A focus on sustainability-oriented economic policies and commercial initiatives in Saudi Arabia will not necessarily advance fiscal sustainability efforts in the kingdom.
OPEC and the International Energy Agency issued their long-term outlooks to 2045 and 2040, respectively, in October. Under normal circumstances, it would be easy to compare the two central scenarios in each of the outlooks. This year, however, there is a new catalyst that has changed the equation. The coronavirus pandemic has altered perceptions as to the direction of energy demand growth and the IEA has given more weight to the climate agenda and net-zero commitments by major consuming countries and blocs and how these will shape the energy system in the decades ahead.
These are uncertain times and all previous assumptions of economic and energy demand growth have been derailed by the global health crisis, which according to the IEA, has caused more disruption to the energy industry than any other event in history. The IEA expects energy demand to decline by 5% in 2020 as a result of the global economic slowdown brought on by the coronavirus pandemic. This, according to IEA Executive Director Fatih Birol, is seven times larger than the decline following the financial crisis of 2008-09. Global energy demand had been expected to grow by 12% between 2019 and 2030; the IEA now forecasts growth of 9% during this period, led mainly by the developing economies, in particular India. Demand growth is far lower at 4% in the IEA’s Delayed Recovery Scenario.
The IEA’s World Energy Outlook 2020 presents four scenarios that explore various policy pathways that might transpire depending on the speed of the recovery, the consequences of a faster shift to more sustainable energy, and the implications of the drive to net-zero carbon economies in many parts of the world. China and Japan have become the latest large energy-consuming countries to pledge net-zero ambitions and this will likely have a significant impact on the future direction of energy demand and the types of energy required to drive their economies. The European Union has led the way with its Green Deal, which is at the core of its post-pandemic recovery policy and aims to make Europe climate neutral by 2050.
Yet for all the lofty ambitions, the outlook beyond the next decade remains foggy, which might explain why the IEA’s scenarios have focused more on the period to 2030 given the near-term uncertainty over the course of the pandemic, the economy, and policy responses.
The IEA expects the pandemic will be prolonged, leading to the slowest decade of global energy demand growth in a century, with attendant implications for oil and gas producers. In both its Stated Policies Scenario, which assumes that the pandemic is brought under control in 2021 and reflects today’s policy intentions and targets, and its Delayed Recovery Scenario, oil demand reaches a plateau in 2030. Even in the most bullish scenario for oil, demand does not recover to pre-pandemic levels before 2023, which is in line with OPEC’s projections in its 2020 World Outlook 2045. The IEA, which was set up to defend the interests of energy-consuming countries in the wake of the 1973 OPEC oil embargo, sees no rapid decline in oil demand without a major shift in policies, a lingering uncertainty as governments around the world put together their economic recovery plans.
Depending on the length and severity of the pandemic, the IEA’s Delayed Recovery Scenario projects 4 million barrels per day will be shaved off oil demand compared with the Stated Policies Outlook, which has oil demand staying at roughly the pre-pandemic level of 100 mb/d by 2027. A delayed recovery would put energy demand into “slow motion,” prolonging today’s supply overhang, according to the IEA’s summary of its analyses. Still, both OPEC and the IEA see a much longer life span for oil, unlike the recent BP Energy Outlook 2050, which projected energy demand peaking in the early 2020s and suggested that the pandemic may have already brought it forward to 2019.
OPEC expects demand for oil will continue to rise for the next 20 years before flatlining. Both OPEC and the IEA in their central scenarios expect a slow return to pre-pandemic levels and continued strong demand growth into the second half of their respective forecast periods before plateauing at just over 109 mb/d in 2040. OPEC this year extended its analysis to 2045 to allow for space to consider the “evolutionary shift of economic and energy demand growth to developing countries” as well as the growing importance of renewables and natural gas.
According to the IEA, the shock delivered by the pandemic on the global economy and energy demand will endure for decades: “The most severe structural dislocations from Covid-19 occur in the first half of the projection period but much of the damage sustained during a decade of subdued recovery from the pandemic leaves deep scars in the 2030s.” The longer-term energy impacts of a delayed recovery will still be visible in 2040, it adds. In both the IEA and OPEC scenarios, as well as the BP outlook, the transportation sector is what drives down demand for oil, while in the power sector, renewable energy takes the lead as solar photovoltaic systems become the cheapest source of electricity in most countries. The IEA expects some impact from behavioral changes wrought by the pandemic and more so if the recovery is delayed. “The longer the disruption, the more some changes that eat into oil consumption become engrained, such as working from home or avoiding air travel,” the IEA explains. However, the impact on oil demand is tempered by a rise in the use of private cars and the delayed replacement of older vehicles.
