IAGS logo Energy Security
Prepared by the
Institute for the Analysis of Global Security

May 24, 2004
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China and US should set up a strategic dialogue on energy issues
Interview with Dr. Gal Luft of the Institute for the Analysis of Global Security, originally published by 21st Century Business Herald in Chinese.

A crude threat
The terrorist campaign against Iraq's pipelines demonstrates that pipeline attacks are no longer a tactic but part of a sustained, orchestrated effort that can deliver a significant strategic gain. They can also cause significant damage to the global oil market.
Next in line to emulate the insurgents in Iraq could well be Islamist terrorist groups operating in Central Asia, among them Chechen separatists and the Islamic Party of Liberation, a group that seeks to carry out a holy war against the West and is a suspect in the recent wave of deadly attacks in Uzbekistan.

Chilly response to U.S. plan to deploy forces in the Strait of Malacca
Whether something is profoundly wrong in the dialogue between the U.S. and the two Asian powers is an important question in itself, but the real issue is what is the best mechanism to secure the world's most important shipping corridor, through which one quarter of world trade and half of the world's oil and two thirds of liquefied natural gas move each day.

North Sea oil is declining
Since the 1970s North Sea oil has not only been a major source of wealth for both the British and Norwegian economies but also a way for Europe to cut its dependence on Middle East oil. Now many of the major fields in the North Sea are in decline and the North Sea is about to lose its prominent role as one of the world's leading oil domains.

Terror's Big Prize
Since September 11, pipelines, tankers, refineries and oil terminals have been attacked frequently. Except for a sharp increase in maritime insurance premiums in these regions these attacks had marginal strategic consequences. But in at least two cases oil terrorism could have rattled the world.

Libya: changing its spots?
Libyan crude oil is particularly attractive due to its very low sulphur content, which requires much less refining than higher sulphur oil. It is extremely high quality crude, whose characteristics are not easily found elsewhere. Despite its unique treasure, Libya's production capacity is relatively small, standing on 1.5 mbd of crude, or 2% of world supplies.
Since the 1988 Lockerbie bombing Libya had been under U.S. and UN sanctions which hindered its ability to generate enough investment to develop its oil sector. Libya's decision to embark on a rapprochement with the U.S came at unsurprisingly perfect timing, just as concessions for major U.S. oil companies were about to expire.

On the technology front

Fuel Cell power plant installed at NJ College
The fuel cell will provide 250 kilowatts of electric power as well as heat, to several buildings on the campus.

Biomass-to-Ethanol Progress
The enzyme costs of converting cellulosic biomass into sugars for fuel ethanol production have been reduced approximately twenty-fold with technology developed by the National Renewable Energy Laboratory (NREL) and Denmark based Novozymes, biotech-based leader in enzymes and microorganisms.

EU study: Methanol from biomass - competitive with gasoline
A study of a new patented Swedish technology concluded that the alchohol fuel methanol can be produced from biomass via black liquor gasification at a cost competitive with that of gasoline and diesel.

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Back Issues

Highlights from the Department of Energy’s International Energy Outlook 2004-2025

The Energy Information Administration (EIA,) the analytic arm of the U.S. Department of Energy (DOE), released its annual International Energy Outlook 2004-2025 (IEO2004). The report projects that world energy consumption will increase by 54 percent by 2025, with fastest increase in energy consumption among the developing nations of the world, primarily China and India.

Gross domestic product (GDP) in developing Asia is expected to expand at an average annual rate of 5.1 percent, compared with 3 percent per year for the world as a whole. With such strong growth in GDP, demand for energy in developing Asia will double by 2025, and will account for 40 percent of the total projected increment in world energy consumption. Energy demand in the industrialized world is projected to grow 1.2 percent per year.

Overall, the EIA projects a positive future for the energy market. Though demand for energy is growing at a staggering rate, EIA projects it will be met by supply, albeit at higher prices. The EIA analysis is based on the assumption that the world's oil resource base is substantial and that it will not peak before 2037. If true, there is enough room for significant expansion of the oil market. But the EIA, by its own admission, has no mechanism to conduct reliable, independent reserve data analysis. Like other agencies it relies on data provided by petroleum ministries of oil producing countries, which are often deliberately exaggerated, and on data provided by oil companies. As the recent Royal Dutch/Shell scandal showed, reserve data by major companies may be overstated. On March 18, the company slashed its reserve estimate by 21%.

