London, 21 March 2011

The current mix of prices and policies will favour substantial growth in gas-fired electricity generating capacity, and expansion of unconventional oil to meet growing transport demand.

If policymakers want a different outcome -- for example more clean power generation to limit CO2 emissions -- they will have to tilt the playing field much more aggressively to provide a different set of incentives.Together with technology changes, public policy remains the most important driver for energy sector investment. Current incentives for clean generation are not sufficient to outweigh the cost and technical advantages of natural gas in the power sector.

In transport, petroleum liquids retain overwhelming price and technical advantages. If real oil prices stabilise at $80- 100 per barrel or more in the next few years rising demand will be met by significant expansion of both unconventional recovery techniques (deepwater drilling and CO2 injection) and unconventional forms of fossil fuel (shale oil and tar sands).

The supply of liquid hydrocarbons (including gas-to-liquids and coal-to-liquids) at real prices of $100 is inexhaustible in the medium term. Fears about peak oil are misplaced. But the transportation sector will continue to add significantly to carbon dioxide emissions. As with power generation, if policymakers want a different outcome, they will have to tilt the playing field much more aggressively than they have done so far.

For a presenation examining major energy trends over the next five years, Reuters customers can click on the link below:

http://graphics.thomsonreuters.com/ce/ENERGY-MARKETS.pdf

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