IEEJ：April 2018○ｃIEEJ 2018
Special Bulletin
A Japanese Perspective on the International Energy Landscape (370)

April 6, 2018

An Examination on the Factors to Increase Uncertainties of Long-term EnergyProjections
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
It is very difficult to accurately project future conditions in any field. This is the same casewith energy projections. Actual results frequently deviate from national or global energy projections.
Difficulties accompany projections even for the immediate future including the next year andincrease for medium to long-term projections. This is because various important factors having
impacts on energy market trends grow more uncertain for longer terms. Actual moves of factors arelikelier to deviate from assumptions for longer terms.
What factors are important for long-term energy projections? How uncertain are thesefactors? First, factors having great influence on energy supply and demand include fundamental
macroeconomic indicators such as economic growth and population. Both an economy andpopulation can be expected to grow in a long-term trend. If economic growth rate projections deviatefrom actual results by 0.1 to 0.2 percentage points, however, the economic size and energy demand
will differ widely over a long term. How fast any regional economy will grow will bring about
dramatic changes in the energy market structure. This is obvious, given that China’s rapid,
substantial economic growth from 1990 to 2010 led to great changes in the world economy and theinternational energy market.
Second, it may be needless to say that national and international politics and geopoliticalproblems have great influence on the energy situation, in addition to the above mentioned economicfactors. It is also very difficult to accurately project such political trends. Unexpected developmentsin the past include Middle East upheavals that triggered oil crises, the collapse of the Soviet Union,
and the birth of the U.S. Trump administration and its impacts.
Coming third are energy price trends. Clearly, it is extremely difficult to accurately project
how crude oil, gas, coal and other major energy prices would change over a long term. A common
challenge for forecasters is that they must depict a long-term future market picture even under suchextreme difficulties. It must be noted that not only absolute prices of crude oil but also relative pricesof competing energy sources would exert great influence on the future picture of energy. While
prices of crude oil as an internationally traded commodity are important, final prices that consumers
pay are even more important in a sense. As this point involves policies described later, tax andsubsidies must be taken into account. In this way, projection grows even more complex.
Fourth, how to view the availability of energy sources is also very important. An unevenendowment of resources has exerted great influence on the energy market power balance, asindicated by the history of energy markets. When thinking about the importance of the Middle Eastand Russia, we have no choice but to consider the uneven endowment of energy resources. This1IEEJ：April 2018○ｃIEEJ 2018
issue is clearly important, given the recent U.S. shale revolution that has dramatically changed theglobal energy situation by making massive energy resources available.
Fifth, we must consider policies that directly influence future energy supply and demand.
Policies have directly tapped the abovementioned prices and technologies and people’s choices as
described below, bringing about large changes in the global energy market. The oil crises in the1970s prompted the members of the Organization for Economic Cooperation and Development tostrongly promote energy policies that dramatically altered their energy supply and demand structuresand exerted great influence on the international energy market and crude oil prices. In Japan, strong
energy conservation and alternative energy introduction policies significantly reduced dependenceon oil. Not only such energy security policies but also policies to address environmental problems
are important. Air pollution improvement measures promoted in such countries as China are bringing
about key changes in the energy mix. Over a long term, how climate change countermeasures would
be enhanced globally and how energy choices would be affected by such countermeasures will exert
great influence on the global energy situation. Energy market liberalization or deregulation policies
are also key factors that variously influence energy choices and long-term energy investment throughcompetition.
Sixth, the advancement and diffusion of energy technologies and their impacts are difficult
to project. Since human beings depended on natural energy before the industrial revolution,industrialization with coal had made progress before the world entered the age of oil in the 20thcentury. The next energy transition is expected for the 21st century. Behind such transitions were theadvancement and diffusion of important energy technologies, as indicated by the history. Theproblem is that the rapid advancement and diffusion of energy technologies are unpredictable andoccasionally lead to disruptive changes in which very rapid, dramatic changes are accompanied bypains for long-existing systems. It is well known that not only resources problems but also the rapid
diffusion of horizontal drilling and hydraulic fracturing technologies were behind theabovementioned shale revolution. Recently, interests are growing globally in the advancement ofrenewable energy technologies resulting in rapid falls in power generation costs, the growing
diffusion of electric vehicle and other advanced automobile technologies and the wide-ranging
impacts of artificial intelligence and Internet of things technologies on energy. How far thesetechnologies would advance and penetrate the market is surely a key point for projecting long-term
energy supply and demand.
Seventh, the impacts of human lifestyles, values and other social factors are also
unignorable. How to use energy, what energy we should select and what society we should pursue
would have influence on the future picture of the energy market in a bottom-up manner. The
influence will be coupled with the impacts of technologies and policies to alter the energy market
structure. It is difficult to accurately project the alteration.
Uncertainties of these factors have long existed but have apparently increased more andmore recently. In this sense, long-term energy projection has become more difficult. In fact, various
institutions’ long-term energy outlooks differ widely, depending on the scenario. Particularly, theircoal and nuclear projections vary widely. Differences in oil demand projections have also widened as
numerous scenarios for peak oil demand have been published since last year.
Long-term energy projections are provided despite projection difficulties because energy
problems include those that must be considered for a long term and energy sector investment exerts
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IEEJ：April 2018○ｃIEEJ 2018
influence over a long term. As uncertainties grow, it will become even more important to conduct
analyses on the future based on flexible, multiangle approaches without being preoccupied with
fixed or biased approaches.

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