The International Energy Agency (IEA), known as the energy watchdog for OECD countries, has once again raised concerns about an impending peak in hydrocarbon demand, projected to occur before 2030. The agency, which has become notably politicized, attributes this "doomsday scenario" for hydrocarbon producers, particularly OPEC+ and the USA, to the struggling Chinese economy. China's ongoing shift from hydrocarbons to renewables and the potential liberalization of its economy further contribute to this assessment.
Fatih Birol, the head of the IEA, sees the ongoing challenges in the Chinese economy and energy demand as a positive development, coinciding with a significant energy transition in the country. However, the IEA's latest report doesn't delve deeply into a comprehensive analysis of Chinese hydrocarbon demand or the still-low production of renewable energy.
The IEA's report primarily relies on its assessments, suggesting that China, as a global driver of hydrocarbon demand growth, is reaching a turning point. The IEA states, "China is reaching an inflection point, and its total energy demand is likely to peak around the middle of this decade." These developments are seen as positive for global climate change and efforts to combat global warming, as Beijing has become the world's largest polluter, surpassing the USA and Europe.
The IEA projects that China's GDP growth will average just under 4% per year until 2030. However, these projections are unsubstantiated, given China's non-liberalized economy, where state interference and investments could potentially drive higher GDP growth. As long as China's ruling elite remains in power, limiting the room for private entities, the IEA's statements must be taken with skepticism. Furthermore, the expectations of reduced pollution and emissions in China contrast with the substantial investments in coal, natural gas, and crude oil within and outside the country. Related: Azerbaijan And Turkey Launch Joint Military Exercises Near Armenia Border
While the market currently anticipates a possible peak in coal demand in 2023, it doesn't necessarily indicate a need for renewed capacity. This is especially relevant considering China's increasing struggles with water supply, which makes coal power a crucial energy source during drier seasons.
On the other hand, China is gradually becoming the primary driver of hydrocarbon-based energy supply, while new drivers such as India and some European countries are emerging. India's pursuit of significant economic expansion and the economic growth ambitions of African countries may mitigate or even eliminate some of the challenges associated with Chinese demand growth.
The IEA's assessments face criticism, particularly in terms of the agency's optimistic outlook on the growth and impact of renewable energy worldwide. The report suggests that renewables will meet half of the world's power demand by 2030, based on optimistic scenarios, including the proliferation of electric vehicles (EVs) and substantial investments in offshore wind, solar, green hydrogen, and ammonia. The IEA emphasizes the idea that consumers worldwide are enthusiastic about changing their heating systems to electricity or heat pumps.
The report acknowledges impressive growth in clean energy and technologies. For instance, the number of electric cars sold increased from one in 25 in 2020 to one in five in just three years. However, the IEA's claim that the transition to clean energy is unstoppable is debatable. While the sales of new EVs are on the rise, many rely on government subsidies or strategies, particularly in China. There are no indications that the majority of vehicles, especially in non-OECD countries or China, will be EVs. Technical challenges, power grid availability, capacity constraints, and the cost of EVs are not fully considered.
In Europe and the USA, offshore wind and solar energy are facing growing challenges, including rising costs due to supply chain constraints, interest rates, and low Power Purchase Agreement (PPA) financial terms. A growing number of offshore wind projects worldwide are being delayed or need renegotiation due to financial difficulties. However, the IEA does not adequately address these mounting financial, technical, and supply chain issues.
Despite the significant number of green hydrogen projects under discussion, only 7-8% of these projects are fully financed, with the rest remaining in the planning stage. The substitution of hydrocarbons by hydrogen or ammonia is not expected to occur before 2035, and even that timeline is optimistic.
The IEA's calls for governments to support clean energy transitions do not fully consider the increased costs, low returns, and growing opposition from consumers and industries. In Europe, both consumers and industries face substantial increases in electricity bills that they cannot mitigate. The additional costs of solar and heat pumps are often unaffordable for most individuals, regardless of government support. Even OECD governments are struggling to finance their own strategies, as evidenced by ongoing challenges in the Netherlands, the UK, Germany, and the USA.
