World Energy Roadmap – A Perspective (Updated)

Awwad A. Alharthi and Mohammed A. Alfehaid1

Abstract

Since the publication of this paper in the World Energy Council (WEC) 2008,
several factors have emerged to enforce the idea of cooperation between the two parties
(consumers and producers). While the dialogue between the two sides continues,
economic downturn and revealed doubts about the validity of results (using misleading
information) published in some scientific journals pertaining to expected drastic changes
in the global environment as well as rising concerns about the reported data.
Negative impacts of many alternative energy sources seem to reshape the discussion on
different fronts. Still consumers are concerned with security of supply and producers
have equal concern with access to markets. In addition, producers become more
concerned about sustainable investments to ensure sustainable supply of fossil fuel.
Producers are also concerned about the impacts of redirection of funds to unproven
reliability of alternatives as source of energy. A common ground for the two groups is
sustainable economic development and continued economic growth. The part that divides
the parties is that consumers aim at diving into alternatives at full speed while fossil fuel
producers prefer stepwise approach based on the reality of limited alternatives’ added
values and concerns pertaining to unrevealed environmental impacts.
Both parties have valid concerns and share equal responsibility towards the world at large
where comparative advantages available to both groups are to be employed to achieve
global sustainable development. The key to achieving this goal in a world of competing
and (to some extent) conflicting priorities is not only a sizable and irreversible investment
by both groups, but also the desire to relax unwarranted regulations that have hindered
progress in the energy industry.

The focus of this paper is on challenges facing the energy relations and in particular oil
and gas, in the production and consumption ends. The final result is a suggested road map
that identifies and addresses the areas of concern for producing and consuming nations
and the industry, taking into account economic forces and environmental concerns. In
addition, a set of issues are presented to illustrate how a globally linked world would
perform under the analyzed factors.

Background:
The oil market and the relations between producers and consumers have been
going through major turns. After the first energy crisis in 1973 and the almost
quadrupling of oil prices, the industrialized nations have introduced policies and
measures to increase energy efficiency, diversify energy sources and reduce oil import
dependence. Such policies and measures along with market forces contributed to the

1
The authors thank Dr. Al-Moneef, Majid, Dr. Babiker Mustafa, Dr. Akmal, Muhammad, Greg Sullivan,
Professor Musa Essayed and Professor Tracy Mott for their valuable comments and suggestions. Any error
is the responsibility of the authors. The original paper is published in the World energy Council (WEC)
2008.

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excess supply of oil and to the oil price collapse2 in the mid-eighties. Taxation, subsidies,
efficiency and investment curtailment are the most widely pursued policies. The goal of
these and other related policies was and remains to reduce dependency on imported fossil
fuel. While the sizable investments in fossil fuels production and processing chains
during the seventies led to an increase in supply on the one hand, demand was stagnant or
declining on the other. The price collapse in the mid-eighties caused investment in the
energy sector to decline as excess capacity in production and refining persisted. The price
decline had spillover effects on oil and gas producers through lower revenues and
subsequently economic recession or a worldwide slowdown in the growth of the industry.
Lower prices induced consuming governments to increase fuel excise taxes either as an
easy source of income or to supplement and continue the energy efficiency drives as well
as to address local and global environmental concerns. According to the latest reports and
in response to the latest IPCC 4th assessment report, environmental concerns are said to
be overstated. The major side effects of these policies surfaced in 2000 when consuming
nations were faced with inadequate spare capacity in the upstream and downstream.
Another side effect of the slowdown was in the area of manpower in the oil and gas
industry as many educational institutions had to scale down or eliminate their energy-
related programs due to lack of employment opportunities in the declining sector. Such
unanticipated side effects3 have caused prices to increase for both oil and gas related
energy and the required knowledge to make it available.

According to the latest World Energy Outlook (2009) published by the IEA, oil in
particular will continue to dominate the energy market. In contrast, renewable resources,
while they will continue their relatively faster growth rate, are expected to contribute only
about 14% of total primary energy requirements by the end of 2030. Given the estimate
that oil in particular and fossil fuels in general will account for the largest share in the
energy pool for the foreseeable future, stringent environmental policies will continue to
cause investors in fossil fuel-based energy to reevaluate their investment strategies given
the associated risk caused by such aggressive policies. Fossil fuel producers have learned
their lesson the hard way and are not expected to assume the responsibility of the
estimated investments unless security of demand is addressed adequately. Equally
important, the common perception of peak oil production and tensions in some producing
areas that have led to fears of shortages of oil supply resulting in high oil prices. In
addition, the industrialized nations continue to question the intentions and the capabilities
of the resource holders while the resource holders question the sustainability of demand
as well as shouldering the burden of new supply security obligations. Both camps must
find common ground where both security of supply and security of demand are taken into
account when developing or proposing a set of policies among other factors that have