The most heated debate has to do with Saudi Arabia's reserve base. Upon releasing the report Guy Caruso, who heads the EIA, claimed that contrary to statements by analysts like Matthew Simmons that Saudi oil fields are near peak production, the Dept. of Energy expects the kingdom's output to more than double over the next two decades. Saudi Arabia's current oil production capacity stands on 10.5 million barrels per day (mbd) and Caruso stated it will likely increase to 22 mbd by 2025. While this may be true, the evidence to support such optimistic, self-assured assessment is inadequate. The disappointing rate of discoveries of large oil fields seen in recent years in the kingdom and eleswhere cast serious doubts about the validity of the EIA's analysis. Furthermore, the cost to the global economy of misstating Saudi reserve figures could be staggering. If Saudi oil begins to peak before 2025, an oil shortage will surely be felt.

The EIA reserve assessment influences its price projections. The $51 per barrel of oil figure EIA projects for 2025 assumes supply is steady and uninterrupted. But supply disruptions as a result of depletion could take oil prices to a much higher level deeming many of the report’s parameters irrelevant.

Some of the report's highlights:


Oil is expected to remain the dominant energy source worldwide through 2025. World oil consumption is projected to increase by 1.9 percent annually, from 80 mbd today to 118 mbd in 2025. OPEC producers are expected to be the major suppliers of increased production requirements. OPEC oil production is expected to grow 80 percent while non-OPEC oil production is expected to increase only 42 percent.

The largest share of the projected increase in non-OPEC oil production is expected in Russia, the Caspian Basin, Non-OPEC Africa, and South and Central America (in particular, Brazil). Russian oil production is expected to reach 10.9 mbd in 2025, 43 percent above 2002 levels. Production from the Caspian Basin is expected to exceed 6 mbd by 2025, compared with 1.7 mbd in 2002. In 2025, projected production from South and Central America reaches 7.8 mbd, up from 4.3 mbd per day in 2002. A large portion of the increase in South and Central American production, 0.9 mbd, is expected to come from nonconventional oil production in Venezuela. Non-OPEC African production is projected to grow from 3.1 mbd in 2002 to 6.7 mbd in 2025.

U.S. dependence on imported oil has grown over the past decade, with declining domestic oil production and growing demand. According to the DOE this trend is expected to continue. Total U.S. gross oil imports are projected to increase from 11.5 mbd in 2002 to 20.7 mbd in 2025. This means net imports, which accounted for 54 percent of total U.S. petroleum demand in 2002 are expected to account for 70 percent of total U.S. petroleum demand in 2025. This is a higher level of dependence than the 68 percent figure claimed in last years’ projection.

Influenced by political unrest in Venezuela and Nigeria, the war in Iraq, and the continued discipline of producers in OPEC in adhering to production cutbacks, world oil prices rose by almost $10 per barrel over the course of 2002 and remained high throughout 2003. The IEO2004 expects little downward movement in world oil prices in 2004, given low oil inventories, a surge in developing Asia’s oil demand, and the regional uncertainty that surrounds the situation in Iraq. World oil prices are projected to reach $51 per barrel in nominal dollars by 2025.

According to the DOE, total petroleum demand is projected to grow at an average annual rate of 1.6 percent per year, from 19.6 mbd in 2002 to 28.3 mbd in 2025.

Tar Sands:

In recent years, extensive investment has gone into the development of Alberta’s oil sands. In 2002, Canada’s crude bitumen production from oil sands averaged 790,000 barrels per day, about a third of Canada's conventional crude output. EIA projects total oil sands bitumen production to be 1.7 and 3.3 mbd in 2010 and 2025, respectively. In 2010, about 52 percent of the bitumen is projected to be surface mined, and the remaining 48 percent is projected to be produced through in situ production. In 2025, approximately 57 percent of the oil sands bitumen is projected to be surface mined, and 43 percent is projected to be produced through the in-situ production method which is much more expensive and energy intensive.


U.S. ethanol production, with corn as the primary feedstock, totaled 139,000 barrels per day in 2002. Production is projected to increase to 278,000 barrels per day in 2025, with about 27 percent of the growth from conversion of cellulosic biomass (such as wood and agricultural residues). Ethanol consumption in E85 vehicles is also projected to increase from the national total of 7.8 million gallons in 2002 to 42 million gallons in 2025.

