Hidden factor behind brighter US energy outlook

One big reason the US will become nearly energy self-sufficient by 2035 is increased energy efficiency, says Fatih Birol, chief economist at the International Energy Agency. Aggressive energy efficiency policies could yield even bigger gains.

The International Energy Agency made headlines in November when it published a report predicting the US would become the world's leading oil producer by 2020 and almost self-sufficient in energy by 2035. But there's a key part that's been largely overlooked, says Fatih Birol, chief economist at the IEA, in an interview with The Christian Science Monitor. Almost half of the US improvement will come through energy efficiency. Here are edited excerpts from the interview:

Question: The term “energy independence” is used frequently by policymakers, notably during the most recent US presidential campaign. How do you define the term?

Answer: When we look at the future, oil and gas import dependency is set to increase everywhere in the world except for one country, which is the United States. We expect that the US will be a net natural gas exporter very soon and oil import dependency will go down substantially. For example, the US was, until recently, importing a significant chunk of its oil from the Middle East, and we expect that very soon the US may not need to import any from the Middle East.

The giant steps the United States made in terms of self-sufficiency, or energy independence, is not only the result of the substantial growth in oil production, but also as a result of the recently introduced fuel-efficiency standards [for cars and light trucks]. And when we look at our numbers, we think about 55 percent of the success goes to the production growth and 45 percent on the consumption side, pushing demand down. So therefore, for reducing import dependency, you need to push to increase production as the US did, but government policies are also crucial.

Q: Is it plausible for a nation to aspire to be completely self-sufficient in energy?

A: If the markets are connected with each other, it is not possible. In terms of oil markets, it is not possible because if the oil prices go up, the US economy will still be affected. In natural gas it’s a different story. Natural gas has different, segmented markets. Today the US natural gas prices are much cheaper than the other regions. For example, they are five times cheaper than Europe and eight times cheaper than Asia. So this is a different story.

Q: The report finds that major energy consuming countries haven’t fully tapped into the potential of energy efficiency measures. Why not?

A: For years and years, energy efficiency was neglected in the policymaking. I've followed international energy policymaking for some time and energy efficiency is the epic failure of policymaking.... There are some important energy initiatives in the last year but, despite that, we see that only one-third of the economically viable energy efficiency potential is used. And this is just from an economic point of view, leaving aside the environment, climate, and others. Just from an economic point of view this is really a nonsense policy. Why? Just let me give you one example:

Last week I was in Oslo in a panel with a CEO of a major international oil company and I told him, "If you have an oil field, and it makes a lot of money for you, and you produce one third of the oil, and after one third, they close oil production down and you don't use any more of the oil. What would you do?" He said, “I would fire the reservoir engineer.” It's exactly the same story. We use one-third of this energy efficiency potential and two-thirds are left unused. This is a big problem, and momentum is growing, But we are asking governments to be much more effective here.

Q: The IEA's 2012 World Energy Outlook highlights the connection between water and energy. What role does water play in energy production?

A: Today about 15 percent of the global water use comes from the energy sector, mainly in electricity generation but also in shale gas, biofuels, and others. And when we look at the future, we see that this will increase substantially. This means that either we try – through new technologies – to reduce the need for water, or we discover new water resources for energy production. But in any case, this means that the cost of energy will increase as a result of growing need for water, even if you have new technologies. Therefore, in the future, the availability of water becomes a critical factor in determining the economic viability of energy projects.

Q: How do you respond to critics who say government intervention in the energy sector hurts job growth? Can you identify any specific examples where you see economic growth coupled with subsidies or regulations that promote alternative energy?

A: There are many, many examples. In the US, there is the introduction of CAFE standards [governing vehicle emissions]. This is one of the reasons why Detroit is still with us. Second, a major part of the energy efficiency improvement will be in the building sector, namely refurbishment of the buildings. This is a major source of employment and growth.... I hope to see another unconventional energy revolution, but this time on energy efficiency. And many countries are pushing this button and neither the US nor the other countries should underestimate the very strong potential impact of energy efficiency.

Q: The vast majority of the network that supplies our energy is largely hidden. How can we foster a more energy literate public – one that is more conscious of the amount of electricity and resources it consumes?

A: I know many US citizens don't want to see the government play a key role in energy issues, but there’s a need for a public service here, from the government, to make people understand that using energy more efficiently is good for their own budget. I believe that this should be taught in schools – that our energy resources are limited, at the end of the day, and, that if you want to preserve the environment or the way of life we are going through today, we have to use energy more efficiently.

With the current trends in energy use, the global temperature is set to increase by 6 degrees Celsius. This will definitely change the way of life we live today.... We have to make people understand the connection between using energy at home for cooking or taking a shower, and its relationship to climate change.

Q: Can you explain the Energy Development Index – what it is, and why the IEA felt it necessary to develop?

A: Today, 1.3 billion – about 20 percent of global population – have no electricity, mainly in sub-Saharan Africa, India, Pakistan, and Bangladesh. This is not only statistics; it means that a mother or a father cannot preserve their children's medication in the refrigerator. They don’t have access to the external world. They cannot study and they cannot read. The day finishes for them much earlier than for us....

This is a real issue – beyond energy, beyond economics. It’s a moral issue. The amount of money that is needed to provide access for them to energy, to electricity, is completely peanuts, compared with other expenses. Therefore we are pushing an energy-access agenda, and we are looking at every country every year to see how much they are improving their energy access and using energy more efficiently. [The index] is used by many aid agencies worldwide as a basis for their aid programs.