As chief economist of the International Energy Agency, Laszlo Varro develops and provides the energy economics insights that inform the agency’s extensive policy and security analyses.
In 2017, he is looking at the impact of low prices on oil demand, China’s burgeoning middle class and its financial ability to travel, and the development of more efficient internal combustion engines as reference points for what the future of energy consumption looks like.
On his first trip to Vancouver, he spoke with Business in Vancouver reporter Hayley Woodin about global energy market trends, and where they’ll take Canada.
Where does the global energy market find itself today?
The energy system is at the beginning of a deep transformation, but we are not yet there. We now have had more than two years of stagnating carbon dioxide emissions globally, despite healthy GDP growth. Especially in the electricity system, we are now deploying enough wind and enough solar power globally to satisfy broadly half of electricity demand growth, and that’s the biggest component of electricity by far.
But at the same time, low energy prices had a very significant, positive stabilizing impact on oil demand. Last year global oil demand increased by 1.5 million bbls/d, and new electric cars capped oil demand growth only by 10,000.
So in the transportation sector, the transformation is still in a very, very early stage, and for industrial energy use — broad heavy industry — it is also in a very, very early stage.
Looking out 10, 20, 50 years — or longer if it takes longer — once this transformation is starting to wind down what does it look like? Are we not using fossil fuels anymore, or is it more of a balance and more of a shift toward, say, electric vehicles?
This very much depends on government policies. The policies that are currently being implemented by governments, they very significantly slow down the growth of the use of fossil fuels, but they don’t completely stop it. Specifically for vehicles, we think that even under the policies that are already implemented, the oil consumption associated with personal passenger cars will decline in the next 25 years.
Now this is a very high bar because we also think that the total number of cars globally will grow from the current 800 million to two billion, but the two billion cars will consume less oil than the 800 million today, because of the very rapid spread of electric cars and radical improvements in engine efficiency.
However we also think that in other sectors like aviation, heavy-duty trucking and long-distance shipping, there is still a very, very robust oil demand growth yet to come. Under the policies that are currently implemented by governments, we are not yet moving toward a generally low-carbon economy.
Certainly if you want to tackle climate change, then by around 2060 the energy system will have to be completely carbon-neutral.
When you talk about policies that could have a big global influence, China of course comes to mind, and in that country we are seeing quite a shift toward greener sources of energy, moving away from coal and toward renewable sources. Overall, how big of an impact do you see China having when it comes to influencing demand, price and consumption?
It’s an absolutely huge impact, because China is the biggest energy investor globally, and the biggest source of carbon dioxide emissions globally as well. There is a remarkable shift in China, which is very much driven by concerns over air pollution and concerns about climate change.
If you take the four big low-carbon energy sources — hydro power, nuclear power, wind power and solar power — China is the largest investor in all four of them by a very, very broad margin. The growth of these four low-carbon sources is so powerful that we think that Chinese coal demand has already peaked.
There will be seasonal fluctuations, but we think that Chinese coal consumption is now on a declining trend. And in the transportation sector as well, China has the biggest market for electric vehicles by a significant margin, and I should also add that China is also a rapidly growing exporter of low-carbon, clean-energy technologies. We estimated that last year, around six million people in Africa got their first electricity from [China].
Is the U.S. a bit of an energy wild card? We see China moving toward renewables and energy, and the U.S. not committing as strongly to Paris Agreement policies.
Renewable energy is doing really well in the United States. Wind and solar power investment is booming in the U.S. and if you take the geographical location, the majority of the renewable energy investment in the United States is taking place in Republican voting states. So the fundamentals of the U.S. energy system are looking quite good.
Where does all of this leave Canada and its position in the global energy market?
Canada has in this respect two faces, and you can look at Canada from two directions. One face of Canada is a country which is a significant energy user in itself. Canada has very high per capita energy consumption in international comparison. But also it’s a country which has a proactive, progressive climate policy, and it plays an important role in international energy diplomacy.
With hydropower potential, Canada is already as of today one of the biggest producers of renewable energy in the world. This is the domestic angle of Canada. The international angle of Canada is our country, which is abundant in oil and gas resources, it’s already a significant exporter and it has future significant potential as well.
Even under a strong climate policy and even under a fast penetration of electric cars, the world is going to continue to use significant quantities of oil and gas for a couple of decades. And some regions like Europe [are] going to have very significant gas imports, even under a strong climate policy, because European production is in an irreversible decline.
What about Canada’s capability of being a leader in LNG?
Currently there is an excess capacity of LNG. There have been two big LNG investment bases unfolding in the past five years. One is Australia; the other is the Gulf Coast of the United States. The Australian projects are large projects, in remote locations with some difficult project management experiences, whereas the American projects are brownfield locations using already existing infrastructure and they prove to be very, very competitive.
These two big investment bases have created excess supply of LNG in international markets, so LNG prices have declined by half in the past two or three years, a number of projects are struggling to generate an acceptable return for their shareholders, and, unsurprisingly, the potential big investors are taking a bit of time to assess the market situation and think very hard about which projects will be competitive and which projects [won’t]. So we foresee a significant decline of global LNG investment.
LNG projects have a long lead time from a regulatory and licensing point of view, but we also think that the decline of the European gas production and the increasing role of gas in the energy system of China — where gas is replacing coal in building heating and industrial energy use, contributing to emission reductions — the combination of the two will create a bright future for LNG.
We think that the current investment decline is only temporary, and there will be another wave of energy investment coming in the 2020s. Now Canada is certainly one of the strong potential candidates for this, but Canada is also facing competition because there are very large potential gas resources and very interesting project opportunities in Africa.
Our modelling and our analysis suggests that Canada will eventually emerge as a significant energy exporter, but it’s not going to be a very fast journey, and this will require some very careful project management by the Canadian players.