New decade will reshape patterns of energy usage

As the US baseball star Yogi Berra observed, it's tough to make predictions, especially about the future.

As the US baseball star Yogi Berra observed, it's tough to make predictions, especially about the future. Nowhere does this apply more than in the world of energy, where finely balanced markets and long timescales collide with volatile politics and economies. The next decade will be shaped by the continuation of trends from the Noughties. Superimposed on this is the reversal of cycles that some forecasters mistakenly took as unstoppable. And the usual random surprises will occur. Some of these will be temporary shocks; others may radically alter the underlying picture.

Some of the energy trends of the Teens are simple extrapolations of what happened in the first decade of the millennium. A key factor will be the performance of the world economy - anywhere from a further lurch into the abyss, through stagnation or tepid recovery, to a strong revival. Developing countries, particularly in Asia, will maintain their energy-hungry phase of growth and national oil companies will continue to provoke ill-conceived western anxiety by snapping up overseas assets.

Exhaustive negotiations will gradually toughen global climate policy and alternative energy sources will grow quickly, albeit from a small base. Some trends, though, are due for reversal. The Noughties saw high energy prices, tight supply and a resurgence of state control. The Teens may be rather different. China's growth, for instance, is unlikely to follow the smoothly rising curve beloved by forecasters. As wittily remarked by the economist Michael Wolf, China behaves as though the Earth can run a financial surplus with Mars.

Since Chinese exports cannot rise if consumers cannot afford them, we need a rebalancing of global trade. Alternatively, the Chinese juggernaut may be derailed by political unrest or a bursting property bubble. Such scenarios could undermine the bullish case on energy and commodities generally. Gas - cheap, fast-growing and relatively clean - will go through cyclical booms and slumps, but is essentially abundant. "Unconventional" gas from shales and coal will become significant in Europe and perhaps Asia.

Oil is in shorter supply, as demonstrated by OPEC's rapid success in restoring prices despite the global downturn. Years of underinvestment have still to be fully reversed and output remains vulnerable to political upsets. Maturing fields require continuing technological advances to satisfy a robust renewal of world growth. Yet the oil markets that overheated in 2008 seem likely to remain cooler in the Teens. Demand in developed countries may well be in permanent decline. A reduction in unsustainable petroleum subsidies in China, India and the Middle East would spur efficiency gains.

On the supply side, Iraq is poised for dramatic growth in crude output - security, politics and infrastructure permitting. This will collide with the recent reappearance of OPEC spare capacity, and strong gains in non-OPEC countries such as Brazil, Kazakhstan, Canada and emerging African players. Towards 2020, major new provinces might begin to take shape, for instance in Greenland, deepwater Mexico, the Falkland Islands, the eastern Mediterranean or east Africa.

A sustained period of lower oil prices takes some of the heat out of "resource nationalism". As in the 1990s, major exporters will be forced to trim budgets, invite foreign investment, improve on half-hearted diversification attempts, and perhaps introduce competition or partially privatise national oil companies. Yet state capitalism's political and institutional drivers may, at least for a while, outweigh its economic drawbacks.

Then there are the unpredictable, disruptive shocks. These have to be extreme to significantly shift the gigantic, sluggish energy economy's long-term trajectory. In a curious oxymoron, Iran is the obvious source of a surprise. We do know that Iran is going to matter for energy markets in the Teens, but we don't know how its complex politics will play out. The internal crisis of regime legitimacy is entwined with the external dispute over the nuclear programme and, more broadly, Iran's role in the Middle East.

Resolution of these twin conflicts determines the destiny of Iran's vast oil and gas resources. Their development may continue to be frozen. Exports might be interrupted by anarchy and instability, or a worsening conflict in the Gulf that embroils neighbouring states, particularly Iraq. More optimistically, Iran may open up to investment and engage constructively with the rest of the world. Other obvious hot spots such as Venezuela, the Caucasus, Yemen and Nigeria are also candidates for energy disruptions, although these seem likely to be relatively short-lived or of limited impact.

A wider Middle East struggle, or confrontation between China and the US, is more far-fetched but potentially much more damaging. Lower energy prices may encourage conflict by straining some regional economies. The unpredictable commercialisation of new energy technologies is capable of setting us on a new energy track entirely. Possible contenders are many: biofuels made from waste vegetation or algae; cheap mini-nuclear reactors; inexpensive solar power; competitive hybrid or electric vehicles; synthetic oil from shales, gas and coal; and cost-effective carbon sequestration.

The energy economy turns around slowly, but is almost unstoppable once set on a new course. It is inconceivable that the turmoil of the Noughties will not reshape energy in the Teens. As Yogi Berra also reminded us: "The future ain't what it used to be." Robin M Mills is a Dubai-based energy economist, and author of The Myth of the Oil Crisis (Praeger, 2008). @Email:robin@oilcrisismyth.com

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