nearly 4 gigawatts of new hydroelectric capacity is planned to be operating by 2002.

World net electricity consumption is expected to increase from 12 trillion kilowatthours in 1996 to 22 trillion kilowatthours in 2020. The economic troubles of Southeast Asia and Russia are expected to slow the growth in electricity demand over the next few years, but electricity demand in the developing countries still is projected to increase by a robust average of 4.4 percent per year, and the strongest long-term growth is projected for the developing countries of Asia, as well as Central and South America (Figure 7). Rapid population growth, along with greater industrialization and more widespread household electrification, will increase electricity use in those regions. In the industrialized countries, annual growth in net electricity consumption is projected to average around 1.6 percent over the next two decades, primarily because of the continuing spread of electricity-using equipment.

A nation's transportation system is generally an excellent indicator of its level of economic development. In many countries personal transportation still means walking or bicycling, and domestic animals are still used to move freight. Over the next two decades, fast-paced growth of transportation infrastructure is expected in the developing world. Developing Asia and Central and South America are expected to account for 52 percent of the increase in the world's motor vehicle population between 1996 and 2020 (Figure 8).

According to the IEO99 reference case projection, energy use for transportation among the developing countries is projected to grow at an average annual rate of 4.0 percent-nearly triple the rate of growth in the industrialized countries. Growth in the transportation sector in the industrialized countries--where modern transportation systems have been in place for many decades-is expected to average only 1.4 percent per year. Even in the most economically advanced countries, however, transportation energy consumption per capita continues to increase over the projection period, as rising per capita incomes are accompanied by purchases of larger personal vehicles and by increased travel for business and vacations.

Figure 7. Projected Change In Net Electricity Consumption by Region, 1996-2020

Developing Asia

Central and South America Africa

0 50 100 150 200 250 Percent

Sources: 1996: Energy Information Administration (EIA), International Energy Annual 1996, DOE/EIA-0219(96) (Wash ington, DC, February 1998). 2020: EIA, World Energy Projec tion System (1999).

In 1998, expectations for economic growth and energy market performance in many areas of the world were dashed. The Asian economic crisis proved to be deeper and more persistent than originally anticipated, and the threat and reality of spillover effects grew through the year. Oil prices crashed. Russia's economy collapsed. Economic and social problems intensified in energyexporting countries and in emerging economies of Asia and South America. Deepening recession in Japan made recovery more difficult in Asia and increased the prospects for slower economic growth in Europe and North America. The rate of worldwide economic expansion in 1998 fell by a third relative to that achieved through most of the 1990s.

Growth in energy demand, the hallmark of recent market performance, has been severely constrained by current economic conditions. Shortage has been replaced by surplus in the hardest hit countries. Fear of spillover effects to other regions, as well as recession in Japan and economic collapse in Russia, caused a range of capitalintensive infrastructure development projects involving power generation, pipeline transport, and liquefied natural gas (LNG) supply to be scaled back or put on hold. Uncertain financial markets have made it more difficult to gain financial backing for some projects. Exploration and development expenditures for oil and gas production were in sharp decline in most parts of the world at the close of 1998. Russia's devaluation and apparent default on international debt were choking off investments designed to maintain or expand its role in international oil and gas markets. Given these developments, the near-term prospects for energy markets have become more risky and uncertain; and to the extent that energy investment is affected, so too are intermediate and long-term prospects for energy supply and demand.

In light of these developments, the International Energy Outlook 1999 (IEO99) contains revisions to long-term projections of growth in energy supply and demand trends, relative to those presented in IEO98. The revisions are relatively modest, however: a near-term pause in energy demand growth; somewhat (6 percent) lower levels of aggregate demand in the later years of the projection; and lower projected oil prices for the next few years, followed by recovery to last year's baseline by

2007.

The key themes associated with the IEO98 reference case projections remain: substantial increases in energy demand, based mostly on fossil fuels are in prospect; a major component of growth in world energy demand will be accounted for by developing economies of Asia and South America; natural gas is increasingly the fuel of choice for future electric power generation; oil demand growth is an increasing function of trends in transportation activity; and, over the projection period of about two decades, resource availability does not limit the development of energy markets.

