oil demand growth. And the phasing out of subsidies may be—should be one of the policies one could consider.

QUESTIONER: Hi. Li Lu from Himalaya Capital. Two questions. One, China is widely believed to be the major contributor for the sharp spike up of the oil price over the last few years. And yet, China has been growing more or less around 10 percent over the last 27, 28 years. Now, what happened in the last three years? Why the last three years all of a sudden it has such a dramatic impact on this spike up of the price?

Second question. Even at this price, 60 bucks or so, oil prices probably still just barely kept up with inflation over the last 30, 40 years, and that is in large part, I guess, due to the continuous technological improvement in both exploration and production. Now—(world inaudible)—alternative analysis—you stressed on the alternatives, partially, I guess, out of the concern for the climate change—but do you see any major change on the horizon in terms of the—you know, improvement in technology on the exploration and production that would really have a continuous impact, as it has done over the last 30 years?

Thanks.

BIROL: Thank you.

In terms of China, I wouldn’t agree with you or with the people who say that China is one of the key reasons for the high energy prices, high oil prices. I think there were at least three plus one reasons why we have high oil prices.

One of them is the—we didn’t have enough spare production capacity, and it was very important in the production side. Second, we didn’t have enough refinery capacity. Third, the demand was high, but China was a part of this growth in demand. And plus one is that we had some geopolitical events on top of these things come, and we had high prices.

When you look at China oil demand figures on a per capita basis, they are still very, very low. What happened in the last two, three years is the increase in the Chinese transportation sector, especially the vehicle ownership increase in exponential terms. Let me remind you that even today, even today, in China 13 persons out of 1,000 persons own a car, which compares with the U.S.—860 persons out of 1,000 persons own a car. So with the increasing income levels, with the increasing disposable income, one of the first things what the people do is, for convenience and for prestige reasons, to buy a car, which, in turn, fuels the growth in the oil demand. And when looking at the future, we expect this to continue.

And China is—in the year 2005, the number of cars manufactured in China was equal to the number of cars manufactured in Japan, a major car manufacturer. And today there are about 9 million cars in China, and we expect this to reach about 100 million, and the bulk of it coming from China. And what kind of technology, is the question here, what kind of technology it would be used there it will have implications for everybody.

But to blame China again for the oil demand growth, as it is the case in the CO2 emissions, would be unfair as China is growing and people need for mobility. In rich countries, we have two, three cars per family, and one person having a car in China would not be seen as too much.

The second one is on the question on technology. There we shouldn’t mix two things. There will be—as a result of high energy prices, there will be some improvement in the technology, using energy more efficiently, having some technological improvements. This is something. But to have some technological breakthroughs would change the game is something else. We expect the technological innovation, the improvement in the energy efficiency, energy use will grow and it will be better, but in the next 25 years, to see some major technological breakthroughs may be too optimistic.

There are two important technologies that one may keep an eye on to be on the safe side. One of them is—I mentioned on the—(word inaudible)—cellulosics in the biofuels sector, and the second one is carbon capture and storage in the coal-related power generation. Yes, with the high prices, efficiency and technological innovations will go apace and innovation will increase the energy efficiency, but no major surprises in the next 20 years with a big probability.

MOUAWAD: Let me just butt in here. On the one technology that you haven’t mentioned much—and you’ve been very careful about—is nuclear power. Can you give us your forecast and your view? You said in your presentation that given current policies, the share of nuclear power will go down. But there’s obviously a debate about changing current policies and increasing or going back to nuclear. What’s the picture there?

BIROL: Yeah. Thank you.

In the nuclear power, it is the first time that we made a special analysis on nuclear power. We first—the reason why we did it, many of our governments are very keen to have a second look at nuclear. You may have heard yesterday Mr. Tony Blair made a very strong statement in favor of building new nuclear power plants in the United Kingdom, and similar discussions are taking place in this country and different countries in Europe and elsewhere.

It is mainly driven by the security of gas supply reasons. And it was—one of the reasons why people started talk—think about nuclear power in Europe was mainly as a result of Mr. Putin’s wake-up call in the Russian-Ukraine dispute. The second one is the increasing energy prices. But in some countries, such as in the U.K., nuclear power is thought to be a major instrument against the CO2—increasing CO2 emissions, as it doesn’t emit any CO2 emissions—nuclear power.

