Given the unique role played by the energy sector in the global economy, the current recession makes it imperative to take stock of the major trends unfolding in the industry. Before the crisis, the sector seemed on the verge of a major restructuring, due to the combined impact of new sources of natural gas and mounting environmental concerns. The effects of the intervening global downturn, though yet to be fully gauged, are in any event set to be asymmetrical. On the one hand, lower (and sometimes even negative) rates of growth are helping some countries achieve reduction targets for harmful emissions, while on the other, debate on “clean energy” sources continues.
Still, three fossil fuels (oil, coal, and natural gas) account for 87% of global primary energy consumption. With nuclear power, such percentage rises to 92%. In particular, oil continues to be the lynchpin of the world’s energy system, holding the key to energy prices everywhere. In fact, oil prices have been very high in recent years, pulling up gas and coal prices as well. Consumers around the world would clearly benefit from lower oil prices that would help the global economy recover its strength. But, at present, lower prices seem unlikely because of the structure of the oil industry and specifically because of the economic rent enjoyed by the major oil producers. In such a dysfunctional oil market, prices are likely to be held high by overspending states while oil demand stumbles along.
In this framework, the most recent focus has been on accelerating the unfolding transitions from fossil fuels to renewable sources of energy. But energy transitions have historically required extended periods of development to gradually change the composition of sources used to generate heat, motion, and light. The most consequential global shift during the coming 20-40 years is likely to be not the rise of alternative energy but that of natural gas which is poised to become the world’s single most important fuel.
Specifically, shale gas is expected to play a key role in this picture. It rose from 1% of US domestic gas production in 2000 to over 20% in 2010, and it has been projected to account for 46% of the US gas supply by 2035. The key technologies enabling the “shale gas revolution”, namely horizontal drilling and hydraulic fracturing (fracking), have been met with strong opposition, especially in Europe. Apart from political concerns, the European geological features and high population density seem to undermine the scope of adoption for such extractive technologies in the Old Continent. As a consequence, the American economy will be placed at an advantage, but by lowering the global energy prices positive indirect effects of the “revolution” are likely to be felt beyond North America’s borders.
The shift in geopolitical balances that less dependence on (particularly Russian) oil inevitably entails is an issue that European political institutions can ill-afford to ignore. In the medium term, European countries are still caught between the need to boost growth (relying in part on secure and, if possible, reasonably-priced supplies), diversify energy sources, reduce harmful emissions, and remain competitive in leading sectors throughout the energy industry.
Although the benefits of an internal energy market are progressively materializing, there are challenges that should be tackled urgently in order to complete such market by 2014. The transition towards a sustainable, innovative, low-carbon and energy efficient European system by 2020 (and beyond) is at risk and it requires further significant progress on interconnecting the various national networks. Specifically, the creation of a genuinely trans-European energy infrastructure needs urgent investments. Public-private partnerships for the construction of infrastructure should be fostered, and new funding mechanisms enhancing the classical project financing schemes should be explored.