The key message in the International Energy Agency’s World Energy Outlook 2023, published October 24, is that demand for oil, natural gas, and coal will peak before the end of the decade. This change in the energy balance will come as a result of the growing momentum behind renewable energy investments, a rebalanced Chinese economy, and higher penetration of electric vehicles, according to the flagship report. The forecast contrasts with OPEC’s bullish view of oil demand growth to 2045, which OPEC revised sharply higher in its own World Oil Outlook 2023 published October 9.

The IEA’s report presents three scenarios for its forecasts to 2050. The projection in the central Stated Policies Scenario is based on latest policy measures; the Announced Pledges Scenario assumes all national energy and climate targets are met in full; and the updated Net Zero Emissions by 2050 Scenario highlights what is needed to limit global warming to 1.5 degrees Celsius.

What is new in the latest World Energy Outlook is that the IEA now projects a peak in fossil fuel demand by 2030 in all three scenarios, which is much earlier than previous forecasts. For crude oil, the report forecasts global oil demand peaking at 102 million barrels per day before 2030. The IEA forecast in October that global energy demand in 2023 would rise by 2.3 mb/d to a record 101.9 mb/d. However, the Oil Market Outlook includes biofuels in its estimates and the World Energy Outlook does not.

The IEA’s World Energy Outlook 2022 projected oil demand peaking at 103 mb/d in the mid-2030s. Beyond 2030, the 2023 World Energy Outlook projects demand declining gradually in the central scenario to 97.4 mb/d by 2050, 54.8 mb/d in the Announced Pledges Scenario, and around 25 mb/d in the Net Zero Emissions by 2050 Scenario.

IEA’s World Energy Outlook Base Case Scenario Envisions Oil Demand Peaking at 102 mb/d Before 2030

The IEA’s executive director, Fatih Birol, flagged the World Energy Outlook’s findings weeks ahead of publication. “Based only on today’s policy settings by governments worldwide – even without any new climate policies – demand for each of the three fossil fuels is set to hit a peak in the coming years,” he wrote in the Financial Times September 12. “This is the first time that a peak in demand is visible for each fuel this decade – earlier than many people anticipated.”

This forecast is based on the premise that declines in advanced economies and China will offset higher demand in other parts of the world, as the transition will not be even in all countries.

Birol acknowledged that with oil and coal demand reaching new highs, it is easy to “push back against any assertions that they could soon be on the wane.” Yet, in a September 12 interview, he asserted the world is at “the beginning of the end of the fossil fuel era.”

IEA and OPEC Divergence

OPEC responded immediately to Birol’s remarks, calling such predictions “dangerous” because they would discourage investment in new oil and gas capacity and lead to chaos in the energy market. OPEC pointed out that oil and gas make up 80% of the current energy mix, the same percentage as 30 years ago, and cannot be eliminated within seven years. The IEA expects renewable energy, mainly wind and solar, to make up 50% of electricity generation capacity by 2030, up from 30% currently, as investment in renewable energy outstrips investment in fossil fuel projects.

“Such narratives only set the global energy system up to fail spectacularly. It would lead to energy chaos on a potentially unprecedented scale, with dire consequences for economies and billions of people across the world,” OPEC Secretary General Haitham al-Ghais said September 14. “This thinking on fossil fuels is ideologically driven, rather than fact-based,” he added.

Until recently, long-term outlooks from the IEA and OPEC have been somewhat aligned, but they are now very far apart in their projections. In its October 9 outlook, OPEC made a sharp upward revision to its global oil demand outlook and forecasts demand rising by 23% between 2022 and 2045 to 116 mb/d, compared to 109.8 mb/d in its 2022 outlook. It was the first time that OPEC has forecast oil demand reaching such a high level. Reaching that level will require $14 trillion in oil sector investments, or around $610 billion annually, to 2045.

OPEC’s 2023 World Oil Outlook Revises Up 2045 Global Oil Demand Outlook

OPEC Demand Forecast to 2045 by Sector

The divergence between the IEA and OPEC outlooks is largely due to assumptions regarding the speed at which internal combustion engine vehicles will be replaced by electric vehicles. OPEC’s forecast expects internal combustion engines to “remain the leading technology for both passenger and commercial road transport segments,” while the IEA’s forecast expects that a surge in electric vehicles will spell the “end of the ICE age.” Where the IEA sees gasoline demand dropping from 24 mb/d in 2022 to 16.3 mb/d in 2050, OPEC expects demand for the transportation fuel to rise by 2.5 mb/d to 28.8 mb/d by 2045.

In the longer term, the penetration of electric vehicles, stepped up deployment of wind and solar energy, and a “rebalancing” of China’s economy are changing the energy balance, Birol said in presenting the IEA’s outlook.

“Ten years ago … 70% of the global electricity generation came from fossil fuels. This year, after 10 years, it is about 60%,” Birol said in the presentation webinar. This means that fossil fuels are “slowly but surely” being pushed out of the power system, he explained.
Birol noted that two years ago, one out of 25 cars sold was electric. This year, one out of five cars sold has been electric, “and in 2030, almost every second car sold in the world will be an electric car,” he added.

Birol was asked during the presentation to explain the big divergence in the oil demand outlooks of the IEA and OPEC. “I have no doubt that OPEC colleagues are looking at the global oil markets from an objective perspective, from their point of view,” he replied. “But our data shows that global oil demand will peak before 2030, driven by what is happening on the clean energy technologies, especially in the transportation sector, and also economic shifts.” The main driver of this is the “slowing down” and “rebalancing” of China’s economy, which he said had an “outsized” role in the energy market and had been the single most important driver of global oil consumption growth over the past decade. But this has changed as China’s economy has become more service oriented.