We look at the generation costs of nuclear power vis-a-vis other sources of—energy sources, for example, gas, natural gas, and we have seen that the nuclear power makes perfect sense in terms of generation costs vis-a-vis natural gas and the others, in the absence of, again, a—(word inaudible)—tax or anything. Even if the natural gas prices would go 325 percent lower than what we have now, nuclear power proves to be a cost-effective solution. However, there are problems with nuclear power as well. This is the—(word inaudible)—of the energy sector, there are problems with everything. There is no major (bullet ?) here.

MOUAWAD: You can keep coming back every year, then.

BIROL: Exactly. With pleasure.

The question with the problem with the nuclear power is at least twofold. One of them is you need to find upfront investments, which are very, very hard. A medium-size nuclear power plan is about $3.5 billion. And in a deregulated market, liberalized markets, to find this sum of money at once is rather challenging. Most of the nuclear power plants we have now—we have about 450 nuclear power plants worldwide—in the OECD countries, they were built when the markets were regulated. Governments decided this here and then they made—built the nuclear power plants. But now it has to compete with the others, and therefore, in the absence of the government support—this can be in any case—in any form, it seems a bit difficult that nuclear power fly in the OECD countries.

Of course, the second problem is, as we all know, in some countries there’s an issue of public acceptance for nuclear power; again, an issue that the government has to address.

MOUAWAD: Let’s go back—sorry—to the first the table, and then, we’ll jump back.

QUESTIONER: Hi. Richard Kauffman, Good Energies. So I’m in the renewable business. There’s another technology you haven’t mentioned either, which is solar. And under, arguably, pretty much existing technology it’s getting cheaper every year. So within a few years, even without feed-in tariffs it could be competitive, and I’m just wondering why you haven’t really dealt with that.

BIROL: We did deal with that, but we didn’t deal as much as the—more or less the share of solar energy, it is about—in the total energy mix, the total of solar power is roughly 2 percent. It is rather small. And it will go—as you said, it will go up very strongly mainly using the solar panels for heating, for preparation of the hot water, and even in developing countries, especially in North Africa and elsewhere. And in terms of the growth rates, they are growing very strong. But since they are coming from a very low base, they will not make a major change in the global picture.

In order for the solar to make a major change in the electricity sector in terms of electricity generation, the cost needs to come down substantially, or we would need strong government subsidies. And these are the two reasons. Otherwise, costs wouldn’t allow to make the solar a bigger share than we have foreseen. For example, we see five times increase in the share of solar between now and 2030. It’s a huge increase, but still it would be 1 percent in 2030, compared to 0.2 percent today.

MOUAWAD: We have some people in the back. Over there, please.

QUESTIONER: Hi. Thanks. Adam Wolfensohn. There’s a growing consensus, I think, among climatologists that a number of 70 percent reduction in CO2 emissions by 2050 is what’s necessary to stabilize the climate. Is the alternative policy scenario compatible with that goal?

Thanks.

BIROL: Well, there are many consensus in the climate business, but some of these consensus are not in line with the consensus with the others.

But what I can tell is that our alternative scenario is in line with a concentration trend which is 480 PPM, which is very much in line with the IPCC stabilization scenario. So we are on the safe side if we wish to have that scenario.

MOUAWAD: Here, and then, we’ll come—

QUESTIONER: Karen Monaghan, the Council on Foreign Relations. What’s the IEA’s perspective on the peak oil debate? And how—if it’s plausible, in terms of Saudi Arabia, how would that change the reference scenario?

BIROL: The—there are people who say that of course, as you mentioned, we have already reached the peak oil; we are—now global oil production is peaking. And there are people who are saying that we have no problems several years to come in terms of oil production worldwide.

We are somewhere in between, which is safer. We—for two reasons. One, in terms of production, in terms of the numbers, we think non-OPEC production will peak within the next 10 years of time. From Gulf of Mexico, from North Sea, Brazil, Russia—(inaudible)—all of them together, they are going to peak. And the—it will—the—we will be relying more and more on the key OPEC producers, which is of course a fact that I have tried to underline all the time.

