By Gioietta Kuo

The International Energy Agency (IEA) was set up during the oil crisis of 1973 to serve as an energy policy advisor to the industrialized nations of the West to ensure reliable, affordable and clean energy. It acts as a watchdog on energy security, economic development and environmental protection. As such its short and medium-term forecasts are eagerly taken up by member governments and world business communities alike.

The IEA's mid-term oil market report of July 9 issued a warning that the world will be increasingly experiencing an oil supply crunch with prices to soar to unprecedented levels over the next five years.

The basic facts are that demand for oil will rise by 2.2 percent a year between now and 2012 - up from a previous forecast of 2 percent - as the world's economy expands at 4.5 percent a year.

Industrial countries are having to place increasing reliance on main OPEC countries due to continuing geopolitical tensions in alternative producers such as Venezuela, Iran and Nigeria.

The IEA report said: "Despite four years of high oil prices, this report sees increasing market tightness beyond 2010. It is possible the supply crunch could be deferred - but not by much The potential effects of a combination of low OPEC spare capacity and slow non-OPEC production growth are of significant concern - all the more so when considered alongside tightness in other hydrocarbons, particularly the natural gas market."

Lawrence Eagles of the IEA warned: "The results of our analysis are quite strong. Something has to happen. Either we need to have more supplies coming on stream, or we need to have lower demand growth."

An additional warning is that additional global refining capacity over the next five years will not match earlier expectations as a result of rising costs and a shortage of engineers, which will delay construction.

Production of bio-fuels is set to reach 1.75 million barrels per day by 2012, which is more than twice that of last year. However, the important point is that this will only contribute to a mere 2 percent of global supplies.

There are two problems confronting bio-fuels, which will hinder further growth. First is the fact that diverting corn into ethanol has caused a doubling of global grain prices which has resulted in larger than 10 percent rises in food prices in many countries such as the United States, China, India, Mexico, and in other developing countries.

Second is the economics of fuel production. It seems to be a fact of life that wherever we turn to make new fuels, we find it cannot be done without expending enormous amount of our resources such as electricity from burning fossil fuels and water, defeating the original purpose.

One might ask: What about the potentials of newly discovered or hitherto unexplored oil fields in the Pacific Ocean, Gulf of Mexico or in the Arctic Ocean, which was previously ice covered?

Most of them would need a combination of advanced and possibly new technology and it would be perhaps a decade before we would see significant oil flowing from them. Consequently that oil will not be cheap.

The real trouble facing the world today is not just the oil crunch, it is global shortage of power that is reaching crisis proportions. This will increasingly come into play to curb demand for energy and consequently reduce the economic growth rates of all countries.

How does the impending oil crunch fit into the overall global energy crunch? Currently, oil for transport accounts for 22 percent of total world energy consumption. Apart from the limited potential of bio-fuels discussed above, there are no miracle fuels in sight that will replace oil for transport.

Oil currently constitutes the biggest component of the world's marketed energy use at 39 percent, followed by natural gas (26 percent), coal (24 percent), renewables (8 percent) and nuclear (6 percent). In order to reduce the effect of burning fossil fuels - oil, gas and coal - on climate change, it is imperative we start replacing these traditional fuels by wind, solar, biomass, tidal, hydro and nuclear energy.

The main renewable sources of energy, wind and solar, can never provide a large fraction of our electricity needs - partly because of the high capital cost, which is at least three times more per watt than nuclear reactors - but a more important reason is that wind does not blow nor sun shine all the time, so a large and steady power source is needed to provide for the national grid, which the electricity generated from renewable sources can plug into.

For a variety of reasons, economics among them, it is never likely that renewable sources can contribute to more than 20 percent of our electricity needs in the US.

For example, much technological progress is still required to make the solar cells 10 times cheaper before they can be adopted by the majority of population in the West, let alone those in developing countries where per capita wealth is lower.

How do we then provide for the 80 percent of electricity to be generated for the national grid? Of the fossil fuels, oil and gas are running out and this leaves the controversial coal.

We all know the disadvantages of coal. It creates horrific atmospheric pollution and toxicity that is injuring the health and well-being of many in China. Worse still, it in fact generates large amounts of greenhouse gases, which pose a threat to further global warming.

Coal-fired power stations produce 1 metric ton of CO2, the chief greenhouse gas, for just one mWh of electricity generated. No wonder the world spewed into the atmosphere 27 gigatons (billion metric tons) of CO2 in 2006.

As the world's demand for electricity will rise by 70 percent between 2000 and 2030, the concentration of CO2 in the atmosphere will rise to 44 gigatons, causing a world temperature rise of 1.5 C from 1900.

The only salvation for the world's energy problems is nuclear power, for reactors do not emit greenhouse gases. They are not very expensive to build, about US$1/watt, that is US$1 billion for a large 1,000 megawatt power station.

Unfortunately the world is woefully inadequate when it comes to adopting new energy policies. It is forecast that by 2030 we shall still be producing 75 percent of our electricity from fossil fuels.

It is almost certain that without a fundamental change to a new direction in the energy policy of many nations, the world's temperature is going to keep on rising, with many dire consequences such as sea level rise of many tens of meters. Not good for coastal regions worldwide.

The author is senior fellow at the American Center for International Policy Studies in the US.

(China Daily via agencies July 25, 2007)