Global energy scenarios to 2035

Global energy is and always has been, highly controversial, particularly since the world’s conversion from locally supplied coal in the 1950s, to  dependence on oil from the Gulf.  The shift occurred swiftly .  Changes in U.S. tax incentives in 1958 encouraged the oil majors to increase their liftings from the oil-rich region of the Gulf and the Middle East. In Europe, the port at Rotterdam became the hub of tanker traffic for imported oil as a main energy source. Primary energy imports to Europe in the 1960s rose by a multiple of four, displacing indigenous coal resources. Consumer prices were kept low, through the oligopolistic structure of the oil market, dominated by the seven major Anglo, Dutch and U.S.companies, with extensive downstream facilities in Europe.

A number of consequences flowed from these events. Cheap oil stoked world growth. The conversion to oil extended the dollar’s primacy, as the key commodity currency. In 1960, oil-producing countries in the Middle East, Africa and Latin America, created the Organisation of Petroleum Exporting Countries (OPEC) with the aim of gaining control over production and pricing policies. Arab nationalists sought  support from the Soviet Union in their struggle against Israel. With Iran and Libya pushing for high oil prices, President Nixon in August 1971 announced the end of the dollar’s convertibility to gold. The measure launched the world on the dollar paper standard, and was followed by the 1973 Arab Israeli conflict , the outcome of which confirmed US predominance in the Mediterranean, the Middle East and the Gulf. Throughout the turbulent events of the coming decades, the U.S. remained the world’s prime power, with its finger firmly on the oil well of the world in Saudi Arabia,  and as the royal family’s ultimate protector.

How then is the global energy scene likely to develop in the coming decades? What follows is based in part on the publications from the International Energy Agency; the World Energy Council, and BP. Energy has indeed always been about the world economy; about national economic policy; about very divergent capabilities between states to pay for energy imports; about the development of technologies for exploration and extraction, as well as for alternative technologies to reduce dependence on Gulf supplies; and not least about global geopolitics. We will look first at the prognosis; and then at some key scenarios.

 The present global energy system.

Over the last quarter of a century, the part played by fossil fuels in the overall global energy mix has continued to rise. The biggest surge has been in coal, with the largest rise inconsumption being registered in mainland China. The Mid East and Gulf countries have retained their position as the swing suppliers to the world markets of oil, and this position is about to be reinforced by the re entry of Iraq as a major source.  The main natural gas suppliers are North America and Russia, with the North Sea beginning to reduce its output. In nuclear energy, the big four are the U.S., France, China and Russia, while Europe is the main source of renewables. But as may be seen in the following graph, the contribution of renewables in the global energy mix is marginal. Fossil fuels are also the number 1 provider to industry, transport, buildings and electricity, and the number 1 emitter of greenhouse gases. The dominant players in the global energy scene are China; the US; the EU; and Japan. The dominant suppliers are: the Mid East and Gulf; Russia and Canada.

But if the pattern of reliance on fossil fuels has continued as before, there have been some notable changes that have greatly modified the global scene. These may be listed under 6 headings:

1.The centre of gravity in the global energy system is shifting to Asia. The reason for this is China’s emergence as the world’s No 1 energy consumer. China accounts for 68% of world coal consumed; 17.7% of world oil and 4.7% of world natural gas. Beijing is expanding nuclear capacity from 16 to 41 reactors by 2020, and renewables are growing at a rate of 25%. China’s energy imports are rising, accounting in 2013 to 13% of total consumption. China’s coal imports represent 18%  of the global total, while oil dependency is 55% of domestic consumption. Given these figures, it is scarcely surprising that China emits 25% of global greenhouse gases. The main reason is the heavy reliance of China on domestic coal production and consumption. But there is a heavy health cost paid by Chinese people for this reliance on local coal: the IBRD considers that the total per annum environmental degradation is equivalent to 9% of gross national income. This includes the damage done to water resources: acid rains impact 10% of the China landmass, and in particular, effect 468 cities-a major challenge to local governments across the vast country.

