IEA’s modelling of energy future is more likely because of China
Will the energy transition be fast, with fossil fuels demand peaking in 2030 and quickly declining, as the International Energy Agency thinks? Or will it be slow, with oil demand peaking in 2045, then falling slowly over decades, as OPEC predicts? Why does peak demand even matter?
Let’s start with why it matters. Fifteen years difference between peak demand estimates may not seem like much, but in reality the IEA and OPEC think of the energy future very differently.
The IEA’s future is electrified: electric transportation, electric heating and cooling, electric industrial processes, and a power sector dominated by low-cost renewable energy (mostly solar), hydro, nuclear, and geothermal. Low-carbon fuels like hydrogen are used where electricity doesn’t work, but clean power is used to produce them. Hydrocarbons are used mostly as feedstock for materials. What little combustion remains is abated with carbon capture and storage (CCS).
“The transition to clean energy is happening worldwide, and it’s unstoppable,” says executive director Fatih Birol. “It’s not a question of ‘if’, it’s just a matter of ‘how soon’ — and the sooner the better for all of us.”
This isn’t quite the mid-century future modelled in the IEA’s flagship World Energy Outlook or its many technical reports, but it is the logical extension of that work. That world could probably arrive by the end of the 21st century, perhaps sooner if international efforts to accelerate climate policy succeed. And it is a vision of the global energy system that might have a fighting chance of combatting climate change.
OPEC imagines a very different future.
“It is an extremely risky and impractical narrative to dismiss fossil fuels, or to suggest that they are at the beginning of their end,” OPEC Secretary General, HE Haitham Al Ghais said, reacting to Birol’s comments. “Such narratives only set the global energy system up to fail spectacularly. It would lead to energy chaos on a potentially unprecedented scale, with dire consequences for economies and billions of people across the world.”
Even its most aggressive scenario sees oil consumption only a few million barrels per day less than current levels of 102 million barrels per day by mid-century. Rich economies electrify, but emerging economies stick with oil and gas, essentially emulating the development path of high-income countries. Hydrocarbon-rich Africa, the poorest continent with the highest birth rate, leads this trend, in part because it is blessed with abundant oil and gas resources.
The World Oil Outlook 2045, OPEC’s energy transition modelling exercise, doesn’t deny climate change or the need to reduce emissions. At least, not explicitly. The focus is instead on reducing emissions from oil and gas extraction (principally with CCS), or Scope 1 and 2 emissions, as they are called. But that accounts for only 20 per cent of emissions. The remaining 80 per cent, Scope 3, occur when oil or gas is combusted. While burning natural gas may create half the emissions of coal, its Scope 3 emissions are only a bit less than burning petroleum-based fuels like gasoline, diesel, and kerosene for aviation.
Alberta Premier Danielle Smith and her UCP government have adopted the OPEC view of the energy future lock, stock, and barrel. As have Canada’s oil and gas companies, almost all of which are headquartered in Alberta. As I argued in this column, Smith and the oil CEOs see the energy transition as a marketing opportunity, not an existential threat, which is the logical consequence of the IEA’s worldview.
Smith, to her credit, acknowledges that if oil and gas demand drops, Alberta can “make stuff” with its hydrocarbons instead of using them as feedstocks for refineries and power plants. Energi Media has argued for years that the future of the Alberta oil and gas industry is materials, not fuels. Alberta is already a leader in this type of research, thanks to Alberta Innovates, a provincial agency.
The problem with Smith’s strategy is that building new industries from scratch takes decades, not years. In OPEC’s future energy system, Alberta has plenty of time. In the IEA’s, it does not.
This is why the IEA vs. OPEC debate is so important.
Energi Media recently published a long thread comparing the IEA and OPEC view of the energy future. After reviewing numerous reports and interviewing hundreds of experts about the energy transition over the past 10 years, the conclusion isn’t even close: the IEA’s modelling is far more plausible than OPEC’s.
There are a number of faulty assumptions in the OPEC report, but the biggest by far is underestimating China.
Just like the United States drove global industrialization and economic growth after World War II, so China will dominate the energy transition in the 21st century.
China already has an enormous lead. It manufactures 70 per cent to 80 per cent of the core clean energy technologies (wind, solar, batteries, electric vehicles, heat pumps, hydrogen electrolyzers). Its supply chains have a stranglehold on the supply of required minerals and the intermediate refining and processing capacity. Despite burning more coal than any other country, a fixation for those who downplay China’s role in the energy transition, the country has massively subsidized the adoption of clean energy for 20 years and plans to do even more in the near to medium-term.
The odds of the United States, Europe, Japan, and South Korea catching China are almost zero. In fact, according to IEA projections, they will do well just to keep pace over the next decade, despite spending trillions of public money to build their own clean energy industries, supply chains, and infrastructure.
American automakers, for example, made bold predictions about their pivot to EV manufacturing, but now watch helplessly as their plans flounder amid software and manufacturing problems. At the same time, Chinese EV companies are setting sales records and beginning to export. In 2023, China’s BYD sold more EVs than Tesla, unthinkable only a few years ago.
The IEA’s energy future is more likely because of China.
Smith and the CEOs have bet on the wrong horse. The consequences of that poor judgment won’t be immediately apparent. In fact, the rest of this decade will probably feel like a boom in Alberta. Incumbent industries are often disrupted at the height of their profitability. Nibbling at the edges of the energy transition, such as trying to build a provincial blue hydrogen sector based on natural gas as a feedstock, will only fool Alberta’s political and business leaders into thinking that they are prepared for wrenching change.
They are not.
My fondest wish for 2024 is that the scales fall from the eyes of the province’s leaders, that they finally understand the likely future of the global energy system and begin to take appropriate action. My greatest fear is that those leaders are so wed to the status quo that it’s already too late.
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