This article was published by the International Energy Agency on June 14, 2023.
Growth in the world’s demand for oil is set to slow almost to a halt in the coming years, with the high prices and security of supply concerns highlighted by the global energy crisis hastening the shift towards cleaner energy technologies, according to a new IEA report released today.
The Oil 2023 medium-term market report forecasts that based on current government policies and market trends, global oil demand will rise by 6 per cent between 2022 and 2028 to reach 105.7 million barrels per day (mb/d) – supported by robust demand from the petrochemical and aviation sectors. Despite this cumulative increase, annual demand growth is expected to shrivel from 2.4 mb/d this year to just 0.4 mb/d in 2028, putting a peak in demand in sight.
In particular, the use of oil for transport fuels is set to go into decline after 2026 as the expansion of electric vehicles, the growth of biofuels and improving fuel economy reduce consumption.
“The shift to a clean energy economy is picking up pace, with a peak in global oil demand in sight before the end of this decade as electric vehicles, energy efficiency and other technologies advance,” said IEA Executive Director Fatih Birol. “Oil producers need to pay careful attention to the gathering pace of change and calibrate their investment decisions to ensure an orderly transition.”
Global oil markets are still slowly recalibrating after three turbulent years in which they were upended first by the Covid-19 pandemic and then by Russia’s invasion of Ukraine. The global energy crisis triggered by the war in Ukraine has resulted in an unprecedented reshuffling of global trade flows. Global oil markets could tighten significantly in the coming months, as production cuts by the OPEC+ alliance temper an upswing in global oil supplies. However, the multifaceted strains on markets look set to ease in the following years, according to the new report.
China was the last major economy to lift its stringent Covid-19 restrictions at the end of 2022, leading to a post-pandemic oil demand rebound in the first half of 2023. But demand growth in China is forecast to slow markedly from 2024 onwards. Nevertheless, burgeoning petrochemical demand and strong consumption growth in emerging and developing economies will more than offset a contraction in advanced economies.
Global upstream investments in oil and gas exploration, extraction and production are on course to reach their highest levels since 2015, growing 11 per cent year-on-year to USD 528 billion in 2023. While the impact of higher spending will be partly offset by cost inflation, this level of investment, if sustained, would be adequate to meet forecast demand in the period covered by the report. However, it exceeds the amount that would be needed in a world that gets on track for net zero emissions.
The report’s projections assume major oil producers maintain their plans to build up capacity even as demand growth slows. This is expected to result in a spare capacity cushion of at least 3.8 mb/d, concentrated in the Middle East. The report nonetheless notes a number of factors that could affect market balances over the medium term – including uncertain global economic trends, the direction of OPEC+ decisions and China’s refining industry policy.
Oil producing countries outside the OPEC+ alliance dominate plans for increasing global supply capacity in the medium term, with an expected rise of 5.1 mb/d by 2028 led by the United States, Brazil and Guyana. Saudi Arabia, the United Arab Emirates and Iraq lead the plans for capacity building within OPEC+, while African and Asian members are set to struggle with continuing declines, and Russian production falls due to sanctions. This makes for a net capacity gain of 0.8 mb/d from the 23 members in OPEC+ overall over the report’s forecast period.
In the refining sector, the overhang in global capacity has been reduced by waves of closures, conversions to biofuel plants and project delays since the pandemic. This, combined with a sharp drop in Chinese oil product exports and an upheaval of Russian trade flows, resulted in record profits for the industry last year. While the amount of net refinery capacity additions by 2028 is expected to outpace demand growth for refined products, diverging trends among products means that a repeat of the 2022 tightness in middle distillates cannot be ruled out.