BP 2017 ENERGY OUTLOOK: The issue of the Climate Change needs to be incorporated into the base case of the forecast

BP published 2017 Energy Outlook. The report outlines potential scenarios for global energy markets over the next 20 years based on assumptions and judgements about future changes in policy, technology and the economy

In his welcome note, Bob Dudley, Group Chief Executive indicates that the response to the near-term challenges has to be informed by our understanding of the longer term energy transition that is taking place to ensure we are able to continue to meet the energy needs of a changing world. 

In summary, the report highlights the following points:

  • In the base case, world GDP almost doubles over the Outlook driven by fast-growing emerging economies, as more than 2 billion people are lifted from low incomes.
  • This rising prosperity drives an increase in global energy demand, although the extent of this growth is substantially offset by rapid gains in energy efficiency: energy demand increases by only around 30%.
  • The fuel mix continues to adjust, although oil and gas, together with coal, remain the dominant sources of energy. Renewables, with nuclear and hydroelectric power, provide half of the additional energy required out to 2035.
  • Gas grows more quickly than oil and coal, led by US shale gas; the rapid expansion of LNG is likely to lead to a globally integrated gas market, anchored by US gas prices.
  • Oil demand grows throughout the Outlook, but the pace of demand slows with noncombusted use replacing transport as the main source of demand growth.
  • The increasing penetration of electric cars and the broader mobility revolution will have an important bearing on future oil demand.
  • The abundance of oil resources may prompt low-cost producers to use their competitive advantage to increase market share.
  • Global coal consumption looks set to peak, as the continuing reform of China’s economy causes growth in its demand for coal (and energy) to slow sharply, although China remains the largest growth market for energy.
  • Renewables are the fastest growing fuel source, quadrupling over the next 20 years, supported by continuing gains in competitiveness.
  • The world economy continues to electrify, with nearly two-thirds of the increase in global energy going into the power sector.
  • In our base case, carbon emissions from energy grow at less than a third of the rate of the past 20 years, reflecting gains in energy efficiency and the changing fuel mix. But emissions continue to rise, highlighting the need for further action.
  • The uncertainty around the base case is explored in three alternative cases: a faster mobility revolution; alternative pathways to a lower-carbon energy system; and risks to gas demand. 

I would agree with this conclusion as it seems very logical. However, I noticed that one very important component is missing in BP’s base case. It appears that consequences of the climate change are not taken into account.

I do not mean to criticise and understand that it is difficult to identify how exactly this component shall be incorporated into the forecast. However, without it, the analysis does not appear to be complete.

The reason for inclusion of the potential impact into the base case is the fact that Donald Trump and his team deny the existence of climate change. His decision to significantly cut the EIA’s budget is vivid confirmation of his policies directed towards deregulation of the oil and gas industry.

Trump’s actions leave us with little doubt that previously set standards would be replaced with less (or much less) restrictive rules. Needless to say that it will lead to the increase of the greenhouse gas emission and deterioration of the environment.

It is understood that without urgent measures, the frequencies and the scale of natural disasters will increase causing a substantial damage to the global economy. And with Donald Trump in the White House, it is likely that so much needed urgent measure would be implemented anytime soon.

If we assume that nothing or little is done, it could mean that for the purpose of the base case we need to incorporate the most conservative estimates of human and financial damage caused by such inaction.

About 640 million people are at risk of the rising seas. The climate change would also case severe droughts on some parts of the globe leading to collapse of agriculture, famine, social unrest, civil wars and enormous number of refugees.

In addition, many of the world’s biggest financial and business centres with high concentration of the vital transportation, communication and other types of infrastructure are located in coastal areas. With rise of the sea levels most or all of them would be at risk of the wide range of damage including complete destruction of all such physical infrastructure that we have in place today.

Although it might happen later than 2035, but initial impact would be felt within a period covered in the report. I would think that even initial impact could be translated into a less optimistic forecast.

Marshall Burke, Solomon Hsiang, and Edward Miguel, economists based at Stanford and the University of California Berkeley, presented a new analysis of the relationship between historic temperature fluctuations and macroeconomic growth. In contrast to past studies, they argue that 21st century warming could lead to huge global-scale macroeconomic impacts. The best estimate from Burke and colleagues is that business as usual emissions throughout the 21st century will decrease per capita GDP by 23% below what it would otherwise be, with the possibility of a much larger impact.

They also conclude that countries with an average yearly temperature greater than 13°C (55°F) will see decreased economic growth as temperatures rise. For cooler countries, warming will be an economic boon. This non-linear response creates a massive redistribution of future growth, away from hot regions and toward cool regions.

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Based on the analysis, rich and poor countries respond similarly at any temperature, but the impact of warming is nonetheless much greater on poor countries, because they are mostly in regions that are already warm.

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It is also important to study what kind of political consequences could be triggered by the climate change. The recent events involving Syrian refugees could be used as a reference point.

Governments of the EU members states made a decision to close boarders in contradiction to their international legal obligations in accordance with the signed 1951 Convention relating to the Status of Refugees and/or its Protocol. It suggests that if faced with a greater number of Climate Refugees, governments would not do the same causing a wide spread poverty or even military conflict.

When such conditions have real potential to occur, it is difficult to imagine that we will have the rising prosperity in place, not to mention that such prosperity will drive energy demand.

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