Oil demand to peak in 2025 if climate goal policies are met - IEA
Quantum Commodity Intelligence - The International Energy Agency published Wednesday its annual flagship publication, the World Energy Outlook, which sets out a blueprint for the world's governments in transitioning to a low carbon economy.
The report was published a month earlier than usual, as it seeks to provides crucial guidance ahead of the COP26 climate talks due to be held during November 1-12 in Glasgow, UK.
For the first time, the IEA modelled the impact of stated government targets to reduce global warming, comparing what has already been passed into law with what would be enough to achieve net zero emissions by 2050.
- Oil demand will peak in 2025 if global climate/emissions pledges are met
- Oil demand would fall to 75 million bpd by 2050 under this scenario
- An alternative scenario sees mid-2030s peak oil demand, followed by a gradual decline
- Natural gas demand peaks shortly after 2025 under a best-case scenario
- 2021 energy crunch leads to a sharp rise in CO2 emissions
- Huge investments needed in clean alternative fuels, coal phase-out
Peak oil demand
The IEA believes that oil demand is likely to reach a high point around 2025 before declining if countries set out concrete policies to meet previously announced climate pledges.
Oil consumption will then decline towards 75 million bpd by 2050, or around three-quarters of current levels.
However, this assumes that governments adopt more ambitious policies to boost the take-up of electric vehicles and support broader energy efficiency goals, which is far from a done deal.
Under a more conservative scenario, where current policies continue and climate goals are missed, the high point in demand will come in the mid‐2030s before gradually declining.
"Oil demand, for the first time, goes into eventual decline in all the scenarios examined in the WEO‐2021, although the timing and speed of the drop vary widely," said the IEA.
A net zero pledge by all the world's governments would imply a sharp drop in demand to 25 million bpd by 2050, but it is unlikely to materialise.
Natural gas demand rises over the next five years under all scenarios, but if countries meet their climate goals, the IEA estimates that it should reach a high point shortly after 2025 and decline gently between 2025 and 2050.
This view contrasts with many energy executives, who see gas as a transition fuel essential to meet demand when renewable energy demand is low.
According to the IEA, current pledges are broadly compatible with global warming of 2.1 degrees Celsius by 2100, missing the goal of the 2015 Paris climate change agreement to keep it below 1.5 degrees Celsius.
Under the Announced Pledges Scenario, low emissions sources of power generation account for the vast majority of capacity additions, with annual additions of solar PV and wind approaching 500 gigawatts (GW) by 2030, resulting in a 20% reduction in coal consumption from current levels.
Efficiency gains mean that global energy demand plateaus post‐2030 and that global energy‐related CO2 emissions fall by 40% over the period to 2050.
"In the run‐up to COP26, many countries have put new commitments on the table, detailing their contributions to the global effort to reach climate goals; more than 50 countries, as well as the entire European Union, have pledged to meet net zero emissions targets," said the IEA.
"If these are implemented in time and in full, as modelled in detail in our new Announced Pledges Scenario, they start to bend the global emissions curve down."
The APS achieves a doubling of clean energy investment and financing over the next decade, but this acceleration is not sufficient to keep global warming well below 2 degrees Celsius due to the inertia of the energy system.
The IEA makes clear that there is still a significant divide between national climate change targets and what has been put into law.
"Looking sector‐by‐sector at what measures governments have actually put in place, as well as specific policy initiatives that are under development, reveals a different picture," it said.
Current policies achieve a gradual decline in power sector emissions helped by huge investments in solar PV and wind, even as global electricity demand nearly doubles to 2050.
But this is offset by continued growth in emissions from industry and heavy‐duty transport, and as a result, annual emissions stay at around current levels, and global temperatures rise 2.6 degrees Celsius above preindustrial levels in 2100.
Four key measures
The IEA highlights four key measures that can help to accelerate the transition cost-effectively.
The main push is for clean electrification, which would require a doubling of solar PV and wind deployment relative to announced pledges and expansion of other low‐emissions generation, including nuclear energy.
Other measures include a build‐out of electricity infrastructure and all forms of system flexibility, a rapid phase-out of coal use, and a drive to expand electricity use for transport and heating.
"Accelerating the decarbonisation of the electricity mix is the single most important lever available to policy makers," said the IEA.
"The low costs of wind and solar PV mean that more than half of the additional emissions reductions could be gained at no cost to electricity consumers," it added.
Governments should also focus on energy efficiency, cut methane leaks from fossil fuel operations, and invest more money in clean energy innovation, which will become essential after 2030 to accelerate the transition.
The IEA noted that in 2020, even while economies suffered because of Covid‐19, wind and solar PV continued to grow rapidly, and electric vehicles set new sales records.
However, as demonstrated in recent months, this has put major strains on the energy system and triggered significant price rises in natural gas, oil, coal and electricity markets.
"Every data point showing the speed of change in energy can be countered by another showing the stubbornness of the status quo," said the IEA.
"For all the advances being made by renewables and electric mobility, 2021 is seeing a large rebound in coal and oil use. Largely for this reason, it is also seeing the second‐largest annual increase in CO2 emissions in history".
Coal in terminal decline
Coal use is likely to decline under all scenarios, but there is a stark difference between current approved climate pledges, which imply a 10% fall in demand to 2030, and net zero goals, which would require a 55% drop.
Key measures include stopping the approval of new, unabated coal plants; reducing emissions from the 2,100 GW of operating plants; investing – at sufficient scale – to reliably meet the demand that would otherwise have been met by coal; and managing the economic and social consequences of change.
"Approvals of new coal‐fired plants have slowed dramatically in recent years, stemmed by lower cost renewable energy alternatives, rising awareness of environmental risks, and increasingly scarce options for financing. Yet some 140 GW of new coal plants are currently under construction and more than 400 GW are at various stages of planning," said the IEA.
It added that China's recent pledge to stop financing coal plants abroad is potentially significant, even if the IEA did not include it in its scenarios as it was announced just before the publication of the report.
It said the pledge could save 20 gigatonnes in cumulative CO2 emissions, an amount comparable to the total emissions savings from the European Union going to net zero by 2050.
The IEA warned that the world is not investing enough to meet its future energy needs, and uncertainties over policies and demand trajectories create a serious risk of a volatile period ahead for energy markets.
It said that oil and gas investments have stagnated in recent years but that there has not been a corresponding increase in clean energy investing.
"Oil and gas spending today is one of the very few areas that it is reasonably well aligned with the levels seen in the Net Zero Emissions Scenario to 2030," it said.
"IEA analysis has repeatedly highlighted that a surge in spending to boost deployment of clean energy technologies and infrastructure provides the way out of this impasse, but this needs to happen quickly or global energy markets will face a turbulent and volatile period ahead. Clear signals and direction from policy makers are essential. If the road ahead is paved only with good intentions, then it will be a bumpy ride indeed."
The World Energy Outlook says it is not a forecast of future energy outcomes, but rather it follows a scenario-based approach where the impact of different policy choices on the energy sector are presented.