Each issue of the IEO underscores important sources of uncertainty that can dramatically change the future course of events affecting trends in the composition, cost, and level of energy use. Economic growth and energy use are closely tied. Thus, assumptions about alternate paths of economic growth can have significant effects on expected energy requirements. The IEO99 reference case economic projection adopted for this outlook depicts a recovery in Asia's economic growth beginning in 1999. With the exception of Indonesia, countries currently in recession in Asia are assumed to be back to baseline rates of growth within the next 3 to 5 years. Japan, too, is expected to resume positive rates of economic expansion by 2000. China and India are projected to sustain average growth rates in excess of 5 percent between now and 2020.

The events of the past year demonstrate that economic expansion can falter, with severe implications for energy market developments. The reference case economic growth assumptions may not be realized. Accordingly, alternative growth cases are included in the projections. More so than last year, the reference case projection depends on the continued efficacious application of economic policies designed to counter recession and foster structural reforms within national economies. In various countries, economic stress is leading to increased social tensions. Changing political forces could upset policy expectations in a variety of areas, causing reference case expectations not to be realized. Those who are more pessimistic or who have different views of the political and economic uncertainties in particular regions may have less optimistic expectations for economic growth in some of the regions covered in this review. The alternative growth cases presented here may provide useful perspective to assist their analyses.

IEO99 assumes that the reference case projections are the most likely outlook at this point in time. Aggressive policies to counter recession in Asia and to forestall spillover effects in Europe and the western hemisphere were instituted in 1998 by the International Monetary Fund (IMF), the World Bank, and banking institutions in Europe and the Americas. Signs of economic turnaround are now being reported for Korea, Thailand, Malaysia, and the Philippines.

Additional uncertainty arises from the commitments being made by developed countries under the Kyoto Protocol of the Framework Convention on Climate Change. If those commitments are realized, energy demand could actually be reduced over the next decade. Such a development could lower total world energy consumption in 2010 by more than 10 percent relative to the reference case projection presented here, equivalent to 60 quadrillion Btu or 30 million barrels of oil per day. The Protocol identifies stringent targets for reduced greenhouse gas emissions in developed countries; however, neither policies nor technologies to achieve the targets have been identified for implementation, nor have the countries ratified the agreement. Thus, the Kyoto Protocol is viewed in this report as a factor heightening uncertainties and the need for collateral analysis of the IEO99 reference case rather than one that per se alters it. Another key source of uncertainty for the long-term evolution of energy markets relates to trends in energy intensities-i.e., the manner in which energy requirements evolve relative to growing income levels. History shows different trends in energy intensity for the developed and developing countries. In developed countries, energy requirements have grown slowly relative to increasing levels of economic activity. That historical trend is projected to continue in the reference case, with energy use rising at only about half the rate of economic expansion.

In the developing countries, energy and economic growth have tended to move in parallel. The process of economic development is energy intensive, and rising living standards enable broad access to electricity and motorized means of transportation. The accompanying widespread development of infrastructure causes growth in energy-intensive industries such as steel and cement. As economies continue to develop, however, the rate of energy use tends to fall relative to economic expansion. Consumer demands tend to evolve toward increased use of services that are not energy intensive. The reference case projection presented here assumes a declining rate of energy intensity for developing countries over the projection period: by 2020, the relationship between energy and economic growth in developing countries is projected to be is similar to that in developed

countries. This is a key assumption. Although per capita energy consumption is expected to rise over the next two decades, the projected levels in 2020 are still low relative to those currently prevailing in developed countries. If energy growth rates do not decline substantially relative to projected economic growth rates, the demand for energy in the developing world, where more than two-thirds of the world's population resides, would be substantially higher.

