Global oil demand growth to slump, peak in sight as clean energy transition accelerates: IEA Report

New Delhi: The International Energy Agency (IEA) on Wednesday forecast a significant slowdown in global oil demand growth as the world approaches a peak in consumption. In its “Oil 2023 medium-term market report”, IEA attributed the deceleration to high prices and concerns over the security of oil supplies, which have expedited the transition toward cleaner energy technologies.

According to the report, global oil demand is expected to rise by 6% between 2022 and 2028, reaching 105.7 million barrels per day (mb/d). The growth will be supported by strong demand from the petrochemical and aviation sectors. However, annual demand growth is projected to diminish from 2.4 mb/d this year to just 0.4 mb/d in 2028, indicating an approaching peak.

The report highlights that the use of oil for transport fuels will decline after 2026 as electric vehicle expansion, biofuel growth, and improved fuel efficiency reduce consumption. IEA executive director Fatih Birol emphasized the increasing momentum toward a clean energy economy, said, “The shift to a clean energy economy is picking up pace, with a peak in global oil demand in sight before the end of this decade as electric vehicles, energy efficiency, and other technologies advance. Oil producers need to pay careful attention to the gathering pace of change and calibrate their investment decisions to ensure an orderly transition.”

While global oil markets are still adjusting after the pandemic and Russia’s invasion of Ukraine disrupted them, the report suggests that the multifaceted strains on markets are likely to ease in the coming years. The global energy crisis triggered by the war in Ukraine has led to a significant reshuffling of global trade flows. Although production cuts by the OPEC+ alliance may tighten global supplies and potentially cause market tightness in the months ahead, the report indicates a subsequent easing of market strains.

China, the last major economy to lift stringent COVID-19 restrictions at the end of 2022, experienced a rebound in oil demand in the first half of 2023. However, demand growth in China is forecasted to slow markedly from 2024 onwards. Nevertheless, strong consumption growth in emerging and developing economies, coupled with burgeoning petrochemical demand, is expected to offset any contraction in advanced economies.

The report also highlights that global upstream investments in oil and gas exploration, extraction, and production are on track to reach their highest levels since 2015, growing 11% year-on-year to $528 billion in 2023. While higher spending may be partly offset by cost inflation, sustained investment at this level would be adequate to meet the forecasted demand in the covered period. However, the report cautions that such investment exceeds the amount needed in a world striving for net-zero emissions.

The report assumes that major oil producers will continue their capacity expansion plans even as demand growth slows. This is expected to result in a spare capacity cushion of at least 3.8 mb/d, predominantly concentrated in the Middle East. Nevertheless, the report acknowledges several factors that could impact market balances in the medium term, including uncertain global economic trends, the direction of OPEC+ decisions, and China’s refining industry policy.

In terms of increasing global supply capacity, oil-producing countries outside the OPEC+ alliance are set to dominate in the medium term. The report predicts an expected rise of 5.1 mb/d by 2028, led by the United States, Brazil, and Guyana. Within OPEC+, Saudi Arabia, the United Arab Emirates, and Iraq are leading the capacity-building plans, while African and Asian members are anticipated to face ongoing declines, and Russian production is expected to fall due to sanctions. Overall, the report forecasts a net capacity gain of 0.8 mb/d from the 23 members of OPEC+ over the covered period.

In the refining sector, the report notes that the global overcapacity has been reduced through closures, conversions to biofuel plants, and project delays since the pandemic. This, combined with a sharp decline in Chinese oil product exports and disruptions to Russian trade flows, resulted in record profits for the industry last year. While net refinery capacity additions by 2028 are expected to outpace demand growth for refined products, diverging trends among products mean that a repetition of the 2022 tightness in middle distillates cannot be ruled out.