Natural gas:

The fastest growing source of primary energy is expected to be natural gas. Over the 2001-2025 forecast period, consumption of natural gas is projected to increase by 67 percent.

Total demand for natural gas is projected to increase at an average annual rate of 1.4 percent from 2002 to 2025 primarily as a result of increasing use for electricity generation and industrial applications, which together account for almost 70 percent of the total projected growth in natural gas demand in the forecast period.

For almost four years, natural gas prices have remained at levels substantially higher than those of the 1990s. Prices are likely to continue to climb. Average prices for natural gas are projected to increase from $2.95 per thousand cubic feet in 2002 to $4.90 per thousand cubic feet in 2003, declining to $3.40 per thousand cubic feet in 2010 as the initial availability of new import sources (such as LNG) and increased drilling in response to the higher prices increase supplies. With the exception of a temporary decline in natural gas wellhead prices just before 2020, when an Alaska pipeline is expected to be completed, prices are projected to increase gradually after 2010, reaching $4.40 per thousand cubic feet in 2025 (equivalent to about $8.50 per thousand cubic feet in nominal dollars). LNG imports, Alaskan production, and lower 48 production from nonconventional sources are not expected to increase sufficiently to offset the impacts of resource depletion and increased demand.


LNG imports are expected to constitute an increasing proportion of U.S. natural gas supply. Total net imports are projected to supply 21 percent of total U.S. natural gas consumption in 2010 and 23 percent in 2025, compared with recent historical levels of around 15 percent. LNG imports already have doubled from 2002 to 2003. The EIA report says that four new LNG terminals are expected to open on the Atlantic and Gulf Coasts between 2007 and 2010.


Coal remains an important fuel in the world’s electricity markets and is expected to continue to dominate energy markets in developing Asia. World coal use has been in a period of generally slow growth since the 1980s, and that trend is expected to continue through the projection period.

Continued improvements in mine productivity are projected to cause falling prices throughout the forecast relative to historical levels. Higher electricity demand and lower prices, in turn, are projected to yield increasing coal demand.

From 2002 to 2025, production of high- and medium-sulfur coal is projected to increase 14 percent from 578 to 664 million tons (0.6 percent per year), and low-sulfur coal production is projected to rise 66 percent from 527 to 879 million tons (2.2 percent per year).

Coal consumption for electricity generation is projected to increase from 976 million tons in 2002 to 1,477 million tons in 2025 as the utilization of existing coal-fired generation capacity increases and, in later years, new capacity is added.

According to the EIA, the average price of coal is projected to decline from $17.90 (2002 dollars) in 2002 to a low of $16.19 per short ton in 2016. Prices decline in the forecast because of increased mine productivity, a shift to western production, declines in rail transportation costs, and competitive pressures on labor costs. After 2016, however, average prices are projected to rise as productivity improvements slow and the industry faces increasing costs to open new mining areas to meet rising demand. In 2025, the average price is projected to be $16.57 per short ton. In nominal dollars, projected coal prices are equivalent to $32 per short ton in 2025.

Electricity from renewables:

The DOE projects significant increases in electricity generation from both wind and geothermal power. From 4.8 gigawatts in 2002, total wind capacity is projected to increase to 8.0 gigawatts in 2010 and 16.0 gigawatts in 2025. Generation from wind capacity is projected to increase from about 11 billion kilowatthours in 2002 (0.3 percent of generation) to 53 billion in 2025 (0.9 percent). Nevertheless, the mid-term prospects for wind power are uncertain, depending on future cost and performance, transmission availability, extension of the Federal production tax credit after 2003, other incentives, energy security, public interest, and environmental preferences. Geothermal output, all located in the West, is projected to increase from 13 billion kilowatthours in 2002 (0.3 percent of generation) to 47 billion in 2025 (0.8 percent).

Generation from municipal solid waste and landfill gas is projected to increase by nearly 9 billion kilowatthours, to about 31 billion kilowatthours (0.5 percent of generation) in 2025. No new waste-burning capacity is expected to be added in the forecast. Solar technologies are not expected to make significant contributions to U.S. grid-connected electricity supply through 2025. In total, grid-connected photovoltaic and solar thermal generators together provided about 0.6 billion kilowatthours of electricity generation in 2002 (0.02 percent of generation), and they are projected to supply nearly 5 billion kilowatthours (0.08 percent) in 2025.