2.The United States is the largest economy and energy user in the world. For over three decades from the 1970s on, the US became more dependent on oil imports from abroad. This trend began to move into reverse in 2005. In that year, the Energy Policy Act set new directions, emphasizing greater security of supply and finding solutions largely through technology. Canada is by far the largest oil supplier to the US, followed by Saudi Arabia as a distant second. Last year, in 2012, 40% of oil consumed by the US was imported, representing the lowest level since 1991. As a major nuclear energy power, the US derives 20% of its electricity from nuclear sources. But the major reason for the resurgence of domestic energy supplies in the US is due to the growth in local, oil, gas and shale resources. The US is heading to replace Saudi Arabia as the world’s prime oil producer, while investing heavily in fuel efficiency.

3.Russia is a major player in global energy policy. It is the third largest oil producer, and the second largest gas producer in the world. Oil and gas revenues account for over 50% of federal budget revenues and around 70% of total exports, according to PFC Energy, the global energy and consultancy group. The vast majority of Russian oil exports (84%) go to European countries, particularly Germany, Netherlands, and Poland. Around 18% of Russia’s oil exports go to Asia, divided between Japan and China. The state-run Transneft owns most of the  pipeline network, transporting about 88% of all crude oil. Russia holds the world’s largest natural gas reserves, the majority of which are located in Siberia. The state-run Gazprom controls directly and indirectly nearly all reserves, owns Russia’s domestic gas pipeline system and enjoys a legal monopoly on Russian gas exports. Russia sends about 76% of its natural gas exports to customers in Western Europe, with Germany, Turkey, Italy, France, and the UK. Finally, Russia is the third-largest generator of nuclear power in the world and fourth largest in terms of installed capacity. Russia is thus highly dependent on world energy prices; the industry structure is monopolistic; Europe is by far its largest market.

4.Japan is highly dependent on imports of primary energy, 96% of which comes from imports. Oil accounts for 50% of Japan’s primary energy supply, with about 90% coming from the Gulf and the Mid East.  This dependence was the main reason Japan opted for a more neutral stance in relations between the US and the oil exporting countries. The other strand of Japan’s energy policy was to invest heavily in the deployment of 54 nuclear reactors, by 2013. But in 2010, the country experienced the Fukushima Daiichi  nuclear disaster. A June 2011 Asahi Shimbun poll of 1,980 respondents found that 74% answered “yes” to whether Japan should gradually decommission all 54 reactors and become nuclear free. But the post Fukushima mothballing of most of the nuclear reactors prompted a sharp rise in the bill for imported fossil fuels. To reduce dependency on Gulf oil, Tokyo favours liquefied natural gas imports from Australia and Indonesia; promotes energy efficiency, in combination with the country’s automobile and electronics industries; and is discussing an increase of imports from the US. But the debate about whether to abandon nuclear remains inconclusive: In late October 2013, Prime Minister Shinzo Abe ruled out the possibility of Japan phasing out its nuclear reactors, stating that those who support such a policy goal are “irresponsible”.

5.Germany is Europe’s prime manufacturing centre, and No 1 per capita exporter in the world. As a major global energy consumer, it imports about two-thirds of its needs. Russia, Norway, and the UK are the largest exporters of oil to Germany. Germany is the third-largest consumer of natural gas in the world; 40% of its natural gas imports come from Russia. Russia is thus a key strategic partner for Germany, and Germany is a key partner for Transneft and Gazprom. Since the late 1960s, Germany has subsidized domestic coal production, which is the main source of electricity. The recent plan is to build 25 new coal plants. Nuclear power accounts for over 17% of national electricity supply. But in response to anti nuclear power protests in the wake of the March 2011 Fukushima Daiichi nuclear disaster, Chancellor Merkel announced that all nuclear power plants would be closed by 2022. Eight of the 17 operating reactors in Germany were closed down. Merkel said that the phase out would give Germany a competitive edge in renewables, which by 2012 accounted for 25% of electricity consumption, more than the electricity generated by nuclear power stations. However, being an integral part of the EU’s internal electricity market, Germany will continue to consume foreign nuclear electricity even after 2022. The government has set the goal of meeting 80% of the country’s energy demands from alternative energy by 2050. These decisions were made on a national basis, prompting the IEA to write:”decisions of this magnitude on German energy policy inevitably have an impact far beyond the country’s borders and have to be taken within the context of a broader European energy policy framework and in close consultation with its neighbours.”

