Global oil demand growth is approaching an almost complete slowdown in the coming years, driven by high prices and concerns over security of supply, underscored by the global energy crisis. This slowdown is accelerating the transition to cleaner energy technologies, according to a new report released by International Energy Agency (IEA).
The IEA Oil 2023 Medium Term Market Report forecasts that based on current government policies and market trends, global demand for oil will increase by just 6% between 2022 and 2028, peaking at 105.7M barrels per day (mb/d). This growth will be mainly driven by robust demand in the petrochemical and aeronautical sectors. However, annual demand growth is expected to slow significantly, from 2.4mb/d this year to just 0.4mb/d in 2028, indicating a spike in spot demand.
One of the main drivers of this slowdown is the reduction in the use of petroleum in transport fuels, as the expansion of electric vehicles, the increase in biofuels and the improvement in energy efficiency reduce the consumption of petroleum in this sector.
IEA Executive Director Fatih Birol stressed that the transition to a clean energy economy is accelerating and that peak global oil demand is expected before the end of the decade due to advances in electric vehicles, energy efficiency and of other technologies. Birol also highlighted the importance for oil producers to keep up with this change and adjust their investments to ensure an orderly transition.
Global oil markets are still slowly recovering after three turbulent years, hit initially by the Covid-19 pandemic and then by the crisis resulting from geopolitical conflicts in Europe. The global energy crisis has resulted in an unprecedented reshuffling of global oil trade flows. While markets may contract in the coming months due to OPEC+ alliance production cuts and other market tensions, the new report predicts an easing of these tensions in the coming years.
Although China has resumed its oil demand after lifting Covid-19 restrictions in late 2022, Chinese demand growth is expected to slow significantly from 2024 onwards. development, along with rising petrochemical demand, will offset the slowdown in advanced economies.
Global investment in oil and gas exploration, extraction and production is on the rise, with 11% year-on-year growth to total US$ 528 billion in 2023. While this increase in investment could meet projected demand in the period covered by the report, exceeds what is needed in a world seeking to achieve net zero emissions.
The report's projections assume that major oil producers will continue to add capacity even as demand growth slows. This will result in overcapacity of at least 3.8 mb/d, concentrated mainly in the Middle East. However, the report highlights that several factors, including uncertain global economic trends, OPEC+ decisions and China's refining policy, could affect market equilibria in the medium term.
In the refining sector, global overcapacity has been reduced due to refinery closures, conversions to biofuel plants and project delays since the pandemic. This reduction, combined with the drop in Chinese exports of oil products and changes in Russian trade flows, resulted in record profits for the sector last year. Although a net growth in refining capacity is predicted until 2028, outpacing the growth in demand for refined products, there are divergences between the different products, which indicates the possibility of a shortage of middle distillates similar to the one that occurred in 2022.
In conclusion, the new IEA report highlights the impending slowdown in world oil demand, driven by high prices and concerns over security of supply. The transition to cleaner energy technologies is accelerating, with peak global oil demand predicted to occur before the end of this decade. The oil industry faces the challenge of adapting to this change and calibrating its investments to ensure an orderly transition. There is still uncertainty in global oil markets due to geopolitical, economic and regulatory factors, but demand for oil is expected to be increasingly impacted by environmental concerns and the transition to more sustainable energy sources.