And the second one, which is, I think, more important, I believe, even though we have enough oil, with the OPEC and everything seen globally, in geological terms, this is far from being—giving a comfortable message. This is—I think the main stories here is not the geological availability of oil. The main story’s here whether or not the oil in the key Middle East countries will ever see the light of the day and come to the pump station in Beijing, Shanghai, New York or Paris and so—there are formidable barriers between the production and the investment and the consumption.

I believe we have enough oil, but the problem is the issue of investments, whether or not the investments will take place in this very few number of countries and make the production increase as much as the world demands from them. This is the key question (related on ?) the geological availability of oil itself.

MOUAWAD: We have more questions in the middle.

QUESTIONER: Hi. Kristi Jones from J.P. Morgan. One constraint you didn’t mention and I don’t know if you—in your opinion, it is a constraint—on the availability of oil from two of the three main suppliers you’ve cited as key in the next—in the upcoming decades are—is the increasing oil demand from Iran and Saudi Arabia themselves. We’ve been seeing it from your figures, above the 6—you know, above 5 percent demand growth in those countries. And have you sort of put that into your projections? And how do you see that affecting their ability to supply oil?

BIROL: That’s completely true. The oil demand—we always look at China and India, but Saudi Arabia, Iran—their domestic oil demand is growing substantially, mainly as a result of three factors. A, as a result of higher prices, the economy’s booming, and the growing economy pushes the oil demand. And the second one is that they have a huge population growth. It also increases the oil demand growth. And the third one—I was—the colleague over there asked the question—the subsidies in Iran and the—one liter of oil is about 5 cents or something—How do you call it here?—oil 5 cents per liter. So it’s very, very cheap.

MOUAWAD: That’s 20 cents a gallon.

BIROL: Twenty cents a gallon. Okay. This is the right formulation here.

So this is—as a result of these three reasons, oil demand in Saudi Arabia and Iran and elsewhere in the producing countries are increasing substantially. And this is also one of the reasons why we think the oil demand in developing countries is generally becoming very strong here.

Perhaps a fourth point, on Russia, here—again, talk about subsidies—again, putting things in the context, you may have heard that the International Energy Agency is very worried about whether or not the investment in Russian gas sector is going to be made in a timely manner and bring the gas to the markets in line with their plans. And just without commenting on that and looking at the subsidies, the amount of subsidies, domestic gas subsidies, the— Russia has today is about twice the upstream gas investments Russia has to make, just to make a point.

MOUAWAD: Let—well, let me press you a little bit on Russia, then—

BIROL: Thank you.

MOUAWAD:—and natural gas. You mentioned that the bulk of natural gas reserves are in three countries: Russia, Iran and Qatar. And you also mentioned last Christmas’s events, when Mr. Putin used natural gas as perhaps leverage. How worried is the IEA of the political smartness of giving Mr. Putin even more investments to develop his natural gas resources?

BIROL: Russia is a very important energy country, energy-rich country, and we have to acknowledge that. They have a lot of oil, gas, coal, uranium. And we need Russia. The world needs Russia, Russia’s energy, and access to Russian energy and bringing this energy to the rest of the world would be very good news for the economic development and (world ?) of the humanity.

However, what we have seen in the Russia-Ukraine dispute and now in the Russia-Georgia discussions, that the—we have been reminded that the security of gas supply is a key issue. And this security of gas supply has two, of course, dimensions here.

The first one is what we are seeing are governments and others—is that perhaps it may not be a bad idea to have several countries to import gas, with diversification there, and the second, diversify your power generation mix—not only gas, but look at the renewables, look at nuclear, look at the hydro, this and that, just to give a suggestion there. This is the first.

The second one, however— Russia has expansion plans for gas to Europe, to—even to Asia and so on. We would like to see whether or not these expansion plans are in line with the investment plans. We are very worried, as we wrote in our book, that, for example, three major gas fields, the most important of them in the west of Siberia, are declining substantially—30 (percent ?) per year.

So in order to reach with the expansion plans Russia has, in order to—because everybody make their plans, according to gas coming from this country or that country—we would like to know whether or not enough investments are going to be made. And the recent Gazprom statement—they said that they will spend $13 billion per year, which is good news, increasing—stepping up of investments—but this is still lower than our estimated level of $17 billion per year.

