Fuel prices - outlooks from IEA

Indicator definition

Definition:
Fuel energy prices represent a monetary market value of the qualitative characteristics of energy fuel resources.

Model used:
World Energy Model (WEM)

Ownership:
International Energy Agency Temporal coverage: 2000 - 2030

Geographical coverage:
OECD Europe (Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Slovakia, Spain, Sweden, Switzerland, Turkey, the United Kingdom); Japan, USA

Units

Fuel energy prices are measured as amount of money in US dollars in year-2005 per amount of fuel.

Units of energy prices by fuel type presented in World Energy Outlook 2006 are the following:

For oil:  US dollars per barrel;

For Natural Gas: US dollars per MBtu; (gas prices are expressed on a gross calorific-value basis)

For Steam Coal: US dollars per tonne. 

Policy context and targets

Context description

This indicator shows the trends in fuel price dynamic and the contributions of each type of fuel. It can be used to help monitor the success of key policies at the Pan-European level and national levels that attempt to influence correlation between energy supply and energy demand.

Pan-European policy context

Reforming energy prices and subsidies is a main focus for a plethora  of economical and environmental policy documents. UNECE Guidelines represents number of ways how to manage energy market with prices and subsidies modelling in more sustainable way.

EU policy context

Sustainable Development Strategy 2001 deals with economical procedures to phase out subsidies to fossil fuel production and consumption by 2010.

EECCA policy context

EECCA Environmental Strategy reveals main efforts in the region to form more effective energy prices through support of regional trade markets and subsidies' reforming.

Targets

Pan-European level

• Reforming energy prices and subsidies (UNECE Guidelines)

EU level

• Phase out subsidies to fossil fuel production and consumption by 2010 (EU Sustainable Dev. Strategy, 2001)
• Efficient internal energy market (2006 EC Green Paper on energy)

EECCA level

• Remove adverse energy subsidies (EECCA Environmental Strategy)
• Support regional cooperation for energy trade (EECCA Environmental Strategy)

Links to other policies

UNECE Guidelines

EECCA Environmental Strategy

Related policy documents

No related policy documents have been specified

Methodology

Methodology for indicator calculation

Fuel energy prices represent a monetary market value of the qualitative characteristics of energy fuel resources. Fuel energy prices are measured as amount of money in US dollars  per amount of fuel. All real prices in the World Energy Outlook are in expressed in year-2005 dollars unless otherwise specified. All prices are for bulk supplies exclusive of tax. Nominal prices assume inflation of 2.3% per year from 2006.

The Reference Scenario projections are based on the average retail prices of each fuel used in final uses, power generation and other transformation sectors. These prices are derived from assumptions about the international prices of fossil fuels (see  World energy outlook 2006, p.62, table 1.3). Tax rates and excise duties are assumed to remain constant over the projection period. Final electricity prices are derived from marginal power-generation costs (which reflect the price of primary fossil-fuel inputs to generation, and the cost of hydropower, nuclear energy and renewables-based generation), and non-generation costs of supply. The fossil-fuel-price assumptions reflect our judgment of the prices that will be needed to stimulate sufficient investment in supply to meet projected demand over the projection period. Although the price paths follow smooth trends, prices are likely, in reality, to remain volatile.

Fuel prices are used as assumptions and the input data for World Energy Model 2006 (WEM).

Overview of the World Energy Model 2006 (WEM)

The WEM is a mathematical model made up of five main modules: final energy demand, power generation; refinery and other transformation; fossil fuel supply and CO2 emissions. The main exogenous assumptions concern economic growth, demographics, international fossil fuel prices and technological developments. Electricity consumption and electricity prices dynamically link the final energy demand and power generation modules

The IEA's WEM is a principal tool used to generate detailed sector-by-sector and region-by-region projections for the Reference and the Alternative Scenarios. (see definitions of scenarios under section reference scenario). The model has been updated and revised over years and the development process continues.

Methodology for gap filling

n.a.

Methodology references

No methodology references available.