For OPEC, the largest contributions to the oil demand increase will come not from China but from India, where demand for oil is expected to increase by 6.6 mb/d over the forecast period. Yet it also forecasts healthy oil demand growth of 4.6 mb/d from “other Asia” and 4 mb/d from China. The Middle East’s oil demand is forecast to rise by 3.6 mb/d and Africa’s by 3.8 mb/d.

The IEA, however, does not see India taking over China as the center of global oil demand. Laura Cozzi, the IEA’s director of sustainability, technology, and outlooks and lead co-author of the report, pointed out during the presentation that while Indian oil demand will continue to grow, the size of the Indian market is around one-third of Chinese oil demand today, and China is projected to be the largest oil market in 2030, at around 19 mb/d.

In OPEC’s view, road transportation, aviation, and the petrochemicals sector are the main drivers of oil demand growth. It forecasts oil demand in these sectors increasing by 4.6 mb/d, 4.1 mb/d, and 4.3 mb/d, respectively.

The natural gas market is also set to turn from deficit to surplus with the addition of new capacity coming on line in the second half of the decade, the IEA stated. Slowing demand for natural gas will mean the end of the “golden age of gas,” a term the IEA coined in 2011 when natural gas was still the dominant fuel in power generation. “Global natural gas use has increased by an annual average of almost 2% since 2011, but growth slows” in the Stated Policies Scenario to “less than 0.4% per year from now until 2030,” when demand for natural gas will peak.

New liquefied natural gas projects are due to come into the market, mainly from the United States, Qatar, and Australia, starting around 2025. This will ease supply concerns and put downward pressure on gas prices. LNG projects under construction or for which final investment decisions have been made “are set to add 250 billion cubic metres per year of liquefaction capacity by 2030, equal to almost half of today’s global LNG supply.”

Yet that does not mean there is no need for investment in oil and gas projects, though there is a risk of “overinvestment” as demand growth slows. “Continued investment in fossil fuels is essential in all of our scenarios. It is needed to meet increases in demand over the period to 2030 in” the Stated Policies Scenario “and to avoid a precipitous decline in supply that would far outstrip even the rapid declines in demand seen in the” Net Zero Emissions by 2050 Scenario, the IEA stated. However, the “benchmark level of investment” needed in 2030 is lower because of “improvements in the oil and gas industry’s capital efficiency and the decline in the projected levels of oil and gas demand.”

The immediate risk of a severe disruption to oil and gas supplies from Russia following its February 2022 invasion of Ukraine has receded, the IEA noted. It rejected the argument by some large oil and gas producers and major energy companies that the world was not investing enough in new capacity. The latest technologies and market trends mean that the level of investment needed has come.

Investment in oil and gas today is significantly higher than the amounts needed in the Announced Pledges Scenario and almost double what is needed in the Net Zero Emissions by 2050 Scenario, according to the IEA’s demand forecasts. “This creates the clear risk of locking in fossil fuel use and putting the 1.5°C goal out of reach,” it said.

In the IEA’s central scenario, carbon dioxide emissions will peak in 2025 without additional climate policies. However, this will not automatically translate into cooler global temperatures between now and then. “Even if emissions peaked and started declining, without additional climate policies we will break record temperatures year after year after year. The only way to stop emissions from rising is to actually get to net-zero emissions,” explained Cozzi.

The report concluded that, if demand for fossil fuels remains at high levels, “as has been the case for coal in recent years” and as the Stated Policies Scenario projects for oil and gas, current policies will not be enough to reach global climate goals. Emissions would remain high enough to push global average temperatures to around 2.4 C in 2100, it warned.

Geopolitical Risks

The release of the 2023 World Energy Outlook coincided with the 50th anniversary of the 1973 Arab-Israeli war, and the ensuing Arab oil embargo that led to the creation of the IEA as the industrialized world’s energy watchdog is part of the report’s narrative. The ongoing Israel-Hamas conflict has implications for energy security and is referred to in the outlook’s introduction.

“We are today facing a major geopolitical crisis in the Middle East that could shock oil markets once again and deeply because many oil producing countries are in that region,” Birol said during the presentation webinar. “This comes on top of the insecurity that we had in the natural gas markets about two years ago, after the invasion of Ukraine by Russia, at that time, the number one natural gas exporter of the world,” he added. “Looking at these facts, how oil and natural gas markets are interwoven with the immediate geopolitical risks, I think it will be difficult to say that oil and gas represent safe and secure choices for the consumers for countries worldwide. And these issues, geopolitical risks … come together with another risk, which is the very fact that the climate crisis today is more and more pronounced,” Birol said.

While there are parallels between the oil shock of 50 years ago and today, there are key differences in that the global energy system has evolved. Whereas the 1973 crisis was all about oil, “today’s pressures are coming from multiple areas,” including the gas crisis that followed Russia’s invasion of Ukraine and the “increasingly visible effects of climate change caused by the use of fossil fuels, including the record-breaking heatwaves experienced around the world this year,” the IEA report stated.

Energy decision makers today face the same geopolitical tensions and risk of energy shocks, “but they have a much broader range of highly competitive clean technologies at their disposal, and an accumulated wealth of policy experience on how to accelerate their deployment. The crucial step is to put these readily available solutions to work.”