6.Energy poverty is defined as a lack of household access to electricity and clean cooking facilities. As the IEA’s World Energy Outlook 2013 shows  nearly 1.3 billion people are without access to electricity and more than 2.6 billion people rely on the traditional use of biomass for cooking, which causes harmful indoor air pollution.  More than 95% of these people are either in sub-Saharan African or developing Asia and 84% are in rural areas. These people are mainly in either developing Asia or sub-Saharan Africa, and in rural areas. There is thus huge latent demand for energy worldwide. Local available resources are dispersed around Latin America(Venezuela, Brazil, Mexico); South East Asia (Brunei, Indonesia); and Africa (Angola, Equatorial Guinea, Nigeria, Sudan). Countries without adequate local resources are thus looking to ever greater dependence on global resources, and therefore on their capacity to earn foreign exchange. This trend has accelerated since the year 2000: world population in the first decade of the millennium grew by one billion; over 50% of the world population now live in cities; private investment in developing countries now dwarfs aid flows; global mobile phone subscriptions exceed six billion, and internet binds the world in an ever more integrated information flow. Yet the 1.2 billion poorest people account for only 1 per cent of world consumption while the billion richest consume 72 per cent.

To wrap up: fossil fuels remain massively predominant in the global energy mix: gas is growing and coal is more important than ever; nuclear, hydro and renewables are all expanding from a narrow base. What is changing fast is the map of the global energy system: the Mid East and Gulf remain the key swing producer area for oil and also a key supplier for natural gas; Russia is pursing a vigorous energy export policy, based on its own huge resource base in Siberia; its main export market is Europe. Officially, Europe has opted for renewables, but Germany is fast opening coal plants and deepening dependency on Russia, while France is invested in nuclear. The UK, northern France, Germany and particularly Poland have huge coal and shale reserves. Japan post Fukushima is clearly undecided, particularly with regard to opting out of nuclear as has Germany. Probably, the biggest change in the global energy system to date is the decline in US energy dependence.

In policy terms, there is a clear tendency for all discussions about energy to be clothed in concern about climate change,  and therefore considerable intellectual energy devoted to the promotion of renewables. But it is noticeable that the German government has located the time for a switch over to dependence on renewables far into the future, while pursing alternative energy paths now. The other clear tendency is a universal disquiet among the world’s states to get over dependent for their supplies on global energy markets , and a corresponding preference for maximum development of local resources.

But the reality remains that there are huge sunk costs invested in the existing system, and big investments facing countries seeking to reduce that dependence.


Scenarios for the world around 2035.

Sources: IEA=International Energy Agency; EIA=Energy Information Agency; BP=formerly British Petroleum; NPS=New Policy Scenarios; CPS=Current Policy Scenarios.



The first scenario is business as usual: for the complex of reasons already mentioned, the world trundles along on its present path way. This is clearly a powerful prognosis, given the huge scale of costs already sunk in the existing system. These sunk costs are sustained in effect by popular expectations for improved standards of living around the world; by governments’ dependence on receipts from petrol tax, ranging in the EU from 40 to 60% of the price at the petrol pump; by governments, whether democratic or authoritarian, which feel they have to listen to public concerns; by the jobs at stake in the road, rail, shipping, automobile, exploration, or distribution industries; by the capital intensive industries themselves; and by the global manufacturing and financial industries which rely on the development and flow of energy resources around the world.  At most, if such a system is to change, it will do so realistically only on an accretive basis.

In this scenario, the US stays internationally engaged as at present, despite a move to near complete net energy independence, while fossil fuels dominate the world energy mix. Non OECD is the prime source of growth in  demand and output for all fuels. Australia will be a major  beneficiary with the growth of demand for supplies of liquid natural gas(LNG). Renewables overall are expected to account for 6% or so of total world demand. Carbon emissions will rise by 26%, with 70% of the rise coming from non OECD.

1.The Mid East and Gulf remain the swing oil producers, but high oil prices are expected to entail oil taking a declining share of primary energy. The region will remain a large exporter of oil and gas. The ratio of export to production will be 66% for oil, and 15% for gas. In this scenario, Saudi Arabia remains dependent on the US for security, despite differences over policy to Israel, Iran and the export of Wahhabi interpretations of Islam.