Uncertainties

Methodology uncertainty

In common with all attempts to describe future market trends, the energy projections presented in the Outlook are subject to a wide range of uncertainties energy markets could evolve in ways that are much different from either the Reference Scenario or the Alternative Policy Scenario. The reliability or WEM projections depends both on how well the model represents reality and on the validity of the assumptions it works under.

Macroeconomic conditions are, as ever, a critical source of uncertainty. Slower GDP growth than assumed in both scenarios would cause demand to grow less rapidly. Growth rates at the regional and country levels could be very different from those assumed here, especially  over short periods. Political upheavals in some countries could have major implications for economic growth. Sustained high oil process  which are not assumed in either of WEM scenarios – would curb economic growth in oil importing countries and globally in the neat term. The impact of structural economic changes, including the worldwide shift from manufacturing to service activities, is also uncertain, especially late in the projection period.

Uncertainty about the outlook for economic growth in China is particularly acute.

The effects ofresource availability and supply costson energy process are very uncertain. Resources of every type of energy are sufficient to meet projected demand through to 2030, but the future costs of extracting and transporting those resources is uncertain – partly because of lack of information about geophysical factor.

Changes in government energy and environmental policies and the adoption of new measures to address energy security and environmental concerns especially climate change, could have profound consequences for energy markets. Among the leading uncertainties in this area are: the production and pricing policies of oil-producing countries, the future of energy-market reforms, taxation and subsidy policies, the possible introduction of carbon dioxide emission-trading and the role of nuclear power.

Improvements in the efficiency of currentenergy technologiesand the adoption of new ones along the energy supply chain are a key source of uncertainty for the global energy outlook. It is possible that hydrogen-based energy systems and carbon-sequestration technologies, which are now under development, could dramatically reduce carbon emissions associated with energy use. If they did so, they would radically alter the energy supply picture in long term. But these technologies are still a long way from ready to be commercialized on a large scale, and it is always difficult to predict when a technological breakthrough might occur.

It is uncertain whether all the investment in energy-supply infrastructure that will be needed over the projection period will be forthcoming. Ample financial resources exist at a global level to finance projected energy investments, but those investments have to compete with other sectors. More important than the absolute amount of finance available worldwide, or even locally, is the question of whether conditions in energy sector are right to attract the necessary capital. This factor is particularly uncertain in the transition economies and in developing nations, whose financial needs for energy development are much greater relative to the size of their economies than they are in OECD countries. In general, the risks involved in investing in energy in non-OECD countries are also greater, particularly for domestic electricity and downstream gas projects. More of the capital needed for energy projects will have to come from private and foreign sources than in the past. Crating an attractive investment framework and climate will be critical to mobilizing the necessary capital. 

Prospects for oil prices remain extremely uncertain. The price assumptions described above (in methodology part) are significantly higher than assumed in the last edition of the Outlook. This revision reflects the continuing recent tighness of crude oil and refined-product markets, resulting, to a large extent, from tight product-upgrading capacity.

Data sets uncertainty

Major challenge is a reliable input data energy statistics. The statistics of IEA which provide a major input to the WEO, cover 130 countries worldwide. Most time-series begin in 1960 for OECD counties and in 1971 for non-OECD countries. Recently, however, maintaining the very high caliber of IEA statistics has become increasingly difficult, in many cases because national administrations have faced growing problems in maintaining the quality of their own statistics. Breaks in time series and missing data have become frequent in some countries. The lapses compromise the completeness of IEA statistics. They could seriously affect any type of analysis, including modeling and forecasting.

The projections from WEO should not be interpreted as a forecast of how energy markets are likely to develop. The Reference Scenario projections should rather be considered as a baseline vision of how the global energy system will evolve if governments will take no further action to affect its evolution beyond that which they have already committed themselves to.

Rationale uncertainty

In common with all attempts to describe future market trends, the energy projections presented in the Outlook are subject to a wide range of uncertainties energy markets could evolve in ways that are much different from either the Reference Scenario or the Alternative Policy Scenario. The reliability or WEM projections depends both on how well the model represents reality and on the validity of the assumptions it works under.