A new energy crisis?

In May 2021, the International Energy Agency (IEA), did a scenario planning exercise. This planning exercise was a "what if" exercise to determine what conditions would have to exist for the world to achieve "net zero by 2050". One of these notional conditions in the scenario planning exercise was that there would be no new oil fields and no new gas fields.

As a long-term reader of IEA reports, I took these notional scenario planning conditions for what they were. However, others, who are not so used to reading IEA reports, assumed that the IEA was saying there should be no new oil fields and no new gas fields.

This scenario planning exercise was part of the IEA leadup to COP 26 held in Glasgow. At that conference, both China and India said that they would not be carbon neutral until after 2050. This means that international agreement on 'net zero by 2050' was not reached.

Speaking in New York on 27 January 2023 at a meeting of the Council on Foreign Relations, Fatir Birol, the Executive Director of the IEA, said that he thought that it was still worth pursuing the objectives of "net zero by 2050". He said that in addition to continuing investment in oil and gas, there would need to be an even larger investment in sustainable energy. Fatir Birol said "the investment for fossil fuels were about $1US trillion and investments for clean energy was about $US1.4 trillion. Last year, $US1.4 trillion for all clean and $1US trillion for fossil fuels. To be in line with our 1.5 degrees goal, this ratio in 2050 needs to be a $US1 trillion for fossil fuels and $US9 trillion for clean energy."

Figure 1: Global Oil Supply/Demand

Source: International Energy Agency

In an interview in Paris on 23 June 2023, Fatir Birol noted that he thought in the second half of this year, global oil demand would be around 2.3 mbpd higher than global supply. He thought this meant that the oil market could become "tight" in the second half of the year. He also noted that he thought European nations were too confident about the supply of natural gas that they held in storage going into the next winter. Yes, there was a lot of gas in storage, but the problem was the availability of new LNG supplies to refill that storage in the coming winter was the lowest for many years. He said that should China grow faster than its current estimate, European countries would have difficulty getting enough supply to make it through the winter. This could cause natural gas prices to rise again to extremely high levels.

Our task, however, is not long-term patterns of investment, but short-term patterns in the oil price. We have constructed a model which shows the relationships between IEA data on global oil demand and supply and the resulting level of West Texas Intermediate Grade oil. The level of global oil demand and supply for coming quarters is shown in Figure 1.

Although global oil supply has risen significantly from the beginning of 2021 to the final quarter of 2022, supply has moved sideways since that time. This is not what is happening to demand. The IEA tells us that an increase in demand of 61.2% for jet fuel and kerosene in China this year will lift total world demand to 103.4 mbpd by the third quarter of 2023. This will rise very slightly to 103.5 mbpd in the fourth quarter of 2023.

Although demand improves, supply does not. The best available estimate drawn from IEA reports in May and June 2023 suggest a supply of 101.1 mbpd in the third and fourth quarters of 2023.

Figure2: IEA Estimate based model