IEA plots divergent paths for oil demand

The IEA has highlighted the uncertain impact of the Covid-19 pandemic and the energy transition on global oil demand through four scenarios in its World Energy Outlook (WEO) this year.

In two of the scenarios, demand does not reach a "clear peak". The Stated Policies scenario (Steps) is based on existing and announced policies and targets, and assumes that the pandemic is under control by next year. The Delayed Recovery scenario (DRS) explores the effect of a prolonged crisis. Oil demand's path in both of these scenarios mirrors Opec's recent World Oil Outlook (WOO) but it contrasts with some industry views that suggest demand could peak as soon as this decade.

Under the Steps, global oil demand returns to pre-crisis levels around 2023 and rises to 103.2mn b/d in 2030 (see table). Demand flattens beyond 2030 with annual growth slowing to 100,000 b/d as higher demand for transport services offsets the effect of improved vehicle efficiency, electrification and biofuels use. Under the DRS, demand also plateaus after 2030 but at around 4mn b/d lower than in the Steps.

Peak oil demand is already a reality in advanced economies, but this is offset by growth in emerging markets and developing economies, the IEA says. Under the Steps, India continues to drive demand growth in the coming decade, while the outlook for China has been revised down from last year's WEO to reflect lower car sales and strengthened policy goals, with Chinese oil demand peaking around 2030 at just over 15mn b/d.

The IEA offers two other scenarios in which demand already peaked last year. Under the Sustainable Development scenario (SDS), in which the world achieves net zero emissions by 2070, global oil demand falls to 86.5mn b/d by 2030 from 97.9mn b/d in 2019, although the direct impact of the Covid-19 crisis could make sustainable goals embodied in this scenario harder. And under a new Net Zero Emissions scenario, in which the world reaches the net zero target by 2050, oil demand declines by an average 3.5pc/yr to 65mn b/d in 2030.

Tight supply

The pandemic has also made the outlook for tight oil uncertain. In the Steps, US tight oil supply returns to 2019 levels by 2022 and peaks in the early 2030s, slightly earlier than in last year's WEO. In the SDS, US tight oil production is nearly 2mn b/d lower in 2030.

Producers have "become used to a world in which US tight oil picks up a lot of the slack in oil supply," the IEA said. Its short investment cycle means "the response time for tight oil to market signals" is around 6-12 months. If demand recovers and US production remains flat throughout the next decade, there could be a supply gap of 4.3mn b/d which conventional producers would struggle to bridge, the IEA said.

Tight oil production depends largely on the amount of industry investment. In Steps, this averages $85bn/yr for US tight oil over the next decade, just below pre-pandemic levels. "The timing and extent of a rebound in [global oil and gas] investment from the one-third decline seen in 2020 is unclear, given the significant overhang of supply capacity in oil and gas markets, and uncertainties over the outlook for US shale and for global demand," the IEA said.

In Steps, upstream spending rises in response to an oil price of just over $70/bl in 2025. Upstream oil projects require average investment of $390bn/yr in 2030-40, under 10pc of which meets rising oil demand, while the rest sustains and develops new and existing fields to offset declines elsewhere. Even in the Net Zero Emissions scenario, investment is required on new or existing fields, without which oil supply falls by around 8-9pc/yr in 2019-30.

By Rowena Edwards