Peak oil? Not until 2040 says the International Energy Agency

Despite the Paris agreement.

The International Energy Agency expects global oil consumption to peak no sooner than 2040, leaving its long-term forecasts for supply and demand unchanged despite the 2015 Paris Climate Change Agreement entering into force.

The Paris accord to cut harmful emissions seeks to wean the world economy off fossil fuels in the second half of the century in an effort to limit the rise in average world temperatures to “well below” 2 degrees Celsius (3.6 Fahrenheit) above pre-industrial times.

But while demand for oil to power passenger cars, for example, may drop, other sectors may offset this fall.

“The difficulty of finding alternatives to oil in road freight, aviation and petrochemicals means that, up to 2040, the growth in these three sectors alone is greater than the growth in global oil demand,” the IEA said in its annual World Energy Outlook.

From 2020, the European Union will impose much tougher legislation to control vehicle emissions, which many expect to quickly erode use of traditional fuels such as gasoline and diesel, a major source of oil demand.

In the report, the IEA looks at three scenarios for oil supply and demand. Its central, or “New Policies,” scenario assumes signatory countries will attempt to meet the requirements set by Paris, as well as existing environmental legislation, while its “450 scenario” assumes signatories will adhere to the agreement and oil demand will fall off sharply and the “current policies” scenario does not factor in the Paris deal.

The IEA’s central scenario assumes demand will reach 103.5 million barrels per day by 2040 from 92.5 million bpd in 2015, for which India will be the leading source of demand growth and China will overtake the United States to become the single largest oil-consuming nation.

Overall, under the New Policies scenario, the IEA said it sees non-OECD oil demand growth running at the slowest pace for more than 20 years, but this would still be enough to offset a continued fall in OECD country demand, which will be tempered by policies aimed at improving vehicle fuel efficiency.

“In the New Policies Scenario, balancing supply and demand requires an oil price approaching $80 a barrel in 2020 and further gradual increases thereafter,” the IEA said, leaving its price forecast under this scenario unchanged from last year’s World Energy Outlook.

Drop-off in Demand

The IEA’s “450 scenario” forecasts rising use of electric vehicles and consumption of biofuels that will cut oil demand.

“In the 450 Scenario, global oil demand peaks by 2020, at just over 93 million bpd. The subsequent decline in demand accelerates year-on-year, so that by the late 2020s global demand is falling by over 1 million bpd every year,” the IEA said.

“Oil use in passenger vehicles in the 450 Scenario falls from just under 24 million bpd to 15 million bpd in 2040, nearly 10 million bpd lower than the 2040 level in the New Policies Scenario,” the agency said.

Without factoring in implementation of the Paris Agreement and only assuming the measures adopted by mid-2016 will apply, the IEA’s “current policies” scenario forecasts a rise in demand to 117 million bpd by 2040.

On the supply side, in both the New Policies and 450 scenarios, the IEA expects the Organization of the Petroleum Exporting Countries (OPEC) to maintain its strategy of controlling output in order to support prices.

It sees a gradual decline in OPEC production out to 2040, when it expects the group’s output to be around 10% lower than its current level of 33.8 million bpd, but says this drop will be much slower than the decline in non-OPEC production, which it expects to fall by nearly a third in this time.

In the New Policies scenario, global oil output is expected to rise to around 100.5 million bpd by 2040, from 2015’s 92.5 million bpd, while under the 450 scenario, supply is expected to fall to around 71 million bpd.

In its Current Policies outlook, the IEA estimates global supply will rise to 113.6 million bpd by 2040.

“OPEC provides an increasing share, approaching 50% of global production by 2040—a level not seen since the 1970s—while unconventional production more than doubles between 2015 and 2040,” the agency said.