(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, July 26 Improvements in energy efficiency will confer an enormous competitive advantage on the countries of North America and Europe in the next two decades relative to the fast-growing but energy-inefficient economies of Asia and the Middle East.
Rising oil demand in Asia and growing production from North America's shale formations, among other shifts transforming the global economy and oil markets, have been extensively analysed. But the impact of diverging energy efficiency trends has received much less attention.
In 2035, the advanced economies in the OECD will consume 46 million barrels per day of crude oil and other liquid fuels, essentially unchanged from today's consumption, according to the latest version of the U.S. Energy Information Administration's biennial International Energy Outlook (IEO 2013) published on July 25.
By contrast, consumption in developing countries is set grow more than 40 percent to 63 million barrels per day in 2035. Developing countries will account for almost 60 percent of global consumption, which will make them the most vulnerable to anything that causes an interruption in oil supplies or a sharp rise in prices.
Developing countries' rising oil consumption is driven primarily by population growth and rapidly rising incomes. But unlike the advanced economies, they have so far made little progress improving their energy efficiency.
Countries in North America and Europe have made enormous strides curbing projected consumption growth by legislating tougher fuel-economy standards for vehicles and, more controversially, by mandating the use of biofuels.
The result has been to bend the oil-consumption curve sharply lower. In its last set of projections, published in 2011, the EIA predicted the OECD would consume almost 50.5 million barrels per day in 2035. That figure has now been trimmed by almost 4.5 million barrels (nearly 9 percent).
Rather than recovering after the recession that began in 2008, OECD demand is set to remain subdued and essentially stagnant over the next two decades, according to the EIA. In effect, the advanced economies will achieve "oil-less growth" (Chart 1).
In contrast, the recession has made almost no difference to consumption in the emerging economies and there is no sign of energy efficiency measures slowing its rate of expansion (Chart 2).
Chart 1: link.reuters.com/saw89t
Chart 2: link.reuters.com/vaw89t
Diverging consumption and efficiency trends will transform the world's exposure to oil shocks.
The biggest impact of oil shocks in 1973, 1979 and 2008 was felt in the advanced economies of the OECD, which were by far the largest oil consumers. But improvements in efficiency should reduce the developed economies' exposure and vulnerability to sudden changes in the cost of crude. By 2025 or 2035, the biggest impact will be felt in the emerging world.
Even outside oil shocks, developing-country oil importers such as India and China will find the high cost of oil a growing burden on their balance of payments and competitiveness.
The economic and strategic threat to developing economies has been foreshadowed by the shale gas revolution.
Cheap North American natural gas is already encouraging steelmakers, chemical manufacturers and some other energy-intensive industries to transfer some of their operations back to the United States. Improvements in vehicle efficiency could eventually have the same impact with oil.
If they are not to end up at a serious economic and strategic disadvantage, developing economies need to become much more efficient in the way they use fossil fuels, especially oil.
China's government already understands this: improving energy efficiency has been one of the top priorities in both the last two Five-Year Plans.
Outside observers often attribute the government's focus on energy efficiency to an altruistic commitment to combat global warming. But energy efficiency is as much a matter of competitiveness and national security. (Editing by Anthony Barker)