Other key assumptions underlying the IEO99 reference case projection involve the continuing evolution of world oil markets. Current oil prices are near record low levels. Although some analysts now argue that low al prices could persist for many years, the reference case assumes a price recovery path that begins in 1999 and returns to the levels projected in the IEO98 reference case by about 2007. Expectations for long-term recovery in demand growth and only a modest constriction on al supply, especially in mature producing areas, encour age this view. In addition, IEO99 assumes no change in the influence of the Organization of Petroleum Exporting Countries (OPEC) on oil markets. It is also assumed that technology and government policies worldwide will support a large expansion in oil supply production capabilities.

Outlook for World Energy
Consumption

The prospects for world energy consumption in IEO99 are somewhat lowered from last year's report. Indeed, in this year's projection, world energy consumption reaches 612 quadrillion British thermal units (Btu) in 2020, almost 30 quadrillion Btu less than last year's forecast (Figure 9). The downward revision flows from events in two parts of the world: the Asian economic cri sis-which began in the spring of 1997 and persisted throughout 1998, aided and abetted by the worsening economic situation in Japan-and the prolonged col lapse of the Russian economy.

The persistent recession in Japan-the world's second largest economy-has not shown signs of abating. In October 1998, the Japanese Parliament passed a $517 bilion package to bail out the country's national banking system and attempt to revive the economy [1]. The Japanese government has estimated that the economy will still shrink by 1.8 percent in the fiscal year ending March 31, 1999 [2]. While the Asian economic crisis does not appear to have dramatically affected China's economy thus far, there are fears that the crisis could threaten its program of economic reform, which is designed to downsize state-owned enterprises in favor of more mar ket oriented activities serving both domestic and export demands [3, p. 274].

Other Southeast Asian economies hit by the recession in mid-1997 began to fare better toward the end of 1998. Interest rates in the second half of 1998 fell sharply in South Korea and more modestly in Thailand, two countries that were hit particularly hard by the economic crisis. Both have adhered to the financial reforms prescribed by the IMF, and it appears that they might begin to see positive economic growth by the end of 1999 [4]. Some growth in exports is now evident, and an inflow of new foreign investment has begun. In contrast, the outlook for Indonesia is much less optimistic. By one estimate, the Indonesian economy was expected to contract by more than 13 percent in 1998, with no positive growth expected before 2000 [4, p. 4].

The deteriorating Russian economy-the largest economy in the former Soviet Union (FSU)-has led to some substantial downward revisions to the IEO99 projections. The lower expectations for energy growth are caused by the August 1998 devaluation of the Russian ruble, the defaults on public and private debt, the collapse of the Russian banking system, the worsening political situation for Boris Yeltsin and any potential successor, and expected changes in monetary policy that raise the possibility of hyperinflation. Less than one year ago, most forecasting sources were projecting positive growth in Russia's GDP in 1998 and accelerating recovery in the years to follow. In October, PlanEcon revised its GDP forecast for Russia for 1999 from a positive 4.2 percent to a negative 5 percent, with no positive GDP growth expected before 2001 [5, 6].

For the FSU region as a whole, IEO99 projects that GDP will fall by an average of 2 percent per year between 1996 and 2000, with positive growth returning to the region between 2000 and 2005, averaging about 3 percent per year. As growth resumes, energy consumption in the FSU region is expected to recover. Between 1996 and 2020, energy consumption growth is expected to average 1.0 percent per year. The projection for 2020 is about 10 quadrillion Btu lower than in IEO98-equivalent to about 5 million barrels of oil per day.

Despite the downward revisions for expected energy demand worldwide, the IEO99 reference case projects that energy consumption in 2020 will increase by 236 quadrillion Btu-or about 65 percent-relative to the 1996 level. More than half the increment is expected in the developing countries, where strong economic growth in the long term is expected to increase the demand for energy over the projection period.

