The Race for Energy: What Will It Mean for Western Firms?

Rising energy demand from China and India has unleashed a worldwide race to secure access to scarce fossil fuel resources, a more difficult proposition with the emergence of national oil companies in the resource-owning countries. While Western companies will likely feel the pain of increasing energy costs, there is a potential upside to global energy scarcity, according to experts from Wharton and The Boston Consulting Group: Renewable and nuclear energy present huge opportunities for investors and entrepreneurs, underscored by concern over a global stalemate surrounding curbs on carbon-dioxide emissions.

The International Energy Agency (IEA), an autonomous body set up within the framework of the Organization for Economic Cooperation and Development, says in its November 2007 World Energy Outlook that “if governments around the world stick with current policies, the world’s energy needs would be well over 50% higher in 2030 than today.” Global energy demand would grow an average of 1.8% annually, from 11.4 billion tons of oil equivalent (toe) in 2005 to 17.7 billion toe by 2030. Fossil fuels would make up 84% of that increase, the report notes, although oil’s share would fall from 35% to 32% while coal’s share would jump from 25% to 28%.

The dramatic growth of the Chinese and Indian economies in recent years has caught stakeholders in the global energy industry ill-prepared, according to Hal Sirkin, senior partner and managing director at BCG and head of its global operations practice. “China and India are changing the global balance points in resources,” he says, noting that the emerging consumer markets in these two countries are behind the boost in demand.

The forces at work in the emerging scenario are energy security, energy affordability, climate change and sustainability, says Balu Balagopal, senior partner and managing director at BCG. “There is a clear recognition that energy security and independence are top of mind because the demand side of the equation shows quite healthy growth driven by the growth in these emerging economies such as India and China,” he notes. “At the same time there is an uptick from a supply standpoint — traditional oil and gas are coming under some pressure.”

Balagopal says that while “alarmists talk of peak oil,” it might more appropriately be characterized as the end of cheap oil. Proponents of the peak-oil theory say that global petroleum production will peak sometime between 2025 and 2030, after which total available energy will decline continuously. Balagopal suggests that many new sources of energy are potentially being brought on stream, including frontier energy such as deepwater exploration and oil sands. But all that will take time to come through, he says, and “they are also more expensive.”

University of Pennsylvania