2
Upward movements in prices during the seventies encouraged oil producers to invest heavily in finding
new oil and gas fields, production and infrastructures. As the new production streams were brought to the
market, stringent policies impacts on demand realized and as such excess supply of oil developed leading to
lower crude oil prices.
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Current cost of oil and gas production as well as the cost of alternative energy, direct or indirect costs can
not be overlooked. The prevailing market prices brought along with it higher costs in the part of producers
as both required technology and knowledge became quite costly. Growth in demand outpaced available
spare capacity leading to sizable increases in investments to cope up with such growth. Competition for
equipments, technology and the know-how resulted in a higher production costs.

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direct or indirect impacts on both camps. In what follows, we will provide the basis upon
which the energy road map can be established.

Current and Expected Future Demand:

There is a causal relationship between changes in energy prices in general and the
prices of petroleum products in particular on the one hand and the basic economic
variables such as inflation and economic growth on the other. However, there seems a
weak relationship that has been developing between higher oil prices and, inflation and
economic growth in recent years. The changes in the fundamentals governing the energy
market triggered a new direction in the current debate between oil producers and
consumers. The debate centered around three major interconnected factors; economics,
geopolitics and the environment. To provide a context on how these factors are
addressed, definitions of the available sources of energy from both the supply and the
demand sides are required.

Fossil Fuels:
Most of the energy sources in today’s market are fossil fuel-based, with crude oil
accounting for the largest share. Fossil fuels account for more than 80% of the global
primary energy use. Crude oil comprises about 34%, gas supplying approximately 21%
and coal providing nearly 26%. However, oil constitutes more than 41% of total fossil
fuel consumption.

Nuclear Energy:
While many countries are planning to phase out nuclear energy, other countries
are likely to increase their nuclear programs to use such form of energy in electricity
generation. According to the latest IEA outlook nuclear energy’s share in 2030 will
continue to be the same (6%) as in 2007.

Renewable and Alternative Energy Sources:

This type of energy comprises renewable resources such as hydroelectric, solar,
wind, tide & wave, geothermal …etc., and is used mostly to produce electricity, as well
as alternative resources, such as bio fuels for transportation, some of which rely on fossil
fuels to be manufactured and produced for final consumption. The share of renewable
and alternatives is limited and accounts for only about 13% of total energy consumption
in 2007. It is projected to increase by 56%, resulting in a 1% increase in its share in total
energy mix to 14% in 2030 (see figures below)4.

In our analysis, we will use the following categorization of fuels: oil, gas, coal, nuclear
and renewable plus alternative fuels.

The following charts illustrate the share by energy type of current and expected energy
consumption as calculated from the IEA outlook report.

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Since renewable and alternative energy related policies (taxation on fossil fuel, tax incentives and
subsidies) are designed to lessen dependency on fossil fuel, and given the current investments in such area,
the share of this type of energy in the energy pool is likely to increase. With such prospect, the shares of
fossil fuels in general and oil in particular is expected to decline.

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In the reference case scenario of the IEA, demand for total energy in general is expected
to increase by more than 40% between 2007 and 2030 as shown in the table below.
Several investment programs in the oil industry have been announced and some of these
programs are already in place. Based on the size of these investments, supply is expected
to meet the anticipated demand under current policies. However, the impact of many
current policies are yet to be realized due to the lag effect, raising concerns about the size
of future demand for oil. However, the rate at which the emerging economies (China and
India in particular) are growing may cause shortage of energy supply in general and as
such increasing investments in developing new sources of energy is warranted.