2.China’s energy output rises 46%. Fossil fuels account for 82% of Chinese energy consumption in the 2030s. Coal will be No 1 source, but with a proportion declining from 81% now to 60% then. Nearly all growth in coal output and demand will come from China and India. China’s, demand for oil imports will continue to rise, particularly on Gulf oil.  Natural gas imports to China will rise much faster by 182%, implying  a further growth in interdependence with Central Asia and with Russia. In nuclear power, China will be No 1 power generator. In 2014-15,  China will overtake the US as the world’s prime energy importer.  The implications for global finance are considerable: if Beijing opts for currency convertibility, its oil imports from the Gulf could well become denominated in Yuan; if China continues to denominate its oil imports in dollars, there will be a continued incentive to earn foreign exchange in dollars. That means continuation of the past decades of large Chinese export surpluses with Europe, its No 1 export market, and North America, its 2nd export market.

3.China is of course the largest of the BRICs, the large developing countries of Brazil, Russia, India and China. There relative size by the 2030s is reflected in the expectation that China’s share of global consumption will be 27%; India’s 7%; Russia’s 5% and Brazil’s at 3%. India’s energy consumption is expected to grow by 110%; China’s by 72%; Brazil’s by 57%; and Russia’s by 15%. Brazil presently is heading rapidly to net self sufficiency, and is becoming a net exporter. The country’s ratio of consumption to production, at 95% now, will stand at 110% by 2030. Brazil will become Latin America’s No 12 crude oil exporter, ahead of Venezuela and Mexico. It is expected also to become the world’s second biofuel exporter after the US.  India’s energy consumption will rise in excess of rapid growth in domestic production. Fossil fuels will account for 88% of final energy consumption, as against 92% now. Coal will predominate, accounting for 50% of the energy mix in the 2030s and oil at 29%. As a result net energy imports are expected to increase by 135% as the country imports 42% of total energy demand in 2030. In 2030,  India is expected to become the world’s prime coal importer, implying closer trade ties  with Australia and Indonesia. Oil imports will rise by 152%, implying a huge increase in interdependence with the Gulf. Given the close political ties between Saudi Arabia and Pakistan, and both with China, this is bound to make for a more complex context for the evolution of India’s international relationships.

4.In 2035, Russia is expected to be the world’s No 1 gas supplier, and Europe will be No 1 natural gas importer, and Russia’s prime client. The two regions should therefore be mentioned together as creating a highly interdependent Euro-Asia centering on Germany as the prime importer, and Russia as the prime exporter.  Both regions also share a common characteristic in that their populations are shrinking as a proportion of the global population.  Russia’s energy production will rise in volume, but its share in global energy production will fall from 11% to 9% of the total, and its share of global energy consumption will fall from 6% to 5%.  Europe’s energy demand rises by a mere 5%, while its share of global energy consumption falls from 16% to 12%. Demand for fossil fuels will decline, except for natural gas which is expected to rise by 26%, confirming Europe as the world’s largest net importer of natural gas. Nuclear will be wound down in Germany, in this scenario, and not in France. Renewables are expected to rise sharply. But overall, Europe’s import dependency from Russia and the Gulf will continue to rise from 46% of the total today to 49% then. Considerable energy savings, equivalent to 13% of the region’s energy demand in 2010, is expected to be accounted for via greater efficiency. Additional investments required are $2.2. trillion, compared to the $1 trillion required to reduce global energy poverty.

There are some key conclusions to draw from this business as usual scenario. Fossil fuels remain massively predominant, with coal replacing oil, and gas taking a larger share of the mix. The axis of the global energy economy hinges more than ever on the nexus between Asia Pacific and the Gulf. Ties between Russia and Europe will deepen, and that may also be the pattern of relations between Russia and China. Russia, China, the US and France remain wedded to nuclear energy, while Japan may do so. Japan may also become much more energy interdependent with a net self sufficient US. This is the other major trend that, in this scenario, will have worked its way through the system. Because the US remains engaged internationally, but net self sufficient in energy, its influence as an offshore arbiter in world affairs offers the US the opportunity to exert greater, not lesser influence. Germany’s option against nuclear involves a wager on renewables, but in fact further development of domestic coal resources, involving possible large increases in imports from Poland.

An obvious paradox of this business as usual scenario is that it in effect highlights some major discontinuities.

