The International Energy Agency’s World Energy Outlook 2006

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[Editor’s Note: We don’t normally quote people who quote us, but Eric Fry, the editor of the U.S.-based Rude Awakening, did an excellent summary on the implications of International Energy Agency’s World Energy Outlook 2006, released earlier this week. We reproduce his report for your enjoyment below.]

The International Energy Agency’s World Energy Outlook 2006
By Eric J. Fry

“Dirty, insecure and expensive” are not merely the adjectives that describe most of your California editor’s past girlfriends; they are also the adjectives that the International Energy Agency (IEA) uses to describe the current state of the world energy market. “The energy future we are facing today is doomed to failure,” warns Claude Mandil, head of the IEA.

All hope is not lost, however, the IEA assures, provided that renewable energy sources furnish a growing share of the world’s energy needs.

Earlier this week, the International Energy Agency World Energy Outlook 2006 report was released, a highly regarded publication that provides a forward-looking analysis of the global energy markets. “You don’t have to read all 596 pages to understand the Outlook’s basic proposition,” explains Dan Denning, editor of the Australian Daily Reckoning “Demand for energy is growing. Supply is not.”

“Consider the facts,” Denning continues. “The IEA suggests that total world energy demand – driven largely by developing countries like India and China – will grow by 53% between now and 2030. How it arrives at this figure (why not 52%…or 54%?) we have no idea.

“The IEA projects crude oil demand to grow from the current 85 million barrels per day to 116 million barrels per day by 2030. Break out your slide rule and your pencil and you’ll quickly come to the conclusion that world oil production will have to increase by 37% between now and then to meet projected demand. Or, in absolute terms, the world will have to produce 32 million barrels per day more than it is currently producing.”

Even if such a dramatic increase in crude production were geologically feasible, the IEA’s Outlook implies that it would not be environmentally desirable.

“The energy future we are facing today, based on projections of current trends, is dirty, insecure and expensive,” the IEA’s Mandil asserts. “[But] government policies can create an alternative energy future which is clean, clever and competitive.”

Most members of the Democrat-controlled House of Representatives would agree. Indeed, the Republican governor of California would also agree. Gov. Schwarzenegger’s Environmental Action Plan intends to reduce California’s greenhouse gas emissions in 2020 to less than the levels produced in 1990.

Clearly, the imperative to develop alternative energy sources transcends political affiliations. It also transcends issues of national interest. The quest for viable alternatives to fossil fuels has become an issue of immediate INTERNATIONAL interest.

 

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And yet, alternative energy stocks attract almost no interest whatsoever. While the XOI Index of oil stocks has doubled since mid-2004, the Wilderhill Clean Energy Index has gone nowhere. Perhaps, therefore, alternative energy shares deserve a fresh look. We would hasten to mention that alternative energy stocks are not statistically cheap, generally speaking. But their revenues and earnings are growing rapidly…generally speaking.

Even before Tuesday’ election, alternative energy companies enjoyed a very promising future. The world’s heavy reliance on fossil fuels is already colliding with rigid planetary limitations. The planet cannot easily yield, for example, 116 millions barrels of oil per day. And even if it could, the planet cannot continue to absorb the ever-increasing amounts of greenhouse gas emissions that fossil fuel consumption produces.

“On current trends,” the IEA’s Mandil warns, “we are on course for an expensive and dirty energy system that will go from crisis to crisis. It can mean more supply disruptions, meteorological disasters or both. This energy future is not only unsustainable, but it is doomed to failure.”

We have often observed that the things that cannot continue, do not continue – bad marriages being the sole exception in the universe. The world’s current energy path is one of those things that simply cannot continue. Inevitably, therefore, alternative energy sources will provide a growing share of the world’s energy requirement, as the World Energy Outlook makes very clear.

According to the Outlook’s “Reference Scenario” – a baseline vision of how energy markets are likely to evolve without altering underlying energy trends, global carbon-dioxide (CO2) emissions would jump 55% by 2030. However, under the Outlook’s “Alternative Policy Scenario,” global carbon-dioxide emissions would fall about 16% by 2030. This scenario relies upon increased use of nuclear power and “renewables” to reduce fossil-fuel demand and emissions.

Unfortunately, scenarios are merely scenarios – not certain investment opportunities. Almost everyone would agree that a clean earth is better than a dirty earth. (My son would readily agree that a clean room is better than a dirty room). But that doesn’t mean that the earth – or my son’s bedroom – ever becomes any cleaner. Cleaning requires effort and effort requires an incentive.

The incentives have arrived.

$60 oil provides a major incentive to develop alternative energy sources. So does the fact that Chinese citizens are choking – literally – on the effluent of their own success. A Democrat-controlled Congress does not add any additional incentive, but it might add a catalyst to the mix.

All of these phenomena will drive interest and investment toward alternative energies…And all of these phenomena will continue to create long-term investment opportunities. The days of dirty, insecure and expensive energy are drawing to a close. Get ready for the new era.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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