About the Project
The KAPSARC Energy Vulnerability project looks at analyzing energy shocks and disruptions from the perspective of both exporting and importing economies. The project’s objective is to understand what are the macroeconomic fundamentals that increase the resilience of a country to energy shocks and, in particular, the role of the energy mix in reducing vulnerability. The research will be complemented by an analysis of policies that enhance the resilience of economies to energy shocks.
Summary
It is common for decision makers and media to conflate the oil price with the price of energy. High crude oil prices are taken as signals of energy scarcity. By contrast, and perhaps misleadingly, low crude oil prices are perceived as evidence of energy abundance.
The first decade of the 21st century was characterized by a strong growth in emerging markets, accompanied by a gradual and persistent increase in crude oil prices. Emerging markets grew at an annual average of 6.5% during 2000-2007. At the same time, oil prices grew at an annual average rate of 21%. This increase in oil prices was a reflection of relative slow growth in crude oil production and rapid demand growth. However, these years were characterized by a relative abundance of energy from coal and, to some extent, natural gas. In particular, coal was the main source of the “additional energy” that fueled world economic growth during that period. This relative abundance of energy from coal and natural gas could partially explain why the increase in oil prices did not have as negative an impact on the global economy as many expected. On the contrary, the increase in the supply of coal and, to a lesser extent, natural gas could be one of the reasons that explains the acceleration in global economic growth in the period 2000-2007.
The increase in coal consumption led to a significant change in the energy mix. In 2000, coal only amounted to 29% of the total consumption. In 2012, the share of coal in the fossil fuel energy mix was 34%, a level comparable to half a century ago. The shift in the world energy mix towards coal may be the result of a decrease in coal prices relative to oil and natural gas prices, complemented by accommodative policies in some key countries. Crude oil is still the largest source of energy, but the world has gradually been shifting towards more of a balance between oil, coal, and natural gas.
The surge in coal consumption appears to have impacted negatively on energy productivity growth, as coal use is less efficient than oil or natural gas from a technical and economic perspective. More energy from coal is required to achieve the same economic and calorific yield as is derived from oil. Despite an increase in energy productivity in key countries, the first years of the 21st century saw global energy productivity growing more slowly than in the past. One reason for this is that emerging economies, which were less productive from an energy perspective, grew faster than advanced economies and increased their weight in the global average before their energy productivity had reached OECD levels.
Perhaps one conclusion to be drawn from the period 2000-2007 is that governments of emerging economies will not easily turn their backs on a source of energy that is affordable and reliable to drive economic growth. The relative costs of energy are as important to them as social, political, and environmental considerations in shaping the global energy mix. However, the other side of the coin is that the increasing exposure of the global economy to coal and natural gas means that oil may cease to be the only source of energy shocks or disruptions. Oil prices may no longer be the sole barometer of energy shortages or abundance.