1.Given US energy independence, but continued international engagement, there is the possibility of a very different relationship emerging with Saudi Arabia. This will depend on many features adumbrated in this scenario, not least the evolution in the relations of interdependence between the Gulf, Pakistan, India and China.  It will also be affected by the choices that China makes on the way to convertibility on its current account. In this scenario of business as usual, Saudi Arabia continues to back the greenback, but will be sorely tempted to invoice exports in Yuan. In this scenario, Japan will cling more than ever to its post 1951 security relationship with the US, as China’s ambitions grow, along with its economy.

2.Carbon emissions will continue to rise, mainly due to China’s and India’s determination to grow their economies. This determination is not just fed by the desire to escape poverty, but also to recover the prestige which their civilizations enjoyed around the different world of the 18th century.  To the extent that China, India, and indeed, the non OECD world listen to the western debate on climate change, it may be expected that they will do so only for domestic reasons, relating to the cost s of pollution which their development entails. They will not in this scenario subscribe to binding international commitments, as the EU was suggested in the run up to the 2009 Climate Change Conference in Copenhagen.

3.The EU may hold 27 member states, and be discussing enlargement to the Ukraine, but this business as usual energy scenario for Europe tells a very different story. It tells that Russia is a de facto member of Europe as its prime energy supplier, and that Germany has more at stake in its relations with Russia, than it does with France. Merkel did not consult France when Germany opted to phase out nuclear by 2022.  Russian-German relations, are also very much dependent on both countries relations with Poland, on account of unresolved tensions from the world wars and before.  Poland’s main natural resource is coal and shale, so that growing interdependence is also on the horizon between an import dependent Germany and its eastern neighbor. In other words, Germany’s eastern orientation in energy weakens German interdependence in the EU, and further saps the already weak EU energy policy, as the IEA has elliptically referred to in the reference cited above.

4.This scenario also is predicated on high energy prices, driven by a premium on oil as a resource. This is one continuing reason to consider that countries with abundant own resources will be in place to benefit, but if they are exposed and isolated politically, may receive more than welcome attention by larger and powerful countries dependent on them. Australia for instance is more than aware that the emergence of China requires both finessing Australia’s relationship with the US, and reinforcing it at the same time as a reinsurance against Chinese ambition. Russia is in a similar position, but interestingly has chosen to talk about greater  interdependence with China, while downplaying the relationship with the US.

Overall, business as usual sees a more Asia centric global energy system; a fracturing of the EU; a reinforcement of US leverage; and, it should not be forgotten, major efficiency gains to be had by all.

Three other scenarios for global energy.

The business as usual scenario is predicated on two critical uncertainties: will the US stay internationally engaged, and will fossil fuels continue to predominate? The assumption for the scenario is that these two uncertainties become certainties: together, they form the scenario for business as usual. But as we have discovered, this scenario draws out some significant discontinuities, of which we highlighted four.


In the matrix above, there are three other  possible scenarios which are worth exploring. We shall discuss them all together in this section.

The first is where the US turns isolationist, and fossil fuels continue to predominate in the global energy mix. This represents a significant discontinuity. The reason is that the US, since its entry to the war in 1941, has been at the centre of global affairs, and the world political and economic system has been made very much in the US image. The US favoured the promotion of international organizations, starting with the United Nations; promoted open world markets; stood behind the internationalization of businesses; and has favoured the emergence of constitutional democracies as a preferred from of government over any other.  In February 1945, President Roosevelt famously met with King Ibn Saud on board the US Navy cruiser Quincy, paving the way for the crucial bi-lateral relationship between the House of Saud and the US. From the start, the relationship was founded in a mutual interest in the development of the country’s giant fossil fuel resources, and in the mutual dischord over the Jewish settlements in Palestine.

