Illustration; Source: International Energy Agency (IEA)

With peak oil demand in sight, is the end of the black gold era really approaching?

As the spending on clean energy seems to be growing by leaps and bounds while investments in fossil fuels are not keeping up with this pace, the International Energy Agency (IEA) believes that this pivot to green and low-carbon sources is paving the way for peak oil demand to come into view. Is black gold nearing its expiration date or will oil find a way to turn things around and make a comeback after 2028, when its growth in global demand is projected to slow down to a crawl?

Illustration; Source: International Energy Agency (IEA)

The Ukraine crisis has caused an upheaval in the global energy landscape, propelling energy security concerns to the top of the priority list and putting the wind in clean energy’s sails. Recently, the International Energy Agency outlined that about $2.8 trillion was set to be invested globally in energy in 2023 while the global investment in clean energy technologies was on course to rise to $1.7 trillion in 2023, with solar set to eclipse oil production for the first time. The remainder, slightly more than $1 trillion, was expected to go to coal, gas, and oil.

The IEA’s new report, called Oil 2023, confirms the downward trend in the demand for fossil fuels and dives into the evolving oil supply and demand dynamics through to 2028. The report sees oil use for transport going into decline after 2026, as the expansion of electric vehicles, the growth of biofuels, and improving fuel economy reduce consumption while overall consumption is expected to be supported by strong petrochemicals demand.

Within its new report, the International Energy Agency underscores that global upstream investments in oil and gas exploration, extraction and production are on course to reach their highest levels since 2015, growing 11 per cent year-on-year to $528 billion this year. If sustained, this level of investment – despite being partly offset by cost inflation – would be adequate to meet forecast demand in the period covered by the report, however, the IEA claims that this exceeds the amount that would be needed in a world that gets on track for net-zero emissions.

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Furthermore, the report’s projections assume major oil producers will keep their plans to build up capacity even as demand growth slows, resulting in a spare capacity cushion of at least 3.8 barrels per day (mb/d), concentrated in the Middle East. A number of factors could still affect market balances over the medium term, such as uncertain global economic trends, the direction of OPEC+ decisions, and China’s refining industry policy.

Plans to increase global supply capacity in the medium term are spearheaded by oil-producing countries outside the OPEC+ alliance, with an expected rise of 5.1 mb/d by 2028 led by the United States, Brazil, and Guyana. On the other hand, Saudi Arabia, the United Arab Emirates, and Iraq dominate the plans for capacity building within OPEC+, while African and Asian members are set to struggle with continuing declines, and Russian production is anticipated to fall due to sanctions.

As a result, the IEA predicts a net capacity gain of 0.8 mb/d from the 23 members in OPEC+ overall over the report’s forecast period. Therefore, the International Energy Agency emphasises that the growth in the world’s demand for oil is set to slow almost to a halt in the coming years, with the high prices and security of supply concerns highlighted by the global energy crisis hastening the shift towards cleaner energy technologies.

According to the medium-term market report, global oil demand will rise by 6 per cent between 2022 and 2028 to reach 105.7 million mb/d based on current government policies and market trends. This growth is expected to be supported by robust demand from the petrochemical and aviation sectors. Despite this cumulative increase, the IEA predicts that annual demand growth will shrivel from 2.4 mb/d this year to just 0.4 mb/d in 2028, putting a peak in demand in sight.

Fatih Birol, IEA Executive Director, remarked: “The shift to a clean energy economy is picking up pace, with a peak in global oil demand in sight before the end of this decade as electric vehicles, energy efficiency, and other technologies advance. Oil producers need to pay careful attention to the gathering pace of change and calibrate their investment decisions to ensure an orderly transition.”

With unprecedented reshuffling of global trade flows as a result of the global energy crisis, the global oil markets are still slowly recalibrating after three turbulent years in which they were upended first by the Covid-19 pandemic and then by the Ukraine crisis.

To illustrate one of the upheavals in the oil market, the report mentions the long lead-time before the EU embargoes on crude and oil products came into effect and the G7 price cap that allowed EU maritime services to be used to ship Russian oil to third countries, facilitating the rerouting of oil flows and minimising production losses for the global market.

In addition, the report states that the world product trade flows also shifted in response to G7 and EU embargoes on Russian oils, thus, import replacements came from North America, the Middle East and Asia. In light of this, the call on available tankers to carry volumes over longer distances “massively tightened” the market for available capacity and boosted freight rates, says the IEA.

The International Energy Agency’s report points out that global oil markets could tighten significantly in the coming months, as production cuts by the OPEC+ alliance temper an upswing in global oil supplies, but the multifaceted strains on markets look set to ease in the following years.

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As China was the last major economy to lift its stringent Covid-19 restrictions at the end of 2022, this led to a post-pandemic oil demand rebound in the first half of 2023. Despite this, the IEA underlines that the demand growth in the Asian country is forecast to slow markedly from 2024 onwards. Nevertheless, burgeoning petrochemical demand and strong consumption growth in emerging and developing economies will more than offset a contraction in advanced economies, based on the report.

Moving to the refining sector, the International Energy Agency highlights that the overhang in global capacity has been reduced by waves of closures, conversions to biofuel plants, and project delays since the pandemic. In combination with a sharp drop in Chinese oil product exports and an upheaval of Russian trade flows, this enabled record profits for the industry last year.

Diverging trends among products signify that a repeat of the 2022 tightness in middle distillates cannot be ruled out, even though the amount of net refinery capacity additions by 2028 is expected to outpace demand growth for refined products. The report indicates that most of the increase in global crude and condensate production will come from the Atlantic Basin – although it could see throughputs decline despite substantial new plants starting up in Nigeria, Mexico, and Brazil – while East of Suez will continue to propel growth in capacity additions and refinery runs.

The IEA is of the opinion that the largest incremental supplier of oil to global markets will be the Western Hemisphere, and especially the Americas, with exports up by 4.1 mb/d by 2028. This shift in trade flows comes in addition to most of the 2.5 mb/d of Russian crude oil backed out of Europe and G7 countries due to embargoes flowing eastward. The report shows that steadily rising flows from the Atlantic Basin to East of Suez will come as a result of the absence of additional Middle East exports in 2028 versus 2022 and surging Asian import requirements.

Bearing this in mind, the IEA concludes that the prevailing trend for both crude oil and products is increased supplies from the Americas and the Middle East to Asia while refinery additions and dwindling crude production reduce Africa’s crude export potential by around 15 per cent over the forecast period but curb its net product import requirements by 10 per cent.