What doesn’t the IEA’s 10-point plan to reduce oil demand tell you?

What doesn’t the IEA’s 10-point plan to reduce oil demand tell you?

IEA Executive Director Fatih Birol speaks during the closing press conference of the International Energy Agency (IEA) ministerial meeting in Paris, Thursday, March 24, 2022. (AP)

The International Energy Agency announced a 10-point plan to reduce oil demand earlier this month, which included cutting car use, lowering speed limits and restricting air travel.

The measures were announced after Russia’s military action against Ukraine. IEA Executive Director Fatih Birol said: “The world could face the biggest oil supply shock due to Russia’s aggression in Ukraine.”

He added that these measures are necessary because the oil market is in an emergency situation and could continue to deteriorate if no action is taken. The report pointed out that Russian oil exports could fall by around 2.5 million barrels per day, and possibly disappear as early as April. The body said its 10-point plan would reduce oil demand by up to 2.7 million bpd over the next few months to make up for lost supply and restore market balance.

These measures mainly target the transport sector, in particular road and air transport. However, questions remain and other challenges need to be addressed.

I have stated six key points below.

First, the IEA said its measures “achieve significant reductions in oil demand within months, reducing the risk of a major supply crisis.” But focusing on the demand side of the market would be counterproductive. Correcting the wrong part of the equation and, perhaps, getting it wrong will hurt the oil market going forward.

The IEA recognizes that the root cause of the current energy crisis is supply. This is a direct result of the underinvestment that limited global capacity and caused demand erosion due to the emergence of the COVID-19 pandemic two years ago, which in effect delayed the current energy crisis. .

The Organization of the Petroleum Exporting Countries and its members, led by Saudi Arabia’s energy minister, Prince Abdul-Aziz bin Salman, have repeatedly expressed concerns about underinvestment in the upstream oil sector. He said ambitious green energy transition policies around the world are not closely aligned with realities on the ground, leaving a gap between oil supply and demand.

Upstream investment in the oil and gas industry remained weak for the second straight year at $341 billion in 2021, down 23% from the pre-pandemic level of 525, according to the International Energy Forum. billions of dollars. In 2020, investments fell by around 30%. These are alarming figures.

Second, the IEA’s recommendations are aimed primarily at member states of the Organization for Economic Co-operation and Development, or advanced economies, but total consumption and demand increases generally come from non-OECD countries. OECD, such as China and India.

According to OPEC’s latest monthly report, OECD countries consumed 46% of the world’s oil in 2021, while non-OECD countries absorbed 54% of demand during the same period. Consumption is expected to grow strongly this year, particularly in non-OECD countries, driven by sustained economic development, especially in oil-producing countries, and a return to more normal usage patterns. The reduction in demand announced by the IEA if its 10-point plan is followed, could be offset by an increase in consumption in non-OECD regions.

Third, the IEA encourages the use of high-speed trains instead of planes and avoids business travel where possible, which could further harm the airline industry and delay its expected recovery.

The global aviation industry has experienced two unprecedented years due to travel restrictions during the pandemic. According to the International Air Transport Association, the estimated annual losses for airlines worldwide amounted to $137.7 billion in 2020. This figure is 16% higher than the $118.5 billion in losses originally forecast. end of 2020.

However, a new report from consultancy Oliver Wyman last month suggests the industry could soon be on the mend, returning to pre-pandemic levels by 2023. But the IEA’s recommendations could hurt an industry that supports nearly 11.3 million jobs and contributes $961.3 billion to global growth. gross domestic product.

Fourth, there is pent-up demand for oil that will be unleashed, especially in non-OECD countries. The personal savings accumulated by households over the past two years will support oil demand growth over the summer.

We have seen some of this recovery in demand in OECD countries, but there is potential for a larger recovery elsewhere. Even in OECD countries, such as the United States, the pandemic has benefited high and middle income people. In these households, savings increased while debt was paid down. Additionally, stimulus payments from the U.S. government have lifted 11.7 million people out of the poverty line, according to the Census Bureau, which will ultimately drive up demand for oil.

Fifth, in its February monthly report, after reassessing historical data from 2007, the IEA adjusted Saudi Arabia’s oil consumption – in the use of liquefied petroleum gas – up to 500,000 bpd, or about 17% of the Kingdom’s total oil consumption. Such a large adjustment raises further questions about the IEA’s assumptions and forecasts

Last but not least, OECD governments collect revenue from fossil fuel taxes, and the impact of this lost revenue is an open question. In 2020, a liter of fuel at the pump sold in G7 countries was taxed at up to 54% of the retail price, according to the OPEC website. In the UK, France, Italy and Germany, this figure has risen to over 60%.

OECD countries are accelerating the replacement of oil as the main source of energy, driven by debates on CO2 reduction and energy security. Nonetheless, energy market fundamentals tell us that oil will remain the most reliable and cost-effective source of energy that will support global economic prosperity for years to come.

• Hassan M. Balfakeih is an Oil Demand Specialist and former Chief Oil Demand Analyst at the OPEC Secretariat

Disclaimer: The opinions expressed by the authors in this section are their own and do not necessarily reflect the views of Arab News


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Felix J. Dixon