Futurology Today

The world faces a “staggering” surplus of oil equating to millions of barrels a day by the end of the decade, as oil companies increase production, undermining the ability of Opec+ to manage crude prices, the International Energy Agency has warned.

While demand is forecast to peak before 2030, continued investment by oil producers, led by the US, would by then result in more than 8mn b/d of spare capacity, the IEA wrote in its annual report on the industry released on Wednesday.

This “massive cushion” of extra oil could “upend” the efforts of Opec+ to manage the market and usher in an era of lower prices, the IEA said, adding that the level of spare capacity would be unprecedented outside the coronavirus pandemic.

“It is not the first time the oil markets would see an oversupply, but one important outcome would be downward pressure on the prices,” said Fatih Birol, the agency’s director.

He added the combination of slowing demand and rising supply “could have substantial implications” for oil companies. “It is time for many producers to look at their business plans, in my view.”

The Paris-based body, founded in the aftermath of the 1970s Arab oil embargoes to advise on energy security, said last year that the world was at “the beginning of the end” of the fossil fuel era. It has said demand for oil, natural gas and coal will all start to fall before the end of the decade amid the mass rollout of renewable energy and electric vehicles

But its projections have been decried by the oil industry, particularly in the Middle East and the US, where producers are stepping up their investments in pumping more crude.

Global capital spending on oil and fields rose to $538bn in 2023, the highest level since 2019 in real terms. The increase in investment was largely driven by state oil companies in the Middle East, which increased their spending to twice the levels seen 10 years ago, and China.

Haitham Al Ghais, Opec general secretary, has described the IEA forecasts as “dangerous”, and warned of “energy chaos on a potentially unprecedented scale” if producers stopped investing in new oil and gas.

In its new report, the IEA called into question whether Opec+ would be able to expand future production, as it continued to be squeezed by countries outside the alliance, especially the US.

“This year, [the Opec+] total oil market share has dropped to 48.5 per cent, the lowest since it was formed in 2016, due to its sharp voluntary output cuts,” the IEA noted. It added that even if Opec+, a wider group that includes Russia, continued its deep cuts, it “would pump above the call on its crude oil to varying degrees from 2025 through 2030”.

Birol outlined three main drivers for oil demand to peak by the end of the decade: reduced petrol use as the world switches to electric vehicles, a move by countries in the Middle East, especially Saudi Arabia, to switch from oil to renewables to generate electricity, and a lower future growth rate in China.

“Perhaps the most important factor comes from China,” he said. “In the last 10 years, about 60 per cent of global oil demand growth came from China alone.” The IEA said it expected the 6 per cent annual growth the Asian country had registered in that period to fall to about 4 per cent a year in its forecast period.

The future drivers of growth would include more aviation and the “booming petrochemical sector”, Birol said. The IEA also expects petrol use to increase in India as more drivers hit the roads.

Meanwhile, oil demand in OECD countries, which peaked in 2007, would fall to 1991 levels by 2030. The IEA has assumed 3 per cent annual global economic growth for the rest of the decade.

The IEA cautioned its forecast for shrinking oil demand could be derailed by “relatively minor changes” in events. For example, a 0.3 per cent annual increase in the world’s GDP growth, a $5 annual drop in real oil prices, or a 15 per cent slowdown in the rollout of EVs would each be enough to swing oil consumption back to growth by the end of the decade.