MOUAWAD: Okay. We have five minutes left. We want to stop at 2:00, so I’ll take maybe three questions, and then you can answer them together.

One here, and then we’ll go all the way back.

QUESTIONER: Ralph Buultjens, New York University. Dr. Birol, you have outlined the alternative scenario which envisages governments following certain recommendations and steps that you have suggested. Looking at the universe of energy production today, are there any significant governments or significant countries which follow these recommendations? And could you tell us something about them?

MOUAWAD: One in the middle, please, and then one in the back. Maybe you can start answering.

BIROL: Okay. Should I answer now?

MOUAWAD: Yeah.

BIROL: Okay.

MOUAWAD: Oh—

QUESTIONER: I have an organizational question for you. I’m Harry Harding of Eurasia Group. Given the fact that so much of the increasing demand is coming from non-OECD countries and yet all members of the IEA are OECD countries, what are the prospects for either bringing large consumers and importers like India and China into the organization either as members or as some other form of participants?

MOUAWAD: I’m sorry. And one in the back. We’ll just take the last question, and we’ll put them all together.

QUESTIONER: Barack Obama just began to talk about climate change as a possible presidential candidate. We know that Al Gore just did his film, which may or may or not be PR for his possible race in 2008. But how do you see these kind of issues juxtaposing with the kind of—and I know you’ve been talking about it throughout this whole entire talk, but I just wanted you to explore that question, the one of political will. There’s some talk about the need for a Manhattan-style project to deal with these kind of questions.

MOUAWAD: All right, thank you.

BIROL: Okay. Let me start with the first question. I think this is also a very key one.

Many governments—or let me put it this way—all of our governments—we have 26 governments—U.S., Canada, plus all European countries, Japan, Australia, New Zealand and Korea—I am, since—following these governmental energy public policy debates since 17 years, six years in OPEC, 11 years at the IEA—I see for the first time such a strong momentum in the IEA governments to put new policies in place. I am by nature an optimistic person, as our previous executive director, Mr. Priddle would know. I believe that there will be a move in the IEA governments, but driven for different reasons.

Some governments are driven by the energy security reasons. This is the main reason for them—why they want to change. For example, the discussion within Washington, I believe, to increase vehicle fuel efficiency is mainly driven by the security of oil supply issue. (Inaudible)—yesterday’s intervention on the nuclear power is mainly driven by the climate change (vis-a-vis ?) CO2 emissions. Within the commission and within the EU, if they push for biofuels, they are pushing it both for security of oil supply and the climate change reasons. But high energy prices give additional impetus to them.

If I have to rank the countries in general, I would—unfortunately would put a non-OECD, non-IEA country at the top of the list, which is China. China is much more active, vigilant and dynamic to consider and policies in place—and less rhetoric and more action. I will put China, followed by some European countries. And of course, Japan is a very important country in terms of the efficiency improvements in that respect.

The second question?

MOUAWAD: Very quickly. In 10 seconds, the second question was the consumer-producer dialogue and whether it’s going to be more than a dialogue.

BIROL: Exactly.

MOUAWAD: And the third one is about leadership. You’ve addressed that a little bit in your first answer.

BIROL: Yeah, yeah. The second—the consumer-producer dialogue is continuing. We are having very good and nice discussions with our OPEC colleagues, with colleagues from the producing countries, and of course, this dialogue helps to understand each other. And we will see how the relationship with the other (consuming ?) nations go, especially with China and India here. We are very keen to improve our existing very good relationships with China as with India. We may see very soon that we are going to get closer and closer with them in that—in this or that format in the very near future.

In terms of the leadership question, I think we need people to change the game. It is the—we do not need only the research; we do not need only recommendations, but we need people to implement—or political will to implement them. I think the political will of the governments are key, and if the IEA governments— U.S., European governments, Japan; these are the big players—if they cannot take the lead, I don’t think that this major change will ever happen.

Specifically on the climate change issue, in the absence of U.S., China and India, any solution we are thinking to implement this or that way, any a paper we can make here will have almost negligible effect in terms of the real life. This is—I think I will stop there.

MOUAWAD: Okay. Well, hopefully on this optimistic note—I’m not so sure—(laughter)—please join me in thanking Dr. Faith Birol. (Applause.)

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