Primary Energy Demand (Mtoe and shares %)

Energy Source 2007 2015 2020 2030
Oil 4093 (34) 4234 (31) 4440 (31) 5009 (30)
Gas 2512 (21) 2801 (21) 3035 (21) 33561 (21)
Coal 2184 (27) 3828 (28) 4125 (29) 4887 (29)
Nuclear 709 (6) 810 (6) 851 ( 6) 956 (6)
Renewable +
1515 (13) 1815 (13) 1998 (14) 2376 (14)
Alternatives
Total Energy 12013 13488 14449 16789
Source: IEA World Energy Outlook 2009
A closer investigation of the above table indicates that oil’s share in the energy mix will
decline by less than 0.04 in 2030, assuming that the growth in supply of the other energy
types materializes. The share of renewable and alternative energy sources, on the other
hand is found to increase by less than 0.01, partly from the declining oil share. The share
of gas is projected to increase by less than 0.005 during the same period. However, many
consuming nations are targeting a larger increase in alternative fuel supply, as large as
30% which implies lower than the projected demand for fossil fuels5. The above outlook
poses challenges and opportunities to the producers and consumers as well as the

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The share of the different energy types stated in the table is about the same over the period 2007-2030.
However, many policies taken or being proposed by the consuming nations are based on a higher reduction
in dependency on oil and gas, depending on sector and type of fuel. The least reduction of 30% is in the
transportation sector which is the core market for oil. Unless security of demand is ensured, investments in
oil and gas will be scaled back as was the case in the eighties, at least to guarantee a reasonable rate of
return on investments in place.

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industry. Providing the adequate, timely, diversified and environmentally friendly energy
sources to fuel world economic growth for the growing world population requires some
energy roadmap involving all stakeholders.

The Roadmap Analysis:

In order to define the energy roadmap, we need to examine the challenges facing both
producers and consumers in supply, demand and their interrelationships. Issues such as
investment, environment, market functioning which emanate from such interrelationships
should be addressed as well. Three types of challenges are identified based on relevance
to consumers, to producers or to both. Namely, supply issues; emanating from the
security of supply concerns, demand issues; emanating from the security of demand
concerns, and common issues which are challenges common to energy producers and
consumers.

Supply Issues:
The most important supply issues are those of reserves, production and supply security.
While several factors are candidates to be included under the supply issues, only the most
important ones are analyzed.

i. Reserves:
In this context, reserves are considered in a broader context than their general
classification as “proven” or “probable” reserves of oil and gas. This definition of
reserves also includes reserves pertaining to substantial supplies of the energy mix.
While coal, oil and gas reserves are tangible, reserves of non-fossil fuel must be
viewed from a sustainability of supply point of view. In light of the energy sources
and their share in the total energy pool identified above, increasing the size of the
tangible reserves and sustainability of supply from the non-tangibles are governed by
their economics at each point of time. As oil and gas account for the larger share of
the energy mix due to their high rate of returns, producers of these types of energy
assume the responsibility of increasing investment to ensure adequate reserves in the
long run. Increasing non-tangible reserves, on the other hand, should be pursued, but
not at the expense of tangible energy reserves. The complementarities condition for
the two types of reserves is that they are achieved at a point where the final form of
the commodity enters the market in a competitive fashion. At the end, increased
investment in reserves is a function of sustainable demand for the commodity in
question. Owners of natural resources and technology share common investment risks
conditioned by the sustainability of demand. The two camps must strike a balancing
point at which all types of energy are brought to the market based on their economics.
ii. Production:
Owners of natural resources and technology tailored their production to meet
demand and national interest at any point of time. Failure to invest in increasing
production will result in scarcity of supply causing prices of all energy types to
increase. Energy producers are required to ensure that an adequate supply is available
at any given time to ensure sustained economic growth. Increasing production and

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 preserving the environment require a higher level of investment and sustainable
demand. Increases in production should be achieved to a level where demand and
supply are balanced. Over or under-investment will create an unbalanced market
resulting in a lower rate of return and lower rates of economic growth which will
create the seeds for potential supply interruption.
Directly related to the above is the issue of spare production capacity. Since the
latter is needed for market stabilization, it should be borne in mind that such spare
capacity has a short and long term technical as well as economic cost. Suppliers of
energy assume the responsibility of maintaining an adequate level of spare capacity in
order to minimize market volatility. While spare capacity of conventional and non-
conventional energy is a prerequisite for market stability, the cost of maintaining
spare capacity is so high that it is prohibitively expensive for all but a handful of
producers.
iii. National sovereignty vs. access to resources:
Ownership of national resources is a major point of discussion by both camps.
Natural resources are not limited to oil and gas, but go beyond to include all natural
resources from which energy in any form can be produced. Access to such resources
for independent investors is the choice of the owner of such resources. While many
countries have made the choice of opening their natural resources for independent
investors, others have chosen to make such natural resources off-limits. The
development of natural resources is governed by, capital availability and economic
needs. As such, economic rent, required technology, and demand and supply
conditions determine the level and source of required investment at any given point of
time.

