Oil demand is expected to take a years-long hit from COVID-19—and oil-dependent export nations must fundamentally shift their economies to meet that reality.
That was the message on Tuesday from Fatih Birol, executive director of the International Energy Agency, which ultimately downgraded its oil outlook yet again. He warned that oil demand, thanks to COVID, will be weak in the coming years.
But even after the pandemic (hopefully) fades away, the market prospects don’t look much better. Oil demand will ultimately flatten—the IEA prefers the word “plateau” to “peak oil”—by the end of the decade, the IEA says, a prediction similar to one made by OPEC last week.
You’ll see that shift in some obvious parts of the economy. “This reinforces oil demand for cars plateauing in this decade at roughly 2019 levels of demand, before declining after 2030,” the IEA said.
That future, paired with current sinking demand for oil and volatile prices, and broad shifts towards climate policies worldwide, means that the world’s petrostates must find other ways to sustain their economies.
“They have to prepare themselves before it is too late,” Birol said in an interview with Bloomberg TV on Tuesday.
A weak outlook
In its annual World Energy Outlook, the IEA warned that COVID-19 is now expected to depress global oil demand until at least 2023, or even later.
“The recovery of oil demand may not be as quickly as we or the others thought a few months ago, mainly because of the governments around the world not being able to have the coronavirus under control,” Birol said Tuesday.
The crucial factor for oil demand is now the virus—more to the point, when will the global economy return to pre-pandemic levels. And it doesn’t look good.
“The rebound may be slower than one hopes to see,” he said. Demand also won’t shift to other forms of energy without changes in government policy, Birol said.
But it’s not the only headwind. Since the start of the pandemic, the IEA has been warning that any economic recovery must include the energy transition to low-carbon sources, including the full range of options, from hydrogen to nuclear.
That shift will transform countries that depend on oil and gas revenues—many of which have economies with a “one to one” relationship with oil prices, Birol said.
Such a diversification requires serious financial means, and he added that there is an element of déjà vu: “we saw this movie before, and [diversification] didn’t happen.”
But such a dependency is now “risky and dangerous,” he said, and even oil economies including Saudi Arabia and Iraq are increasingly heeding the call, he added.
It’s not just countries that are at risk. As the pandemic has sunk oil prices once again, cities and regions including Houston and Calgary, Canada are also grappling with what their economic future will look like.
The IEA did not lay out a specific date for “peak oil,” and Birol said the industry does not think that the peak for oil demand has already passed, forecasting that demand will return as economies recover. Meanwhile, industry majors like BPhave also forecast that oil demand may in fact never recover, and laid out some scenarios where the peak has already passed.
Several major legacy oil and gas companies, including BP, have committed to “net zero” carbon emissions goals by 2050, also indicating a shift away from fossil fuels that has continued even amidst the pandemic.