The Energy Transition in Emerging Markets. Part 2

Assuming current trends, the global annual growth rate of consumption of primary energy will nearly double this coming decade to 1.9%, compared to 1% over the past decade. This is solely because the slow-growing economies of the OECD, with high levels of per capita energy consumption but stagnant or declining growth in demand, are being supplanted by higher-growing emerging economies with very low per capita consumption levels.

A similar scenario can be painted for the growth of oil liquids oil and gas consumption. Since 2013, the emerging world, led by China and India, has consumed more oil and gas than the OECD countries. As shown in the chart below based on data from the Energy Institute Statistical Review, in 2022, non-OECD economies consumed 53% of global oil and gas production. Based on current trends,? this will reach nearly 60% over the next decade. Total demand for oil liquids can be expected to grow by 12 million barrels/day over the next decade to 112.5 million b/d. All of this increase will come from non-OECD economies, led by India, China, and Africa.

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The transition to new forms of energy has always been slow and arduous, with the innovative fuel taking share by capturing marginal demand increases. We can see this in the chart below from Our World In Data. In all these transitions, the early adopters were the richest countries. Important transition fuels like hydropower and nuclear have stagnated because of high costs of adoption and political barriers. The same is happening today with coal and oil demand continuing to rise in developing countries where renewables are a costly alternative compared to coal and oil.

The scenario for coal consumption is worrisome, if CO2 emissions are the concern. Non-OECD countries already represent 82% of coal consumption. For leading consumers, China, India, and Indonesia, coal is by far the most abundant and cheapest fuel for generating electricity, and annual consumption is expected to continue growing at the trend of the past decade, 0.9%, 4%, and 9%, respectively.

The transition to green fuels in emerging countries is made difficult by the political commitment to industrialization. While in developed countries, about a third of primary energy consumption is committed to electricity generation and more room exists to substitute electricity for transportation and residential purposes, in Asia and the Middle-East, industry, much of it fueled by oil liquids, makes up half of primary demand. For example, India, following the path of China and the petro-states of the Middle-East, is becoming a major global player in petrochemicals, using Russian and Persian Gulf feedstocks.

The difficulty of reducing CO2 emissions to address concerns with global warming can be illustrated by the example of the United States. Despite conservation efforts and the deployment of wind and solar, the consumption of liquid hydrocarbons has grown its share of U.S. primary energy consumption over the past decade and is at the same level as in 1980. This is because gas has replaced coal for generating electricity. In terms of “clean” energies, nuclear output has been frozen since the mid-1990s while renewables have doubled their share to 13.5% since 2000. This evolution is shown in the chart below.

The exceptionally low cost of gas in the US and the low cost of capital, particularly over the past 15 years, has enabled a relatively smooth and affordable transition to cleaner fuels. Unfortunately, other countries don’t have this luxury. Except for France, which has embraced nuclear, in Europe, the transition is proving exceedingly costly and further undermining competitiveness. After decades of complacency, the cost of “green” politics has now become a big political issue in Germany.

Though China is highly committed to nuclear, it generates only 3% of its energy demand from this source. Also, despite massive political support for renewables, it meets only 13% of its demand from solar and wind, about the same as the US.

Other emerging markets do not have the financial or organizational capacity to follow China’s path because of much higher capital costs and the lack of local suppliers. These countries will find the transition to renewables prohibitively expensive unless prices for solar generation fall much further or the rich countries of the world hand out massive subsidies.

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