While the IEA and most Western governments seem to have a somewhat insular perspective, the world is undergoing significant changes. Currently, the COP28 1.5°C warming limit goals agreed upon in Paris are losing prominence. Concerns about climate change and CO2 emissions are taking a backseat to issues of geopolitical instability and fears surrounding the accessibility of metals, minerals, and hydrocarbons. Beneath the surface, global opposition to current energy transition strategies is growing, as these approaches not only destabilize global energy and economic systems but also disrupt the daily lives of most citizens.
It is both remarkable and concerning that the IEA offers only a brief assessment of ongoing geopolitical power dynamics, shifting global power dynamics, and the substantial instability currently seen in the MENA region. Without a doubt, a regional conflict in the Middle East, involving Iran or Hezbollah, has the potential to not only cause an immediate spike in hydrocarbon prices but also pose a significant threat to global supply chains. A full-scale war, combined with the already challenging situation in Ukraine due to the Russian conflict, as well as the looming China-Taiwan crisis, could have far-reaching negative consequences beyond what is currently addressed by the OECD's energy agency. The turmoil in the Middle East would not only impact global oil and gas markets but also cast doubt on the feasibility of most hydrogen or ammonia projects. Without investments from or within the Middle East, the IEA's energy transition scenarios may need to be reevaluated.
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Simultaneously, the ongoing contentious relationship between the IEA and OPEC is poised to reach new levels of disagreement. The release of the IEA's report shortly after OPEC's relatively optimistic oil market report gives the impression that Paris is attempting to alarm markets without substantial grounds. It's worth noting that, despite its inherent bias, OPEC's reports have historically demonstrated a higher level of accuracy compared to the IEA reports from the early 21st century. Even OPEC's most optimistic scenarios regarding hydrocarbon demand growth have been realized sooner than expected. The current IEA report appears to resemble a modern-day version of "Crying Wolf." It's possible that the underlying strategy of Paris and its supporters is to induce significant fear among investors, including clients, in the hope that their biased outlook becomes a reality. However, at present, such a scenario appears unlikely. It's essential to keep in mind that the IEA will need to present a doomsday scenario for hydrocarbons, as it faces a different audience in Dubai in the coming weeks.
By Cyril Widdershoven for Oilprice.com
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The source of their contentious relationship with OPEC emanates from three factors. The first is that while the IEA is perceived by the global oil market as serving the interests of Western members of the OECD, OPEC is seen as serving the whole world by aiming to keep the market balanced and stable and of course serving the legitimate national interests of its members.
The second factor is that while the IEA reports try to alarm markets without substantial grounds, OPEC’s reports have historically demonstrated a higher level of accuracy. Even OPEC's most optimistic scenarios regarding hydrocarbon demand growth have been realized sooner than expected.
A third factor is that OPEC has decided four years ago not to use the IEA energy data anymore because they are politically-motivated, unsubstantiated and market depressive.
Moreover, the IEA’s projection of a peak oil demand by 2030 is based on two major but unsubstantiated assumptions: an increase in EV adoption and slower Chinese GDP growth.
1- Despite the expenditure of an estimated $6.0 trillion, large government subsidies and daily media promotions over a period of 30 years, the number of EVs in the world is 20 million compared with 1.4 billion internal combustion engines (ICEs).
2- The IEA projects that China's GDP growth will average just under 4% per year until 2030. However, these projections are unsubstantiated, given China's non-liberalized economy, where state interference and investments could potentially drive higher GDP growth.
3- The notions of global energy transition and net-zero emissions are myths. They will never be achieved by 2050, or 2100 or ever. The reason is that renewables on their own are incapable of satisfying global demand for electricity without substantial contributions of natural gas, coal and nuclear energy. The reason is their intermittent nature.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert