The global energy scenario has been impacted over the past few years by two very different phenomena: on the one hand, the gradual energy transition towards renewable energies and, on the other, the unexpected COVID-19 pandemic. However, both issues have been linked together in the short term due to the post-pandemic economic recovery and accelerated technological change.
As a result of the SARS-Cov2 outbreak in 2020, the International Energy Agency forecast an annual oil demand growth of 0.5% on average. These were the crude oil behavior expectations according to the top global producers, since short- and long-term elasticities are highly insensitive to price changes. In other words, even though a scenario of lower global demand for crude was predicted –attributable in part to clean or alternative energies–, oil demand was not expected to deviate significantly from its trend.
In this way, global consumption of primary energy –made up of crude oil, natural gas and coal– would reach its peak between 2025 and 2040. On the other hand, renewable energies would triple by 2050 with increasingly lower costs (kilowatt-hour), according to the consulting firm McKinsey (Global Energy Perspective 2022).
The constant, gradual decrease in the production cost of energy from non-fossil sources, together with the exponential technological change expected by 2050, would deal the final blow to the “oil age.” However, it is not yet clear how far away we are from that date.
Global oil demand will undoubtedly continue to increase until 2050, if we take into account population growth and the needs of emerging countries. Demand will continue to grow owing to the lack of alternative fuels for land, air and/or petrochemical transport. However, this growth will slow down in favor of renewable energies and natural gas. Engines and operating systems will become increasingly efficient, while population growth will fall, affecting consumption levels.
If we observe the annual time series over the period 1980-2022 for the world’s 20 biggest oil exporters –who control more than 80% of the planet’s total production– we can simulate the behavior of fossil and non-fossil energies towards 2050. The procedure used for this popular science article is a dynamic optimization game with Monte Carlo simulation.
Specifically, the variables used for each country are oil demand, oil supply and production, the demand for alternative energies (non-fossil), the average cost per barrel of oil equivalent, Gross Domestic Product, population, and the corresponding reference interest rates.
The set of estimates produced demonstrated that as time goes by towards 2050, the positive relationship between economic growth and oil production decreases. For emerging countries, this relationship seems to be fading away.
This statement is based on the available data and assuming that energy policies will not undergo any drastic changes in the future. This result can be explained in part by the fact that, although there will be an additional almost 1.8 billion people in the urban areas of developing economies by the end of 2050, technological change in energy production and consumption efficiency will reduce the initially projected demand.
Furthermore, given the dynamic game and Monte Carlo simulation, both energy consumption and production are expected to come from developing economies, with China and India leading the way. Remember that, at the beginning of the 21st century, Europe and North America accounted for more than 40% of the world’s energy demand, while the figure for the developing economies in Asia was approximately 20%.
By the second half of the 21st century, this situation will be completely reversed, as Asia is expected to account for half of the projected growth in global natural gas demand, 60% of the increase in wind and solar PV energy, more than 80% of the growth from oil and over 100% from coal and nuclear power. The expectations of the International Energy Agency qualitatively coincide with the data shown by the dynamic programming model regarding Asian countries for 2050 and beyond. This means that the weight of alternative energies in global energy production will gradually displace oil as the main actor, thereby diminishing its relationship with economic growth.
However, this does not mean that we should forget about oil. This resource will continue to be an important energy source for the world, since it will be used as an input for electricity generation and for the production of plastics and other essential petrochemical derivatives for the modern world for many years to come, especially in the poorest countries. International energy trade flows increasingly point towards the Middle East, Russia, Canada, Brazil and the United States, where the oil and gas trade will also prevail for a few decades beyond 2050, according to 2022 figures from the International Energy Agency and the World Bank.
In this context, electricity will be the key player, since its share of global consumption is close to 20% and is expected to increase even more. Support policies and lower technology costs have driven the use of renewable energy sources, placing the electricity sector at the forefront of the quest to reduce emissions. In this regard, the growing demand for electricity in emerging countries is expected to be met through energy portfolios, where oil is a relevant, but not a determining, factor.
In addition, alternative energy sources, such as solar energy, will play a major role in the global energy supply, contributing to the gradual decline in the relationship between oil production and economic growth.
* The content of this article is based on a chapter we authored on economic growth and oil production in emerging countries towards the year 2050, included in the book Data Analytics Applications in Emerging Markets (Springer 2022).
The authors are EGADE Business School graduates and research professors in the Faculty of Economics and Business, Universidad Anáhuac México.