October 15, 2009
World production of fossil fuels-oil, coal, and natural gas-increased 2.9 percent in 2008 to reach 27.4 million tons of oil equivalent (Mtoe) per day.1 (See Figure 1.) In the first half of the year, producers strained to meet global demand, but when the recession took hold later in the year the market was swamped by excess supply. Energy prices reflected this shift: oil peaked at $144 per barrel in July, then fell to $34 per barrel in December.2 Continuing a decade-long trend, most of the growth was in the Asia-Pacific region, where production grew 6.3 percent.3 (See Figure 2.)
Although the global economic crisis has caused a temporary slump in demand, the longterm trend is clear: fossil fuel consumption in developing countries has surpassed that in industrialized countries. With four times the population and a vast demand for economic development to raise standards of living, developing countries will see energy use rise further.4
For six years running, coal has led the growth in fossil fuel production. In 2000, it provided just 28 percent of the world's fossil fuel energy production, compared with 45 percent for oil. But by 2008, coal production reached 9.1 Mtoe per day, representing a third of fossil energy production and a 0.7 percent increase over 2007.5 The growth in China's coal consumption since 2000 dwarfs that of all other countries combined. India, second in growth, added less than an eighth as much coal consumption as China during that period.6 (See Figure 3.)
Globally, the largest share of coal production is for electricity generation.7 Larger capacities and better materials have led to higher efficiencies at coal-fired power plants, particularly in China. China aims to reduce the energy intensity of its economy by 20 percent during the 2006-10 planning period, in part by improving power-plant efficiency by 4 percent.8 Industry data suggest that this goal was already surpassed in 2007.9 In the United States, the construction of new coal-fired power plants has been discouraged by expectations of greenhouse gas regulations, as well as factors such as materials costs and public opposition.10
Despite marginal improvements in utilization efficiency, coal continues to be the most polluting fossil fuel. U.S. coal-fired plants with generators installed after 2000 emit the air pollutants nitrogen oxides and sulfur dioxide at 9 and 90 times the rate of new gas-fired plants, respectively.11 These coal plants emit carbon at more than twice the rate of new gas plants.12 Carbon capture and storage (CCS) has yet to be demonstrated at a commercial scale for coal power, although the U.S. Department of Energy is spending nearly $14 million to determine if it should invest more than $1 billion to complete a CCS demonstration project called FutureGen.13
Oil production reached 10.7 Mtoe per day in 2008, representing 39 percent of fossil energy production and slightly above the level in 2006, the next-highest production year.14 Oil's slowing momentum coincides with the high oil prices that have been in place since 2004, which hit an all-time high (measured in inflation-adjusted dollars) in July 2008.15 World oil production outside the Persian Gulf region has been roughly flat since 2005, with increases in countries such as Brazil and Angola offset by declines in the United States, the North Sea, and Mexico.16
The ratio of proved oil reserves to annual production has held steady at roughly 40:1 for more than 20 years, but the remaining reserves are increasingly concentrated in more politically and technically challenging terrain.17 Most of these reserves are in countries where state-owned companies control the resource (such as Russia and Saudi Arabia) or where political instability increases the investment risk (such as Nigeria and Venezuela).18 Even the Arctic, now seen as a potentially large store of oil resources, has a history of conflicting national claims to ownership that portends a contentious future for production.19
The less politically risky deposits present formidable technical challenges. The deep ocean, oil shales, and oil sands are all potentially major sources of future oil production, but these are often expensive to access and their development may significantly increase the environmental costs of fossil fuel use.20 For example, well-to-wheels greenhouse gas emissions from oil sands in Alberta, Canada, are estimated to be 5-15 percent higher than emissions from conventional oil reservoirs.21 Nonetheless, high oil prices pushed production from the Canadian oil sands to 1.2 million barrels per day (Mbpd) in 2008, up from 1.0 Mbpd in 2005.22
As oil prices neared their peak in mid-2008, consumption by industrialized countries fell by about 1 percent from one year before.23 Economic turmoil dragged demand still lower later in the year, and the average industrial-country consumption for 2008 was 47.5 Mbpd, 3.5 percent below the 2007 level, with even sharper declines in the first half of 2009.24 In contrast, developing-world demand increased by 1.4 Mbpd to 38.7 Mbpd, driven by rising transportation energy needs and government fuel subsidies that softened the pain of higher prices.25 This growth offset much of the industrial-country decline, and global oil consumption ended only 0.3-0.6 percent lower than in 2007.26
Natural gas production has maintained a 27-28 percent share of fossil energy production since 2000.27 Total gas production grew 3.8 percent in 2008 to reach 7.6 Mtoe per day.28 High gas prices have spurred exploration and development, especially in the United States, which provided 19 percent of global gas production in 2008.29 At the height of the 2008 market, nearly 1,600 rigs were drilling gas wells in the country.30 (See Figure 4.) Although drilling activity plummeted as the gas price declined, the industry's success in commercializing production from "unconventional" sources such as coal deposits, tight sands, and especially shale rock, has sharply increased reserve estimates and led to a major upward revision in the forecast for future U.S. gas production.31
Countries that are seeking to reduce greenhouse gas emissions have increased their share of natural gas in electricity production, due primarily to the high energy-to-carbon ratio of gas relative to coal. The European Union's (EU) cap-and-trade system, which effectively puts a price on carbon emissions, caused the traditionally low cost of coal generation to exceed that of gas for much of 2008.32 This trend has continued into 2009, even though the per-ton price of carbon dioxide has declined.33 In the United States, sharp declines in the price of natural gas in 2009 allowed gas-fired power generation to rise slightly while coal-fired generation plummeted 13 percent in response to lower electricity demand, pushing carbon emissions down sharply.34
The shift toward gas-fired generation under the EU cap-and-trade system demonstrates how policies that force the externalities of fossil fuel use to be reflected in market prices can reshape energy markets. The slip in industrial-country demand as oil prices reached record levels in 2008 also indicated that conservation and improved efficiency are real options for reducing fossil fuel dependence-a fact highlighted by the recent U.S. move to increase vehicle efficiency by roughly one third over the next seven years.35
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