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Report| McKinsey Global Institute

Averting the next energy crisis: The demand challenge

March 2009 | byJaeson Rosenfeld, Jaana Remes, Lenny Mendonca, Wayne Hu, Sendil Palani, Utsav Sethi, Scott Nyquist, Ivo Bozon, Occo Roelofsen, Pedro Haas, Koen Vermeltfoort, Greg Terzian

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Global energy-demand growth is expected to stagnate or even contract in the short term in response to the economic downturn. But with economic recovery, demand could snap back more quickly than many observers project, driven by strong energy-demand growth from developing countries. Indeed, there is potential for liquids-demand growth to outpace that of supply—risking a new spike in oil as soon as 2010 to 2013, depending on the depth of the economic downturn.

In Averting the next energy crisis: The demand challenge, MGI and McKinsey's Global Energy and Materials Practice update an analysis of energy demand and energy productivity across regions and end users (light-duty vehicles, medium and heavy trucks, air transport, buildings, industry, and power) and takes a view on the trajectory of energy supply across fuel types. The research also examines the implications of demand growth on petroleum products' supply-demand balance. Since GDP is the most important driver of energy demand and the trajectory of world economic growth is exceedingly uncertain, the report presents several scenarios to give a feel for the range of outcomes possible.

In a moderate GDP scenario, the report projects that energy-demand growth will recover to 2.3 percent a year between 2010 and 2020, nearly a full point faster than the period from 2006 to 2010. Developing regions will account for more than 90 percent, with demand growth most rapid in the Middle East. During the same period, a moderate case projects energy-demand growth in both China and India growing by 3.6 percent. In stark contrast, US demand for fossil fuels—natural gas, oil, and coal—will remain exactly flat to 2020. Meanwhile, energy demand growth in Japan will be virtually flat, while Europe will see energy demand growing at a rate of some 1 percent, reflecting the continuing demand growth from emerging Eastern and Southern European countries. Under current policies, the report finds that CO2 emissions will grow slightly more slowly than energy demand as carbon-intensive coal use increases more quickly than that of other fuels but rapid growth in renewables helps to offset this.

Breaking energy-demand growth down into different sectors, the report finds that the fastest-growing sectors will be steel, petrochemicals, and air transportation. Developing countries, notably China and India, which are both investing heavily in long-distance transportation and infrastructure, will drive energy demand in these sectors. Five sectors within China—residential, commercial, steel, petrochemicals, and light vehicles—will account for nearly 30 percent of overall energy-demand growth. Light vehicles will see one of the slowest rates of energy-demand growth. Although the vehicle stock will see strong growth in China, India, and the Middle East, very rapid efficiency improvements across many other regions will help dampen demand from this sector in aggregate. While the market for electric vehicles will grow to 2020, there won't be a real impact on energy-demand growth until 2020 to 2030.

With current policies to abate energy-demand growth, spare capacity in liquids could return to the low levels witnessed in 2007 as soon as 2010 to 2013, risking a second spike in oil prices that could cost oil-importing countries $1.5 trillion and even more if oil prices more than double.

The research finds that, in addition to using global commodity markets to drive demand reduction and taking steps to enhance energy supply, policy makers could implement complementary policies that could reduce the risk of another oil price shock and reduce energy demand by 6 to 11 million barrels per day, for example, by removing petroleum-product subsidies and increasing the size limit for trucks. In the medium term, shifting to fuels that are potentially more plentiful offers additional abatement potential. In the longer term, more levers based on technologies that are currently in their research phase or are nascent can come into play. Investment in these technologies—in the key areas of electric vehicles, biofuels, and the public-transportation infrastructure—can fulfill a vital role in achieving long-term balance between supply and demand in energy markets.

McKinsey Global Institute

McKinsey Global Institute

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