This year’s global demand for all three fossil fuels has sent a message to overly enthusiastic proponents of the energy transition - hold your horses.
Those who predicted last year the demise of oil, gas, and coal after the pandemic and those who said that peak oil demand was already behind us because lasting changes in consumer behavior would reduce the use of crude are now facing reality.
Global oil demand is just a few months away from reaching pre-pandemic levels, while natural gas and coal demand have already exceeded the 2019 volumes.
Sure, international airline travel is still struggling because of COVID-related travel restrictions in place in many countries. But economies are bouncing back, industries are growing, and the world needs a lot of energy, once again.
Fossil Fuels Support Economic Growth
And fossil fuels continue to supply most of that energy and will do so for years to come. Last year’s slump in fossil fuel consumption is being erased, and those who expected oil, gas, and coal demand to never return to pre-COVID levels now know they were wrong.
Also wrong were all those who hoped the ‘build back greener’ policies that governments pledged last year would suddenly lead to solar, wind, biofuels, sustainable aviation fuels, and hydrogen displacing fossil fuel-generated energy overnight.
Economies are recovering post-COVID, and consumer habits haven’t changed all that much: consumers still want a warm home, power, the latest tech gadgets, and to be able to freely travel and spend money.
Apart from a share of renewables for power generation, solar and wind, for example, are not really providing the energy and all the stuff consumers buy. Fossil fuels do. And they will continue to do so for at least another decade until the energy transition - including in industries other than power generation - accelerates.
The share of renewable energy sources in electricity generation continues to rise, but renewables are incapable of meeting the rebounding power demand, the International Energy Agency (IEA) said in July.
The IEA also says that if the world were to meet a net-zero target in 2050, it should stop investing in new oil, gas, and coal supply now.
Yet, these days, both the most developed economies in Europe and the fastest-growing developing economies in Asia - China and India - are experiencing first-hand what undersupplied coal and gas markets mean: very high prices of energy commodities and power supply, and industries halting factories because of shortage of electricity or gas.
Coal And Gas Demand Back Above Pre-Covid Levels
The post-COVID economic recovery drove demand for oil, coal, and gas, with coal and gas consumption already exceeding pre-pandemic levels. As a result, the record slump in global emissions from 2020 is also being erased, posing another conundrum to the global fight against climate change.
On average, coal demand declined by 4 percent last year - the steepest drop since World War II - but it was already back to pre-pandemic levels by the end of 2020, the IEA says.
“Coal use in the fourth quarter was 3.5% higher than in the same period in 2019, contributing to a resurgence in global CO2 emissions,” Carlos Fernández Alvarez, Senior Energy Analyst at the IEA, wrote in a commentary in March.
This year, coal demand is rebounding strongly in 2021, driven by the power sector, the agency said in its Global Energy Review 2021 in April. Natural gas demand is also bouncing back and is expected to erase the 2020 loss and push demand 1.3 percent above 2019 levels, as per IEA estimates in the same review.
Oil Demand Set To Reach 2019 Levels Within A Few Months Oil demand is also on track to soon reach 2019 levels and exceed them. Many analysts and oil companies see global oil demand returning to the pre-crisis levels of 2019 as early as the start of next year, if not earlier, by the end of 2021. According to OPEC’s latest estimate, global oil demand in 2022 will average 100.8 million bpd and exceed pre-COVID levels.
The current gas, coal, and power crisis in Europe and Asia is also set to accelerate oil demand recovery in the winter if gas-to-oil switching becomes more widespread.
By early 2022, demand for all fossil fuels is expected to have reached or exceeded pre-pandemic levels, highlighting the challenges of the energy transition to secure reliable - and preferably affordable - energy for the world.
“The energy transition and decarbonisation are decade-long strategies and do not happen overnight,” Cuneyt Kazokoglu, head of oil demand analysis at consultancy FGE, told Reuters.
Last year’s slump in fossil fuel demand had nothing to do with the energy transition: it had everything to do with the lockdowns and economic decline, Kazokoglu said.
A rushed transition without considering the still enormous role that fossil fuels play in the economy and consumers’ lifestyle risks exposing the global energy market to supply crunches and price spikes.
“Prices for fossil fuels will remain volatile, perhaps more so than today since the risk of a supply-demand imbalance is greater in a market that is shrinking where the case for further investment is weak, which could produce short-term rallies,” Nikos Tsafos, the James R. Schlesinger Chair for Energy and Geopolitics with at Washington-based Center for Strategic and International Studies (CSIS), wrote in a commentary last month.
The price of commodities critical for the energy transition - such as the key metals lithium, cobalt, nickel, or copper - are also prone to volatility, Tsafos notes.
The energy transition will not be smooth sailing and will take decades. In the meantime, fossil fuels will continue to support the global economy and the security of the energy supply.
Even the IEA, while saying that well-managed energy transitions would be the solution - not the problem - in the current gas and power crises, acknowledged that “The links between electricity and gas markets are not going to go away anytime soon. Gas remains an important tool for balancing electricity markets in many regions today.”
By Tsvetana Paraskova for Oilprice.com
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