What would detonate an end to the post-1945 relationship between the US and Saudi Arabia?  It is worth bearing in mind the very close links between ARAMCO, and the US oil corporations; the heavy investment of  Saudi petrodollars in US Treasury bonds; the presence of 35,000 US troops in Saudi Arabia; or the extensive presence of Saudi students at US universities. They are the third largest non-US student group in the US.  It is also worth recording that there have been repeated disagreements in the past over  policy towards Israel; towards the broader region of the Middle East and the Gulf; over oil policy, and over relations with the rest of the world. Seen in this light, the recent disagreements between Riad and Washington DC are no more than business as usual. Relations are strained, as ever, over Israel, over the war in Syria and most importantly over the recent nuclear deal between Iran and the P5+1 – the US, Britain, France, Russia and China plus Germany. The Saudi  Assistant Foreign Minister Nazar Madani is reported as saying: “Gulf countries should no longer depend on others to ensure their safety.” And Riad has called for an enhanced union with fellow Gulf Cooperation Council states Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates, which together account for 40 percent of the world’s oil reserves and a quarter of its natural gas. But the Gulf Council was formed in May 1981, in response to the “second cold war” between the US and the Soviet Union, following on the invasion of Afghanistan by Soviet troops in December 1979, and the Soviet-inspired crackdown against Solidarity in Poland the following year. As Saudi Arabia’s former intelligence chief Prince Turki al-Faisal is quoted as saying:“We had our differences in the past,” Faisal told AFP. “And today we have differences on certain issues, but we agree on others.”

In this scenario, the source of US isolationism would not be sought in bilateral relations of the US with one or other set of countries, but in domestic politics. US public opinion is disenchanted with an activist foreign policy that has led the country into repeated wars in Iraq and in Afghanistan, with little of benefit to show. Since 2005, the US government has actively pursued an energy policy designed to reduce dependence on the volatile region, with the result that the US is moving fast to net energy self sufficiency.  Given US business links around the world, a policy of US isolation, not unlike that of the 1920s, would involve a mixture of non entanglement in global politics, but continued engagement in international trade and business relations. US businesses would enjoy less support from the US government, and existing US client states would be advised to recast their local, regional and global alliances. This would arguably be the case of US relations with Saudi Arabia, the oil well for the world. The signal would be the withdrawal of the 35,000 US troops from Saudi Arabia, making it urgent for Saudi Arabia to re arrange local, regional and global alliances.

Given the kaleidoscope of local affairs, it would be wise perhaps to recognize from the start that the way local responses to such a profound discontinuity would be difficult to portray in detail. But the broad components of such an evolution are discernible: Israel would be alert to all developments from before the start. Given Iran’s nuclear ambitions, Saudi Arabia would be quick to acquire nuclear capabilities. The rivalry between the two in Syria and Lebanon would be likely aggravated.  Egypt would become more dependent on Riad for financial support. The shift in relations between the two Gulf states would be registered in Afghanistan, and in Pakistan, and in the southern periphery of Russia along to the frontiers of China. Both India and China would be concerned directly on account of the impact on Pakistan, and because both countries are becoming more, not less, dependent on Gulf oil.  China has sought to diversify its supplies of oil away from the troubled region, to such countries as Angola and Russia: but about 50% of its crude oil supply still comes from the Gulf.

There is much evidence that the Chinese leadership is backing away from the admonition of former leader Deng Xiaoping that as China rises in wealth and power it should maintain a low profile. In its place, the China’s leadership is promoting a more active and assertive diplomacy around its periphery. China is a major presence in Central Asia; Russia has become on occasion the main source of imported energy to China; there have been regular conflicts with Japan over the Senkaku/Diaoyu islands, and in territorial claims in the South China Seas. Beijing has announced the formation of an ASEAN infrastructure bank, which would involve use of its 4 trillion dollars worth of foreign exchange holdings to finance, ports, railways, highways and other infrastructure to integrate china and its South East Asian markets. The long term economic and soft power implications of this scheme are substantial.

In addition, the People’s Liberation Army (PLA) are developing an ocean going capacity. Major General Qian Lihua confirmed in 2008 that China’s ambition was to operate a fleet of aircraft carriers. Later this statement was amended to suggest that China was developing a blue-water navy, that would have both defensive and offensive capabilities, particularly in the first and second island chains around China’s seas. In 2013, Beijing announced an airspace defence identification zone” around the islands in dispute with Japan. China also claims almost all the oil- and gas-rich South China Sea, in conflict with claims from Taiwan, Malaysia, Brunei, the Philippines and Vietnam.

The development of a Chinese deep water navy equal or superior to that of the US lies some way into the future. But one of the main reasons for this development has been not just to push the US presence on China’s coast line back to Hawai, but also to reduce dependence for China’s oil supply from the Gulf on the presence of the US VIIth Fleet in the Indian Ocean. India has observed with disquiet the presence of China in Burma and in Pakistan, as well as along the Himalayas.

