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Energy prices poised to rise through 2040 as fossil fuels maintain importance

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Essential Energy Insights - September 17, 2020

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Energy prices poised to rise through 2040 as fossil fuels maintain importance

In spiteof the severe correction in the prices of crude oil and natural gas in the lasttwo years, experts believe that the markets will make a steady recovery in comingdecades as global demand will continue to grow.

In apresentation of the U.S. Energy Information Administration's 2016 InternationalEnergy Outlook, or IEO, on May 11, EIA administrator Adam Sieminski acknowledgedthat the agency is starting from a price deck that is below the level prevalentin the 2014 IEO but expects prices to rise out to 2040.

"Theneed for OPEC oil looks like it begins to accelerate after 2025 … and by 2040, westill need the big three producers in the Gulf area (Iran, Iraq and Saudi Arabia)to be suppliers into that market," Sieminski said. "Even in the aftermathof [the Paris climate agreement], our numbers suggest that the growth and need forpetroleum is still going to be strong. It's still really hard to compete with theenergy density that's in oil."

The EIAprojects that world energy consumption will increase 48% from 2012 through 2040,or about 1.4% per year. Non- Organisationof Economic Co-operation and Development, or OECD, Asia, including China and India,will account for more than half of the increase and industrial consumption willaccount for the largest share growth by consumer. Fossil fuels will continue tosupply more than three-fourths of world energy use in 2040.

Naturalgas use is anticipated to grow the fastest of all of the fossil fuels at 1.9% peryear and will overtake coal as the world's second largest energy source, with petroleumand other liquid fuels remaining in the top spot. Renewables will grow the fastestof all energy sources at 2.6% per year.

The roleof oil remaining a key source of energy was highlighted by Sieminski.

"Overthe course of the forecast period, growth in OPEC production is still going to beneeded, and in fact, OPEC supply accelerates in our model past 2025," Sieminskisaid. "So having production possibilities in the OPEC countries is still goingto be very important."

Outsideof OPEC, countries such as Brazil, Russia and Canada will remain important sourcesof supply. China is anticipated to become an increasingly important source of supplyby 2040, and the impediments to development of shale resources in the country werediscussed by John Staub, team lead for exploration and production analysis at theEIA.

"Infrastructureplays a large role in thinking about where shale development is going to happennext and where the possibilities are," Staub said. "A lot of the resourcesin China are fairly close to existing, traditional types of production of oil naturalgas."

The closeproximity to existing production is needed in terms of access to pipelines as wellas access to labor. Staub said moving crews from the U.S. for drilling boosts costssubstantially. He added that differences in the geology between China and the U.S.can increase costs because equipment breaks down more easily.

"There'sa lot of gas out there," Staub said. "But when you think about the opportunities,there will be more gas development globally."

The developmentof shale in the U.S. and the collapse in prices has helped lead to an easing ofthe export ban, but Sieminski said that there are limits based on pricing spreads.A similar view is held by many in the propanemarket.

"Ihave noticed that we've already peaked in the near-term anyway. We went from about50 Mbbl/d of oil going to Canada to close to 500 Mbbl/d, and that number is nowcoming down because the spreads have changed," Sieminski said. "The differencebetween Brent and West Texas Intermediate has narrowed and it's not as attractiveto export."

Sieminskisaid oil exports may become just like other tradable commodities in that exportstend to go to the nearest possible market that can use them. He cited exports toCanada as an example, but suggested that exports may not continue growing at strongrates in the near term.

"Nowthat the spreads have narrowed and now that oil prices are a little bit lower, whatwe're seeing is that U.S. production is slowing down, but U.S. petroleum demandis continuing to go up a little bit," Sieminski said. "So as a result,we're importing a little more oil so we don't have as much of a need to export."