Hamish McRae: Rather than promoting renewables we should be encouraging conservation

Economic Life: China uses nearly half the world's total coal output and has now become the world's largest energy consumer, with 20.3 per cent of the total
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The Independent Online

So Opec was unable to agree an increase in production quotas. That will not stop some of its members, notably Saudi Arabia, from pumping more if they want to, for quotas are more honoured in the breach than the observance: output is already running a couple of million barrels a day higher than specified. But the oil market remains tight, thanks in part to some recovery in demand from the developed world but particularly as a result of a surge from the emerging nations.

Click HERE to view graphic (86k jpg)

Some facts. Total energy demand rose by 5.6 per cent last year, the sharpest rise since 1973. Oil remains the largest single form of primary energy, with 33.6 per cent of the total, but that proportion has been falling steadily for more than a decade.

Coal is the next, with 29.6 per cent, its highest share since 1970, with China using nearly half the world's total of coal output.

China has now become the world's largest energy consumer, with 20.3 per cent of the total, against 19 per cent for the US. And Russia is for the second year running the world's largest oil producer, with nearly 13 per cent of global production, against 12 per cent for Saudi Arabia. This collection of data and much more comes from the latest Statistical Review of World Energy, published each year by BP. It is worth a close look because the hard numbers tell stories that are much more compelling than the rhetoric we get from the politicians and lobby groups. Here are half a dozen that strike me as most important.

The first is that oil is likely to remain reasonably expensive for the foreseeable future. The demand for energy is so great, and oil so convenient, that it is hard to see any other outcome. But just how expensive is expensive? The top graph showing the real price of oil since 1861 gives a decent perspective. As you can see, the present price is unusually high, far higher than any level it has sustained for the past 150 years. There are three peaks, in the 1860s, late 1970s and late 2000s, when it went up to present levels. But these really do seem aberrations. The price has always fallen back in the past. So anyone expecting prices to stay around or above the $100-a-barrel level has to ask themselves why things should be different this time.

The best answer is that oil is a finite resource, with lower reserves than gas or especially coal, and that demand for energy as a whole will continue to climb as a result of growth in China, India and the other emerging nations.

As noted above, China is already the world's largest energy consumer. India has become the fourth largest, after China, the US and Russia, having passed Japan. So out of the top four energy-consuming nations three are the so-called Brics. Brazil, by the way, uses more energy than France and a lot more than the UK. It is hard to see anything other than relentless growth in energy demand from the large emerging nations. If that is right prices may fall back a little but there must be a solid floor to oil prices, supported by this demand.

The second thing is the importance of gas. It is the fastest-rising of the three fossil fuels, with consumption up 7.4 per cent last year. In India demand was up more than 21 per cent. It may not be as convenient as oil. You cannot use it for aircraft and if you want to ship it around you either have to build a pipeline or turn it into liquid form. But that is happening, with more than 30 per cent of world gas trade now in liquefied natural gas.

Thought number three is the rising importance of Russian oil. A decade ago Russia produced only about two-thirds of the output of Saudi Arabia. It passed it in 2009 for the first time and is now increasing its lead. It is also the second-largest gas producer, with 18.4 per cent of output, against 19.3 per cent from the US. The squeeze on energy worldwide inevitably transfers power to Russia, with western Europe particularly vulnerable. It would be surprising if Russia did not seek to use that position of power in the coming years.

The next point is the way different regions use different types of fossil fuel. As you can see from the graph, Asia is particularly dependent on coal, using two-thirds of the world's total, while as you might expect the Middle East uses very little of it. Since Asia is becoming more and more important as a user of energy, coal will continue to be tremendously important. As noted above, its share of primary energy is the highest since 1970. (Chinese coal production was up 9 per cent last year.)

Flowing on from that, note how relatively unimportant nuclear power, hydro-power and renewables are in the overall mix. Hydro-power is really important only in Latin America. That is not to say that these forms of energy don't matter. But the growth of nuclear power had stalled even before the disaster at Fukushima and now looks at best to be a marginal source of energy.

And while hydro-power has been growing quite swiftly in recent years there are obvious physical limits to its deployment. Renewables are growing fast – actually they are proportionately the fastest-growing of all – but the base from which they start is so small that they cannot change the big picture. They have grown three-fold over the past decade but still make up only 1.8 per cent of the world's primary energy.

Finally, there has to be a greater effort at conservation. There has to be. Oil supplies may be tight but there are the two other fossil fuels in reasonable abundance, gas and coal, and these will drive the world economy for some time yet. But if the burden on the planet is to be contained, conservation will have to play a much greater role. Most people are pretty aware of both. But it is not until you go through the actual numbers that you can see the scale of the task ahead.

From a British or indeed a European perspective this is daunting. The UK has been reasonably active in the drive for renewables, but what we do is not material to the world mix. Germany is more important and we know that it will have to rely more on coal and gas, given the decision to abandon nuclear power. France, of course, has a huge nuclear programme but despite that it still consumes more oil than the UK. But given the global shift to the emerging world, what Europe does is not that important: it will not change the big numbers.

My own hope is that generally expensive energy will encourage everyone – businesses, individuals, farmers, governments – to apply good energy practice. It would be unrealistic to expect any swift change in the way the world economy uses energy but incremental advances are hugely important.

There is quite a lot of evidence that price mechanisms will reduce energy use more effectively than regulation, though the latter has an important part to play. So maybe the big message from the BP study is not so much that we should promote renewables but rather that we should promote conservation instead.