Contributed by Robert Lyman © 2021. Full bio here.
The International Energy Agency (IEA) has long been regarded as one of the most authoritative sources of data and analysis concerning energy. Originally formed after the OPEC oil embargo in the early 1970’s to institutionalize western countries’ efforts to increase their security against politically-inspired oil market disruptions, in the late 1980’s the IEA transformed itself into a largely European-focused advocate of greenhouse gas emission (GHG) reduction policies. Its annual reports on global energy markets still demonstrate its considerable expertise in analyzing economic and technological developments, but also include a clear bias in favour of what it calls “strong policy measures” to achieve the United Nations emission reduction goals
In March 2021 the IEA published “Oil 2021”, its analysis and forecast of oil markets to 2026. The report can be found here:
The starting point for the IEA’s analysis is, of course, the impact that the COVID-19 virus had on the global economy and especially on world oil demand in 2020. Demand was down almost nine million barrels per day below the level of 2019. According to the IEA’s data, demand declined from 99.7 million barrels per day (mb/d) in 2019 to 91 mb/d in 2020.
As oil production did not decline as fast, the result was a very large build-up in inventories. The market and price trends in the next few years will therefore be determined by the interplay among five key factors:
• The increase of oil demand due to the resumption of economic activity;
• OPEC efforts to restrain the growth of oil production;
• The effects of oil prices on non-OPEC oil production, especially in the United States;
• The rate at which the existing inventories are drawn down; and
• Investors’ responses to these developments in terms of new supply development.
There are, of course, always various “surprise” factors that could play a large role, notably prolonged continuation of the pandemic and/or much delayed dissemination of vaccines.
On balance, the IEA in its base case takes what might be considered a conservative view of how fast markets will recover to their pre-pandemic levels. Notably, it projects that world demand will not fully recover to its 2019 level until early in 2023 and that the growth in demand thereafter will be much slower than what had been experienced in the 2012-2019 period, when demand rose faster than one million barrels per day per year. By 2026, the IEA projects global oil demand to reach 104.1 mb/d.
The economic analysis that underlies these projections rests upon the macroeconomic growth forecasts of the International Monetary Fund. The IMF foresees very slow growth among the OECD countries – on average about 1.9% per year from 2023 to 2016 in the United States, 1.6% in the European Union and 1.3% in Japan. In contrast, the IMF foresees continuation of rapid GDP growth in China and the Asia-Pacific region (4.7%), India (7.4%) and Africa (4 %) over the same period.
Slow economic growth and increasingly stringent climate policies also combine to produce lower projections of regional oil demand growth. Over the 2020 to 2026 period, oil demand in North America is projected to grow by only 2.4 mb/d, from 22.2 mb’d to 24.6 mb/d. European oil demand is projected to grow by 1.1 mb/d, from 13.8 mb/d to 14.9 mb/d. Asia/Pacific oil demand (including China and India) is projected to grow by 5.9 mb/d, from 33.4 mb/d to 39.3 mb/d. In other words, by 2026, the IEA projects Asia/Pacific oil demand to be close to the total of North America and European demand combined.
Given the IEA’s current policy focus, these projections necessarily included a note of regret. The IEA’s World Energy Outlook Sustainable Development Scenario, previously published, mapped out a trajectory consistent with the climate goals of the Paris Agreement. According to that scenario, oil demand would have to decline by 3 mb/d from 2019 to 2025. The Oil 2021 report foresees a 3.5 mb/d increase in demand instead. The projected rise in global oil demand departs even more sharply from the pathway to “net-zero emissions” globally by 2050.
The report spends little time addressing the prospects for oil prices. It does note that in 2020 operators spent one-third less on upstream investments than planned at the start of the year (and 30% less than in 2019). In 2021, total upstream investment is expected to rise only marginally. These spending cuts, along with project delays, are constraining supply growth, so world oil production capacity is projected to increase by only 5 mb/d by 2026. By 2026, global effective spare production capacity (excluding Iran) could fall to 2.4 mb/d. It would not take many “surprises” to see crude oil prices rise well beyond current levels by then.