The International Energy Agency’s (IEA) flagship report, World Energy Outlook (WEO), is always eagerly awaited by energy analysts, speculators, and pundits alike. While not much changes from one year to another, the tone and the focus of the IEA says a lot about the rapid transformation of the global energy sector.
In the past few years, the IEA – along with virtually everyone else who is predicting energy trends – has been caught off guard by the unprecedented growth of renewables, particularly in the electric power sector. In October 2016, the IEA increased its projections of renewable growth by 13 percent from the 2015 projection.
“Renewables have surpassed coal last year to become the largest source of installed power capacity in the world.”
The growing concern about climate change culminating in the ratification of the Paris Accord in November 2016, led many analysts to assume that the IEA would abandon its historic oil-centric posture. That did not happen; if anything, the IEA appears to be more bullish on crude than even some oil majors. For renewable advocates, the disappointment was, of course, amplified by speculation that the U.S. may in fact move away from the Paris Accord, and in doing so potentially deliver a severe blow to its eventual success. While the IEA did its analysis prior to knowing the results of the U.S. election, the prognosis is nevertheless consistent with the views expected from the White House so far in 2017.
While the rise of renewables, energy efficiency, and the urgency of dealing with climate change are eminently acknowledged by the IEA, so is the continued supremacy of oil, at least through 2040.
This is even more surprisingly since some oil majors are in fact resigned to accepting a future where demand for oil will peak much sooner than 2040. In early November 2016, 10 oil majors announced that they would invest $1 billion in low-emission technologies. The group, calling itself the Oil and Gas Climate Initiative (OGCI) and accounting for around 20 percent of global oil and gas production, said it would invest to accelerate the deployment of carbon capture and storage (CCS), to reduce methane emissions from oil and gas fields, and to improve operational efficiencies over the next 10 years.
The IEA’s decision to stick with the traditional oil narrative is even more puzzling given that the world’s biggest oil exporter, Saudi Arabia, is preparing for a future when oil will no longer be supreme. The conservative kingdom, whose economy is overwhelmingly dependent on oil exports, has announced that it will publicly list a part of the giant state-owned Saudi Arabia Oil Co., using the proceeds to move its economy away from over-reliance on oil.
If Saudi Arabia can think beyond oil, why not the IEA? It’s clear that oil is not going away overnight, but the narrative needs to reflect a future where oil is merely one player among many other energy forms, and acknowledge the fact that it will be playing a dwindling role over time.
Peak oil demand?
Extending this further, the energy narrative should reflect the fact that we may be heading towards a peak energy scenario, which some putting this as close as 2030. This was precisely the message in a special report on oil in the Nov. 26, 2016, issue of The Economist titled “Breaking the Habit,” which concluded that the “world’s use of oil is approaching a tipping point” – while conceding that we should “not expect it to end imminently.”
The IEA concedes that oil demand has already peaked within the OECD countries, but says this reduction will be more than offset by increases elsewhere. Who knows, perhaps they are right and those who predict that the oil demand peak will come earlier will be proven wrong.
IEA buys oil majors time
But, the oil majors, especially the big U.S. ones, find themselves in a strategic quandary; should they carry on investing in exploration, cut back, or diversify into other businesses? And what message should they convey to their employees, shareholders, and the environmental community? While opinions on the subject vary, the IEA’s latest projections seem to give the oil business at least a lease on life whilst recognising the inescapable march of renewables.