The predominant issue for the development of energy markets in the industrialized countries appears to be the potential impact of the Kyoto Protocol. As of March 15, 1999, 83 countries-including the United States-had signed the Kyoto Protocol, which calls for "Annex I" countries to reduce or limit the growth of their carbon emissions between 2008 and 2012. The Protocol remains open for signature until March 15, 1999, but it will come into force only when 55 Parties to the Framework Convention, including Annex I countries that accounted for at least 55 percent of the total carbon dioxide emissions from that group in 1990, have "deposited their instruments of ratification, acceptance, approval or accession" [7]. As of March 15, 1999, only seven countries (Antigua and Barbuda, El Salvador, Fiji, Maldives, Panama, Trinidad and Tobago, and Tuvalu-all non-Annex I countries) had ratified the Protocol.

None of the Annex I countries had ratified the Kyoto Protocol by the time this report was prepared for publication. As a result, although the Protocol has the potential to change energy use dramatically in the industrialized world, no adjustments have been made to try to account for the impact of the Protocol. Nonetheless, the Protocol could retard the industrial world's energy demand growth. The IEO99 reference case projections suggest that industrialized countries can expect to account for about 30 percent of the world's increment in energy use between 1996 and 2010. Were emissions targets identified in the Protocol to be achieved by reducing fossil energy usage, energy consumption overall would be reduced by between 30 and 60 quadrillion Btu-equivalent to between 15 and 30 million barrels of

oil per day. On the other hand, with potential fuelswitching opportunities, emissions trading, and other offsets (such as reforestation) allowed under the Protocol, a more modest reduction in fossil fuel use is more likely.

The strongest growth in energy consumption is expected to occur outside the industrialized world, which currently consumes about 40 percent more energy than is consumed by the developing world (Figure 10). By the end of the projection period, energy use in the developing countries (defined as developing Asia, Africa, the Middle East, and Central and South America) is expected to exceed that in the industrialized world. Such large increments in energy use in the developing world would have a dramatic effect on world energy markets. The IEO99 projections assume substantial financial investment in all phases of energy production, distribution, and transmission. If the assumed levels of investment are to be achieved, world government policies must continue to evolve to favor private-sector incentives for trade and development.

Figure 10. Projected Energy Consumption in the Industrialized and Developing Regions, 2000-2020

1996 2000

2005

2010 2015 2020 Sources: 1996: Energy Information Administration (EIA), International Energy Annual 1996, DOE/EIA-0219(96) (Washington, DC, February 1998). Projections: EIA, World Energy Projection System (1999).

Outlook by Energy Source

The IEO99 reference case, based on "business as usual" assumptions, projects that every energy source except nuclear power will grow over the 1996 to 2020 forecast period (Figure 11), although renewable energy sources are not expected to grow as fast over the next 24 years as they have in the past. Worldwide, oil remains the dominant source of energy throughout the projection horizon, as it has since 1970. Oil's key role in the transportation sector-where it does not currently have any serious competition from other energy sources-helps

Natural gas is expected to be the fastest-growing primary energy source from 1996 to 2020. Worldwide con sumption of natural gas increases by 3.3 percent per year (on a Btu basis) over the 24-year projection period. nearly twice as fast as oil (1.8 percent per year) and coal (1.7 percent per year). Gas is increasingly the fuel of choice for new electric power generation, primarily because combined-cycle gas turbine plants tend to be less expensive to build and are more efficient than other means of power generation. It is also a fuel of choice for environmental reasons. Local air pollution can be lessened by shifting from coal to natural-gas-fired genera tion. On a Btu basis, carbon emissions from natural gas combustion are less than half those for coal. Within the next decade, natural gas use is expected to exceed coal consumption, with the margin growing ever larger in subsequent years.

Coal use worldwide is projected to increase by 2.4 billion short tons, from 5.2 to 7.6 billion short tons, between 1996 and 2020. Strongest growth in demand is projected for the developing world, where coal use increases by 3.0 percent per year over the projection period (Figure 12). The worldwide increase in coal use is attributable mainly to increases in developing Asia-particularly. China and India. Indeed, IEO99 projects that China and India alone will account for more than 90 percent of the worldwide increment in coal consumption between 1996 and 2020. In the industrialized world, coal demand