Demand Issues:
While the security of supply was dominant in energy debates in the eighties and early
nineties, concerns about future demand for oil and gas brought the security of demand
issues into the debate. The following are the major factors in that category.

i. Fiscal, energy and environmental policies:

One of the major hindrances to the security of demand is the imposition of excise
and value added taxes aimed directly at petroleum products while subsidizing other
sources of energy. The value of petroleum products’ taxes imposed by consuming
governments is growing in magnitude while incentives and/or subsidies to consumers
and producers of certain energy types continue. Unless subsidies and incentives are
limited to energy types whose economics justify their use, such practices must be
eliminated.

In the last two decades the issue of climate change has dominated the global
environment and energy priorities. Policies taken or contemplated to deal with
climate change have had directly or indirectly significant impact on security of energy
demand and supply. To mitigate such impact, the costs and the benefits of these
policies must be evaluated on the basis of sound economic and scientific criterion.

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 Some policies could impact adversely investment in oil and gas in particular; causing
a reduction in the supply of energy in the medium to long run.

ii. Downstream and infrastructures:

To ensure the flow of energy resources across borders, related infrastructures such
as pipelines, terminals, etc. should be made available at fully regulated tariffs to
ensure access to the market, while preserving national sovereignty.
In many major consuming countries there exist a number of barriers limiting the
expansion of downstream facilities, resulting in higher energy prices for end users.
These barriers are behind many of the bottlenecks that happened in the USA for
example during the last decade. The restrictive measures against building new
refineries in addition to the more stringent refined products specifications has resulted
in curtailed output that inflated the price for the end consumer. Also the distribution
networks need to be expanded in order to allow for smooth flow of energy into areas
of consumption.
iii. Pricing and use of markers:
A simultaneous relationship between demand for and supply of energy along with
price should determine the equilibrium of the market, in principle. However, market
forces and the behavior of market players tend to cause the energy market to be in
disequilibrium in general. Taking the oil market as an example, independent investors
increase their profits when the market is volatile. Headlines will continue to provide
the required seeds for volatility. Such volatility could be minimized if trade in
international markers is fully regulated and physical trades are accurately reported.
The impact of headlines on prices cannot be fully eliminated, but the size and
magnitude of the impacts will be easily identified, serving to remedy the market
instability.

Common Issues:
These are issues and challenges that need to be addressed by both consumers and
producers.

i. Infrastructure:
Adequate reserves and production levels will not prevent scarcity of supply if
adequate infrastructure is not in place. Energy producers assume the responsibility of
building the required facilities capable of handling production increases and to ensure
the continued flow of energy to end consumers. While the expansion of
infrastructures such as pipelines, ports, electricity grids, etc. are faced with
environmental regulations and constraints, expansions are required to meet increasing
demand. In order to comply with environmental regulations, producers will be
required to increase their investment beyond the normal level and in many cases will
have to undertake investments in multiple outlets in order to ensure a sustained flow
of energy, reducing the overall return on investments as some of the expanded
facilities will be idle except in the case of unexpected supply shocks. The same could

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 be said about consumers. The necessary infrastructure required to process the raw
energy is essential to warrant investment in the supply side. The consumers need to
relax regulations concerning processing and invest in the downstream sector at their
end.
ii. R&D support:
The energy industry is divided in their support for the type and quality of future
energy. The political and economic path that a country follows often determines the
level of investment that is provided to support various energy types. In consuming
nations, the majority of R&D funding is in alternative energy. However, several
programs exist to support continued oil and gas production in the consuming nations.
Producers of oil and gas on the other hand are more inclined to invest in R&D that
supports a sustainable supply. In order to achieve a reliable energy supply, it is
necessary to undertake funding for all types of R&D with the aim of making oil and
gas available at a reasonable price to induce investment and in an environmentally
responsible manner. Current support for R&D is more of a public relations device
rather than sound economic policy, especially when it is taken by major oil producers
and green activists. For sustainability of supply, it is quite important to recognize the
need for R&D support for the areas that provide the optimum supply which in turn
supports economic development.
iii. Knowledge sharing and human resource development:
Knowledge in the energy industry is viewed as source of competitive advantage and
as such limits progress toward achievement of sustainable energy supply and use. A
prerequisite for the development of a sustainable supply of energy is to make
knowledge and technology available to all participants in the market at a reasonable
price. Another important element is investment in human resource development to
cope with the observation that the numbers of graduates in geology, petroleum
engineering and other oil and gas related expertise have been declining. Without
adequate investment in human resources6, sustainability of supply will be put at risk.
The industry must take interest in working with institutions to develop programs
consistent with the future energy requirements and so develop the future workforce.
Both consumers and producers are required to take part in supporting this important
area.
iv. The right of way through national territories:
Interruption of energy supplies from a region or a country can occur due to sabotage
of transportation routes in national and international water and/or national territories.
A prerequisite for security of supply is the protection of all energy routes to ensure an
undisturbed and continuous flow of energy. This is not only applicable to energy
producers as several types of energy flow through routes that are within the control of
non-energy producers. In short, there must be a distinction between political issues

