When Daniel Yergin speaks on energy, people listen. Chairman of Cambridge Energy Research Associates, Pulitzer Prize-winning author and former chair of the U.S. Department of Energy’s Task Force on Strategic Energy Research and Development, Yergin says oil will continue to be just as important in 20 years as it is today. Here’s why.

Renewable energies have enjoyed immense attention in recent years, with billions of dollars in government subsidies and investor capital pushing clean energy to the forefront. Yet despite this financial support and all the talk of a new wind blowing in the industry, one simple fact has not changed: oil is here to stay.

“By 2030, hydrocarbons will still be over 70 percent of the world’s energy source, “ says Daniel Yergin, chairman of Cambridge Energy Research Associates.

Thanks to sustained growth in China, India and elsewhere, he projects global energy demand will grow over these next two decades on a trajectory nearly identical to the past two decades: growth of 32 to 40 percent. That means new sources of oil and other energies need to be discovered alongside strides in energy efficiency. It also means oil will continue to exert a tremendous influence on the political and social climate for years to come.

Continuing another trend the industry has seen in recent years, energy will increasingly be swayed by what Yergin terms “above-ground risks” such as nationalized control of reserves, trade imbalances and political interference, as seen with Congress’s ill-focused 2008 investigation into so-called oil “speculators.” Despite the many characters on the world energy stage, to divine the future of the market “there are only two characters that matter,” Yergin says. “One is demand and one is supply.”

Supply And Demand

Speaking at the 2010 CME Group Global Financial Leadership Conference, Yergin debunked a notion that has become fashionable in some circles: peak oil. “Inventories are high; there is almost historic shut-in capacity in OPEC, and OPEC itself says … ‘market fundamentals are weak, he explains. A field-by-field analysis shows there is more than enough oil to meet global demand for several years.

Despite weak fundamentals, oil prices stayed remarkably stable in 2010, trolling a range between $70 and $85 a barrel for the vast majority or trading days. This indicates oil has returned to being an asset class investors such as hedge funds and endowments see as an alternative to stocks, bonds and real estate.

While that shift supported prices last year, the cost structure of the energy industry is quickly making those price levels a necessity. Since 2004, key industry costs have doubled, from steel and capital equipment to the commanding salaries brought about by a dearth of engineers. The Saudis now have signaled $75 to be a “fair” price for oil, a level Yergin’s research largely agrees with. To fund the new megaprojects required to pull fresh supply to market, oil needs to be at least $60 to $80 a barrel, he says.

Yergin, who won a 2007 Pulitzer for his book The Prize: The Epic Quest for Oil, Money & Power, also sees increased demand bolstering prices in 2011, as a recovering world economy pushes demand past its 2007 peak. Leading the charge is China, which will see demand growth of 600,000 barrels a day. Such demand likely means oil prices will find equilibrium in the low to mid $80s. But significant risk factors exist, Yergin warns. Currency devaluations could propel oil higher, since historically a weaker dollar translates into stronger oil prices. On the other hand, largely overlooked is the fact that Iraq has significant oil resources that hit the market in 2011 and could depress prices. In the longer term, Iraq recently raised its reserves estimate by 25 percent. However, that figure may be inflated by national pride to appear superior to Iran which, in response, raised its own reserves estimates.

Geopolitical Jockeying

The Iraq-Iran dynamic is just one long-term factor to keep an eye on, Yergin advises. With 80 percent of the world’s reserves now under control of governments and their national oil companies, above ground decisions will have a greater effect on price in the coming years, especially as demand growth presses on the market.

Meeting fresh demand means an increasing share of oil will be from challenging environments such as ultra-deep offshore wells, the Artic and the Canadian oil sands, Yergin explains. Many of these non-tradionals are more complex, difficult and expensive to bring into the market. Some project this to mean there will be a clash between the United States and China for oil resources.

“In reality, unless we all play our cards very badly, it will remain a competition among commercial oil entities, not national forces,” Yergin says.

The bigger risk may be Iran’s nuclear program and the world’s response, which could spark, at the very least, a significant supply disruption.

The New Wildcards

Those in the industry are just beginning to wrap their arms around two other factors. One is what Yergin terms the “shale gale” of U.S. natural gas supply. As recently as 2006, the United States was expected to become a net natural gas importer, but the discovery of extensive fields stretching from New York to Michigan and Texas means there is enough supply to satisfy more than 100 years of consumption.

“It is simply the most significant energy innovation so far this century,” Yergin proclaims.

In all likelihood, it opens up the potential that many yet-to-be-built U.S. power plants could be powered by natural gas, rather than coal or oil. Not to be overlooked, natural gas is relatively clean and low-carbon compared with those alternatives.

The broader move toward clean energy is the other major factor to take into account, Yergin points out. Along with greater energy efficiency, clean technology has emerged as a major policy objective in countries around the world. Looking to forestall supply problems, China is enforcing energy efficiency “with an iron fist,” Yergin notes, through government-mandated closures of inefficient factories. While the industrialized world is already twice as efficient as it was in the 1970s, it continues to need increasing amounts of resources. To that end, the controversial stimulus bill included the largest energy bill the United States has ever passed, with more than $100 billion directed toward energy efficiency or new energy. The results are just now becoming evident.

“I have never seen such an emphasis on innovation across the energy spectrum,” Yergin notes.

Both in China, where wind and solar power are mandated to more than quintuple in the next decade, and in the United States, where 40 percent of recent energy capacity has come online in the form of wind, renewables are significant, but not so much as to displace much, if any, of the demand for oil, Yergin surmises.

“Renewables have grown substantially in the past couple of years, and the overall energy system is so large that wind and other clean energies can grow,” Yergin says. “But they are still a relatively small part of the mix.”

Yergin believes today there is a great race being played out worldwide for determining what the energy supplies will be in 2030 and beyond. Markets are an important part of that equation and, as Congress’s ill-directed and ultimately refuted attack on speculators demonstrates, it is up to the industry to meet the challenge of communicating and educating the rest of the world on the security and stability markets bring, Yergin asserts.