Steven Fries on the global economic outlook VIDEO PROGRAM: Slide 1: Emerging countries as drivers for global growth What we've seen in the current recovery is the very strong potential of the major emerging market such as China and India and Brazil. These countries have performed very strongly through the recession and have bounced back over the course of the past year. And looking forward, these countries are likely to be the drivers of global growth for the next decade to two. Slide 2: What will the future bring? At the same time, we've seen heightened uncertainty and risks, particularly associated with the more developed countries, United States, Europe and Japan that are continuing to loom on the horizon. But when you take an energy focus, it's really the countries in the emerging world that matter the most for the energy outlook, and as these countries are in the process of closing the gap they're going to use more and more energy, and in fact their growth is going to be very tightly linked to the use of additional energy. Slide 3: How will the economy effect advanced and emerging markets? Well the current economic recovery is very much a two-phase recovery. It's characterized by relatively strong growth in emerging markets, but relatively weak growth in North America and Europe. The implications for energy are that because the emerging markets are the main source of additional demand growth, because those economies are going through their material intensive phase of development. Looking forward, the global economy has great potential but also very high risks associated with the outlook. The key aspect of the global economy is the underlying strength and resilience of the emerging markets.

And so Shell is working hard to meet these unfolding energy challenges that arise both from strong growth in emerging markets as well as from the climate challenges that we all face.

EXTENDED AUDIO PROGRAM: Steven Fries: Looking forward, the global economy has great potential but also very high risk associated with the outlook … but I think the key aspect of the global economy is the underlying strength and resilience of the emerging markets. And as long as the emerging markets, such as India and China, continue to grow strongly and to close the gap in living standards between themselves and Europe and the United States, that process of catching up is likely to drive significant demand for energy over the next decade to two. Host: You’re listening to Steven Fries, and this is EarthSky’s Clear Voices for Science, with a special program in partnership with Shell. Some companies and governments use scenarios to help with decision-making. Scenarios are essentially stories about how the world might unfold in the coming decades from existing patterns, new developments, and human choices. The recent global economic downturn and ongoing economic recovery gave Shell new input to its work in scenario planning. Dr. Fries has been Chief Economist for Shell since 2006. He spoke in early 2011 about the big picture of the global economy and energy with EarthSky’s Jorge Salazar. EarthSky: How stable do you think the current economic recovery is? Steven Fries: We've had a very strong bounce back from the global economy in 2010, perhaps more strong than people would've anticipated a year ago. However, looking forward there are significant risks on the horizon, examples of which we have already seen recently with the debt stresses in the Euro area. But also if you're looking more widely across the global economy, the concerns about the sustainability of growth and in China over the medium term as well as political developments in the Middle East. EarthSky: What does this all mean for energy?

Steven Fries: The implications for energy are actually quite large. What matters most for energy is the strength of growth in emerging markets, such as China, India, and indeed in the Middle East. It's in those countries where demand growth for energy is highest. And that's also the regions of the world where the recovery and economic activity impact has been strongest. And so the parts of the global economy that have been relatively resilient to the stresses in the global economy are indeed those parts of the world that are contributing most to energy demand growth. That's why we saw, even though the recovery in North America and Europe was very weak and hesitant by historical standards, that the energy markets turned quite quickly during the course of 2010 as it became clear that the emerging markets, the main centers for demand growth in the energy systems, were bouncing back quite strongly. And so the key implication here for energy markets is, as we go forward, as long as growth and emerging markets remain relatively resilient and robust, as we've seen throughout much of the past decade, then the energy, then demand for energy is likely to remain quite firm and strong going forward. That also means that the volatility of energy prices is likely to be quite high as expectation of the outlook for that growth in the global economy is subject to new information and new assessments about the prospects going forward. So the energy markets and energy pricing is being very strongly driven by expectations of what's happening in emerging markets. What's happening in the advanced economies in Europe and North American also matters, but they're not at the center of strong energy demand growths at the moment. EarthSky: Some countries are doing better than others in this worldwide recession, that we all find ourselves in. How has the recession changed the outlook for CO2 emissions, and what more can be done to reduce these? Steven Fries: The recession has had a very noticeable impact on CO2 emissions because the recession depressed the amount of economic activity in economies, particularly in Europe and North America, but also in the emerging markets in China and Asia, where

growth slowed from it's very brisk pace. The recession has had the effect of depressing emissions and lowering them by the equivalent of about one to two years of economic growth. And so that's created a bit of breathing space, but only a temporary breathing space, as the recovery returns and economic activity picks up and exceeds previous levels, then emissions will be on their upward path again. EarthSky: What’s the most important thing you want people today to know about the global economy and the energy future? Steven Fries: The global economy has significant potential but also significant risks associated with it. What we've seen in the current recovery is the very strong potential of the major emerging market such as China and India and Brazil. These countries have performed very strongly through the recession and have bounced back over the course of the past year. And looking forward, these countries are likely to be the drivers of global growth for the next decade to two. At the same time, we've seen heightened uncertainty and risks, particularly associated with the more developed countries, United States, and in Europe and Japan that are continuing to loom on the horizon. But when you take an energy focus, it's really the countries in the emerging world that matters the most for the energy outlook. These countries are in the process of closing the gap and living standards with the richer countries in Europe and the United States. And as these countries close the gap in living standards, they're going to use more and more energy, and in fact their growth is going to be very tightly linked to the use of additional energy. And so going forward, the emerging markets are going to put a stress and a strain on the global energy systems that is going to have to be met with increase supplies of all forms of energy, including the traditional fossil fuels and renewable sources of energy. To help meet these unfolding energy challenges for example, Shell is in the process of stepping up its production of natural gas, which is the cleanest of fossil fuels that can be used in electric power generation. And at the same time, we're investing heavily in research and development on carbon dioxide capture and storage, which can

help improve the environmental footprint of natural gas over the long run. And Shell is also investing heavily in biofuels, not only in sustainable first generation biofuels such as sugarcane, but also in advanced biofuels. And by advanced biofuels, I mean those fuels based on feed stock that don't complete food and have a relatively limited impact on land use. And so Shell is working hard to meet these unfolding energy challenges that arise both from strong growth in emerging markets as well as from the climate challenges that we all face. Host: You’ve been listening to Steven Fries, Chief Economist for Shell. He said Shell’s work on scenario analysis suggests that - the longer the delay in climate policy action - the more economic shocks become likely. Our thanks today to Shell - encouraging dialogue on the energy challenge. EarthSky is a clear voice for science.