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The importance of investment in human resources and the funding of educational institutions must be
emphasized as these areas were the most to suffer. The current shortages in knowledge pertaining to the
energy sector highlight the need to focus on such important major factor. The impacts of stringent policies
on the wellbeing of the individual and on social programs must be taken into account at the designing stage
of such policies.

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 and deliverability of energy to ensure security of supply and price stability at the
consumer end.
v. Geopolitics:
One of the cited causes of current higher oil prices is geopolitics as tensions
between nations hinder energy supply and result in market volatility as well as higher
prices. Unrest in some oil-producing nations is a concern to operating major oil
producers as well as consumers. Natural resources such as oil and the sovereignty of
nations versus political and economic interests have made spillover impacts of actions
taken by one country or group of countries a potential threat to worldwide sustainable
development. The spillover impacts in the present context are of concern to both
sides. Supply interruption caused by political act is expected to have an adverse
impact on consuming nations, and demand instability due to economic gains or
political regulation is expected to negatively affect producers.

Major issues:

Issues which may impact the substance of an energy road map include:

a. Environmental policies: Many environmental policies are

proposed and are under consideration as presented through the Intergovernmental
Panel on Climate Change (IPCC). How will the implementation of the proposed
stringent policies change the energy outlook stated above and what will the
impact be on future investment by fossil fuel producers? It should be pointed out
that doubt about the validity of the basis of these polices should bring producers
and consumers closer as scarcity tactics using false information surrendered.
b. Geopolitics: Political instability in some producing
countries and disputes between nations can lead to price increases due to supply
disruption or the expectation of armed conflict. Assuming disputes between
nations caused disruptions in the flow of fossil fuel, what would the impacts be?
c. Spare Capacity: A low level of spare capacity in
production and processing have proven to have a major impact on energy markets
ranging from higher prices to market disconnects. What is the expected impact of
limited or little oil production and refining capacity?
d. Subsidies and Taxation vs. competition: Many nations
provide subsidies through various means and impose taxes on certain types of
fossil fuel. What is the expected impact of such policies on welfare programs,
human development, R&D and the security of supply and demand?
e. What would be the consequences if both sides
(consumers and producers) decide to work independently (ignore
interdependencies)?

The answers to these questions constitute the building blocks for an improved
understanding of the energy roadmap, which should be based on cooperation and mutual

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interdependence that considers the needs and requirements of each side. Failure to
address these urgent issues will result in lower rates of return and a price collapse in the
short to medium term. The end result will be lower investment in both the downstream
and the upstream oil sector, resulting in scarcity of supply and higher oil prices in the
long term.

Conclusions and recommendations:

It is clear that interdependencies form the basis for dialog between oil and gas
producers and consumers. According to International Energy Agency’s latest energy
outlook, global energy mix is projected to remain essentially the same over the next 20
years. Oil is projected to remain the dominant energy source, with a share of 30% in
global energy consumption in 2030. It is therefore important to decide investments on the
basis of realistic vision where other sources of energy are pursued based on their
economics employing stepwise fashion process. Oil and Gas producers may be less
concerned with security of demand and more concerned with the ability to allocate
enough investments to meet expected demand, especially in the areas of transportation
and electricity. The rapid growth in Asia, the Middle east, North America, Eastern
Europe and Africa are prompting oil and gas producers to also invest in alternative such
as solar which proven to be environmentally friendly (if the right technology and
materials are used) and reliable source of energy supply. Cooperation between producers
and consumers of oil is a recipe for continuous sustainable development. It is quite
important that both camps move closer to cooperation. The challenges facing consumers
and producers in establishing reciprocal security are clear. Both sides desire continued
economic prosperity. Both sides are interdependent. Both sides have more common
ground than issues that divide them. A focus on self-interest and independent action can
put sustainable development at risk.

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