For OPEC, the oil demand shock led to the longest and largest oil production adjustment in its 60-year history. This refers to the agreement reached with the OPEC+ alliance to remove more than 10 mb/d from markets to counter the sharp drop in oil prices in response to what was then a 30% drop in energy demand at the height of the pandemic. Oil prices have since recovered since the dramatic collapse in April and are currently trading at around $40 per barrel, below what many oil producers in the Middle East consider sufficient to meet fiscal requirements. The IEA expects oil prices to rise to just over $70/bbl by 2025 and energy investments, which it projects will decline by 18% in 2020, to pick up from current low levels by then.
OPEC expects the market to normalize in the next couple of years with non-OPEC supply set to return to growth, led by the United States and Brazil. It expects OPEC’s share of the market to grow again around 2030, when it sees a peak in U.S. shale oil production. Traded volumes of oil will grow only modestly in the long term, according to OPEC’s analysis. However, the Middle East’s share of global crude oil and condensate trade is expected to rise robustly in the second half of the forecast period to reach 23.5 mb/d by 2045.
Given the severe disruption caused by the coronavirus pandemic, the outlook for energy demand, and oil in particular, has not been revised sharply downward when compared with OPEC’s and the IEA’s 2019 forecasts. The IEA’s World Energy Outlook 2019 forecast oil demand just 1.9 mb/d higher in 2040 than in the 2020 outlook. OPEC only revised its outlook for oil demand by 2040 by a mere 1 mb/d.
The long-term energy outlook was uncertain even before the pandemic due to the accelerated transition toward lower carbon fuel sources in a market still reeling from the 2015-16 oil price collapse. OPEC has already revised down its monthly forecast for oil demand in its October Monthly Oil Market Report. It now projects demand for OPEC crude down by 300,000 b/d compared with its September forecast, while demand for 2021 has been knocked down by 200,000 b/d to 27.9 mb/d.
The demand uncertainty, coupled with relatively weak oil prices, is an additional strain on oil producers, particularly in those countries that do not have robust fiscal buffers and foreign reserve assets. According to the IEA, lower oil prices and downward revisions to demand have cut around one-quarter off the value of future oil and gas production. Oil and gas producers in the Middle East and Africa, such as Iraq, Nigeria, and Angola, are facing acute fiscal pressures as a result of high reliance on hydrocarbon revenue, which will erode their ability to invest in upstream capacity and secure foreign investment, the IEA notes. It estimates that net income from oil and gas in the Middle East may fall by more than half in 2020 with the losses higher for African producers. Lower-cost producers like Saudi Arabia, Russia, the United Arab Emirates, and Kuwait, for example, still have financial buffers and are therefore better equipped to deal with the downturn. As a result, the low-cost producers will be able to grow production faster to 2030, when OPEC expects its share of the global market will grow as U.S. shale production goes into decline.
In OPEC’s scenario, the share of oil in the energy mix will decline over time from 31% in 2019 to 27% in 2045 with natural gas a close second at 25% and coal at 20%. For the IEA, coal never recovers to pre-pandemic levels as it is displaced by competitively priced renewable energy, where solar emerges as the “king of electricity.”
Even though oil’s contribution to meeting energy demand in the future is shrinking, the rate of decline from existing fields means that substantial investments are necessary to make up for the decline even in a Rapid Energy Transition Scenario, notes the IEA. It adds that the timing and extent of any required upswing in investment is not clear, given the supply overhang in oil and gas markets and uncertainties over the demand outlook.
U.S. shale, which has met nearly 60% of the increase in global oil and gas demand over the last decade, acted as a “shock absorber” for markets in recent years, but it is unclear whether it can continue in that role as the sector has lost investor confidence due to poor returns, according to the IEA. While overall oil and gas investment in 2020 is one-third below the 2019 level, it is higher in what the IEA called “more exposed areas such as US shale.”
Even though there is limited growth in oil demand after 2030 in the Stated Policies Scenario, around $390 billion in annual investment will be required in upstream projects. Less than 10% of this is needed to meet the 900,000 b/d demand increase in the 2030-40 period. The remainder will go toward sustaining production from existing fields and developing new fields to offset these declines.
The Gulf Arab petrostates, which have traditionally been low-cost producers of oil, have seen their export revenue shrink in 2020 and may find it difficult to step up their upstream investments in a timely manner. This, warns the IEA, might lead to a market imbalance and price volatility since conventional projects need an average three years from the final investment decision to first oil production. “Under these circumstances, the possibility of a mismatch between supply and demand is ever present, with what this implies for market volatility.”
is a non-resident fellow at the Arab Gulf States Institute in Washington, the regional manager for the Middle East and Gulf states at the World Energy Council, and a fellow at the Energy Institute.
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