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A Special Kiplinger Letter December 16, zoos Energy Outlook THE FUTURE OF FOSSIL FUELS Tight supplies, high prices will drive a gradual move to cleaner sources upplies of oil and natural gas will remain very tight over the next two decades as growth in demand out- paces growth in production and new discoveries come less frequently. Consistently high fuel prices, as well as concerns about greenhouse gas emis- sions, will launch a long, expensive and bumpy transition to apost-fossil-fuels world. Development of alternative fuels will accelerate, but they won't account for a significant chunk of U.S. energy supplies until the latter half of this century. Along the way, businesses can expect big changes and challenges, as well as fresh opportunities, to arise. The energy squeeze isn't temporary. It differs fundamentally from the oil crises of the 1970s and the early 1980s. They were caused by political events in the Middle East that curtailed supplies. This time, the rapid development of mar- ket economies in China, India, eastern U.S. Energy Consumption, by Fuel 120 pn Quadrillion Btu) #~`"i: Renewables 90~~~ ,Nuclear 60 ~ ~ Coal 30 Natural Gas 0 L~ Petroleum - 2005 2025 2050 Sources: Dept. of Energy, Kiplinger Europe and elsewhere has led to soaring demand for fuels. At the same time, the search for new sources of oil and gas has become much more difficult and costly. Most discoveries are in places that are high risk, both politically and geological- ly, and require colossal investments. Energy firms recognize this, publicly stating their own plans to prepare for a future in which oil and gas play a smaller role. Since the late 1990s, most oil giants have been depleting their own reserves much faster than they have found new oil. BP and ExxonMobil have announced major expansion of their investments in renewable energy, coa] and other sources. Recent estimates from the oil giants sug- gest that global oil production is likely to peak sometime between 2020 and 2025 and then start a slow decline. For natural gas, the same pattern will be repeated with about afive-year lag. The average price for oil in 2025 could reach $180 a barrel (about $90 a bar- rel in current dollars) if little is done to cor- rect the growing supply/demand imbalance, which could total about 20 million barrels a day by then. And this assumes a slowdown in the pace of annual growth in oil demand to about 2%. Demand has actually grown 3% a year since 2000, when rapidly indus- trializing countries really started to make their presence felt. However, consistently high energy costs will lead to widespread conservation measures that should temper rising demand. Prices will ease during downturns in the economy, but businesses and con- The world won't run out of oil and natural gas. There is an estimated 2.3 trillion barrels of oil and 13.6 quadrillion cubic feet of gas in the ground, equivalent to about 80 years and 140 years, respectively, of global con- sumption at current rates. Long before these fuels can be tapped out, con- sumers should be using other energy sources. But there's still reason for concern about future supplies. Reserves of 860 billion barrels of oil and 4.8 quadrillion cubic feet of natural gas have actual- ly been proved to exist and are deemed economically viable. At current con- sumption rates, just 130 billion barrels of oil and 1.8 quadrillion cubic feet of natural gas would be left by 2025. New discoveries are sure to be made. But finding and extracting deposits wilt be an increas- ingly tough, expensive task. Promising areas for new oil and gas fields include such challenging locations as deep water off Greenland's coast and sev- eral miles offshore of West Africa. The success rate of test wells will be far lower in the future than in the past few decades. THE KIPLINGER LETTER (von. ez, rlo. so) AND KIPLINGERFORECASTS (vo~.I, rlo. z9) ^ KIPLINGERFORECASTS.COM