In his latest World Energy Outlook, the International Energy Agency said that thanks to the energy crisis that is shaking the world at the moment, the demand for fossil fuels will peak, accelerating the transition to renewable energies. But is this just wishful thinking?
The IEA, for the first time ever, sees this happening in all of the scenarios it has developed for its forecasts. Even under the stated policy scenario—usually the most conservative of scenarios—fossil fuel demand would begin to decline permanently in the mid-2020s “by an annual average roughly equivalent to the lifetime production of a large oilfield”.
Coal will be the first to disappear, and in just a few years. Next comes the end of natural gas, which will peak by 2030. Oil, meanwhile, is expected to be squeezed out by the influx of electric vehicles.
But will it really be?
The energy crisis that began last year in Europe with insufficient gas supplies has fully unfolded this year after Russia cut exports of the product to the EU. This disruption has pushed demand for fossil fuels higher than it was before the pandemic.
At the time, BP forecast that peak oil had already occurred in 2019. According to the oil major, oil demand would never return to 2019 levels again. On top of that, everyone in the forecast said that the demand for coal would never increase globally again and that gas would be a transition fuel to the future of renewable energy. Then gas started to be demonized along with oil as dirty and inappropriate. But that was then, before the crisis.
Now the coal request increased due to gas shortages in Europe, with countries reopening mothballed coal-fired power plants, increasing oil production and even converting gas-fired power plants to coal for the winter.
Politicians – as well as the IEA – seem to believe this is a short-term increase in demand that will expire when gas markets return to normal. The problem with this belief is that gas markets will not return to normal in a week or even a month. In fact, gas markets in Europe are unlikely to ever return to normal, as normal means getting 40% of EU gas from Russia.
Related: IEA expects demand for all fossil fuels to peak in next decade
With new US LNG supplies slow to come online and replace lost Russian pipeline flows, we could see strong demand for coal for a few more years. And then China and India, and other Asian economies will continue to use coal because it will remain cheaper than gas, especially liquefied gas, the price of which has been pushed up by thirsty European buyers.
On the subject of oil demand, the IEA seems to believe that electric vehicles will kill it from the mid-2030s. Yet this would require the production, sale and use of several million electric vehicles, which is far from certain due to impending worldwide shortages of metals and minerals.
Copper supply warnings have been coming from the mining industry and analysts for months now. Trafigura was the last to add its voice, saying earlier this month, global copper stocks had fallen to dangerously low levels, equivalent to around 4.9 days of global consumption. By the end of the year, Trafigura told an FT event, that will be reduced to 2.7 days.
“It is no coincidence that the EU has decided to advance the objective of doubling its solar capacity from 2030 to 2025. All this requires a lot of copper,” said Kostas Bintas, co-head of metals trading and minerals at Trafigura.
“Look at electric vehicles everywhere, [the numbers on the road] are surprisingly on the rise. It’s also a lot of copper. As a result, we dipped into inventory throughout this very difficult year. »
What all these warnings suggest is quite simple: there may not be enough raw materials for all the electric vehicles – and the solar and wind farms – that need to be sold to kill oil demand and usher in the future of renewable energy.
According to the IEA, the transition is a matter of energy security, and the war in Ukraine has highlighted this and would likely act as a catalyst for a faster transition. Indeed, the more locally produced energy a country has, the more secure it is. The problem is that the forms of renewable energy chosen to drive the transition are not very efficient in ensuring energy security.
Jeffrey Currie of Goldman Sachs was the last to say so clearly. Told CNBC this week that some $3.8 trillion has been invested in renewable energy over the past decade, and this massive investment has only shifted the share of fossil fuels in the global energy mix from 82% to 81 %.
Now, Currie continued, that share may well be back at 82% due to the energy shortage that has spurred coal consumption. He also pointed out that investments in renewable energy have focused on capacity, but the capacity utilization factor of wind and solar installations tends to be quite low. This is what prevents wind and solar power from ensuring the energy security mentioned by Fatih Birol of the IEA.
The International Energy Agency has established itself in recent years as a champion of energy transition rather than as an energy agency open to all forms of energy. Its emphasis on the need for a transition as fast as possible and on the absence of a causal link with the energy crisis has caused some skepticism, especially after the publication of its roadmap to Net Zero.
At the time, the Saudi energy minister mocked the plan, calling it “La La Land”. Interestingly, since the release of the roadmap, demand for fossil fuels has indeed increased and prompted the IEA itself to call for more investment in them after stating in the roadmap that we no longer needed to invest in additional oil and gas production.
Like that roadmap, this latest WEO could go down in history as the final IEA installment of wishful thinking rather than a reflection of some remotely plausible reality.
By Irina Slav for Oilprice.com
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