So what is the probability of an isolationist US ending the intimate relationship with Riad that has been in place since 1945, at the latest. The answer is: not very high, if we consider statecraft as a rational game of chess played on the world by the great powers and their clients. US withdrawal from the Gulf, it can be anticipated, would shake the local political kaleidoscope in unforeseen ways; most notably, US isolationism would trigger major realignments among China’s neighbours. If we add to that, the probability that the global energy system will hinge on the Asia Pacific by the 2030s even more than is the case today, and that China long since could have liberalized transactions on current account, a retreat of the US from the Gulf  would create a power vaccum, which China would be sorely tempted to fill. We would be looking at the emergence of a very different world structure. Its pre condition though would be a disenchantment of US public opinion with global entanglements: the key to this evolution is domestic US politics. And there, the answer as to the likelihood of such a scenario happening is rather higher than if we assume that statecraft is about a global chess game. For the US, as always, playing the game depends on whether  there is continued support at home.  US foreign policy begins and ends at home.

The second of our three scenarios holds that the US remains internationally engaged, and takes a lead role in promoting  an “energy vision” (a phrase borrowed from the World Energy Council), which emphasizes the development of non fossil fuel alternatives, including nuclear and renewables; a drive to improve efficiencies in the use of fossil fuels, including the development of smart grids, sustainable cities and biofuels.

In this scenario, global energy intensity-the efficiency at which energy is used- is halved, with the US taking the lead. For the US, a combination of high oil prices and technological innovations by 2035 has unlocked unconventional energy sources. The US will be the dominant player in shale exploitation, be a major oil and gas supplier, and enjoy energy savings equivalent to 15% of the country’s energy demand in 2010. These efficiency gains will boost productivity, raise economic activity, and generate extra tax revenues. Overall, US energy output rises by 23% and consumption by 1%, so that the production/consumption ratio rises from 76% now to 99% in the 203°s. Net oil imports fall away by 70% by 2030 compared to now, with producers seeking alternative outlets on world markets.  But fossil fuels will still account for just under 80% of total US consumption; nuclear will continue to provide about one quarter of US energy consumption, and renewables will contribute 10%, up from 3% now.

Greater energy intensity in the case of the EU exaggerates the different energy policy mixes already chosen by the member states. In the case of Germany, policy is torn between an environmentalist push for clean energy, and an industrial push for cheap and reliable supply. The decision to phase out nuclear, though, increases German dependence on Russian supplied gas. Investment in wind, biomass and solar power generators, on the other hand, points to much greater self sufficiency. Investment in solar energy is powering ahead: at the end of October 2013, new solar PV (photovoltaic) installations provided about 3% of total electricity needs. The aim is to produce 35% of electricity from renewable sources by 2020, and 100% by 2050. Government subsidies for clean energy, though, drive a surge in subsidized supply that is helping to push wholesale costs down. With the price drop, gas fired plants have begun to use cheaper and more polluting local lignite.  In France, the pattern of energy supply is just as nationally determined as is the case of Germany: despite the fact that Electricité de France(EDF) is one of the world’s largest suppliers of electricity, trade in electricity is minimal. By the 2030s, the prognosis is that 50% of total energy supply will be local, and the rest in the form of oil and gas will be imported. Nuclear generated electricity will be the largest provider. Wind and solar are expected to supply 1.3% of total energy supply by the 2030s. In other words, the sources of improved energy intensity between Germany and France will differ.

The scenario of greater energy intensity lends itself to interesting speculation about emerging markets and the BRICs. China works with the US to achieve energy efficiency, and adopts a freer pricing policy, which encourages progress in energy intensity. Given China’s preference for secure supplies, the nuclear energy programme will continue apace, and abundant subsidies will be provided for renewables. Severe measures are taken to curb run away costs caused by pollution. Overall, the result is a significant savings in energy equivalent to 25% of China’s energy demand in 2010.  Nonetheless, the Chinese leadership face two major risks in pursing this policy: first, China’s dependency on foreign sources of coal, oil, gas and uranium continues upwards; secondly, control over food and over energy prices has always been used by the government to reduce costs for poor households. Bringing market discipline to energy usage has significant social costs.

Brazil is a very different case. It is very well endowed with natural resources, and is  racing towards energy independence, with fossil fuels likely to account for 53% of Brazilian energy consumption by the 2030s, significantly below the world average, in a business as usual scenario, of 81%. Renewables are expected to rise to 13% of total supply, with hydro at 32%.  Greater energy intensity in Brazil would benefit by the country’s participation in global research and development networks, and particularly in the development of links to the US.  As an importing country, India benefits to the extent that greater net energy autonomy by the US, and low growth in the EU, favours less pressure on fossil fuel prices. But India’s government recognizes that growth will keep pressure on conventional energy forms of coal, oil and gas, aggravating the Indian economy’s vulnerability to world price movements. The major gains for India are therefore identified not so much in the supply mix, so much as in efficiency gains. As in China, energy prices are subsidized, thereby encouraging inefficiencies. India’s energy efficiency is calculated as 0.69%, compared to China’s 0.78. The EU’s is 0.13%. Without any doubt, the energy intensity scenario has much to offer India, but as in the case of China, ending energy subsidies entails high social and political costs.

Overall, in this scenario, it is technology that plays the prime role. Those countries and corporations with a competitive advantage in energy intensity have much to gain, not least because so many major players in the global market are straining to reduce  what they consider as over-dependence on global markets. The probability of this scenario must be judged as high for a number of reasons: shared, but varied concerns at over dependence on global markets; clear benefits to consuming countries to work on improved energy intensity; an interest among governments, research institutes, corporations with a lead in the relevant technologies to market them; but governments which subsidize energy face heavy political costs in ending them for reasons of efficiency. The scenario, most visibly in the case of the EU, feeds path dependency of existing national policy options.

The third scenario is a game changer, so much so that there is nothing written about it.  In this scenario, the US goes isolationist, and major investments are made worldwide in opting for “vision”: greatly reduced dependence on fossil fuels, investment in energy intensity, the rapid development of biofuels, hydro sources, nuclear and wind. The interesting question to pursue here is whether this scenario is not the best suited to deal with the reality of energy poverty.

In this final section, we can draw on the OECD/IEA report on global energy for 2012. It records that nearly 1.3 billion people remain without access to electricity, and 2.6 billion do not have access to clean cooking facilities. These people are mainly in either developing Asia or in sub-Saharan Africa and in rural areas. If things remain as they are, or moderate changes occur in global energy policy, the trend will worsen, with more people suffering from energy poverty than now. The UN calculates that if its Sustainable Energy for All vision is to be realized, the need is for  nearly $1 trillion in cumulative investment. Because in this scenario, the world puts its back behind “vision”, it is possible to imagine that energy poverty disappears, and that energy demand barely changes, given improvements in energy efficiency. This vision is presented in the IEA”s “Energy For All” scenario. ( For more on financing and investment for modern energy access, see the WEO-2011 special early excerpt “Energy for All: Financing Access for the Poor” (October, 2011),

The requirements for this scenario to be realized would include: cheapness for the consumer; ready accessibility; development of local sources of supply; effective delivery systems, such as South Africa’s Integrated National Electrification Programme; partnerships such as that between Ethiopia and Norway, whereby Ethiopia receives funds to  support energy development, including increased distribution of clean cook stoves in rural areas; or development of solar technology from Germany to be applied to local requirements across rural India.

The IEA’s vision though is only a partial glimpse of what this final scenario entails. If this scenario is to be played out, it should be emphasized that the withdrawal of the US to an isolationist policy would have to be countered by a universal political trend away from power politics. If the US were to go isolationist, and the rest of the world continued in its millennial pursuit of power, then the likelihood that a global society could coalesce around a determined poverty reduction programme is minimal.  Alternatively, if the world were to break from politics as the pursuit of power and prestige, it  is possible to consider such a scenario as reasonable.

That is why this scenario is a game changer, and therefore, given what we know about human affairs, improbable. Nonetheless, there are components which are worth recording. The most important of these is the combination of investment in improved energy intensity, and in alternative energies. Slowly, but surely, these are likely to create a new energy paradigm, very different to that on which the existing fossil fuel world has been built. It is the one scenario which is truly worth developing, compared to business as usual.  It is the tensions between the two that we should start to follow closely if we are to be able to chart our way into an evolving future.

About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) ( His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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