The IEA goes from net zero to ground zero

Thinktank the National Centre for Energy Analytics recently analysed how and why the IEA is heading in the wrong direction with regard to energy scenarios. The paper, titled Energy Delusions: Peak Oil Forecasts: A Critique of Oil “Scenarios” in the IEA World Energy Outlook 2024, explained how wishful thinking had become the organisation’s primary directive.

For decades, the IEA was the world’s gold standard for both energy information and credible analysis. In the past few years, the agency has radically changed its mission to become a promoter of an “energy transition” following the commitment of all its member governments to the Paris Agreement climate accords.

The US signed the Paris Agreement under Obama, withdrew from it under Trump, rejoined under Biden and has again withdrawn under Trump’s second term. In 2022, the IEA’s governing board reinforced its changed mission to “guide countries as they build net-zero emission energy systems to comply with internationally agreed climate goals”.

The IEA’s preoccupation with promoting an energy transition has resulted in its signature annual report, the World Energy Outlook (WEO), offering policymakers a view of future possibilities that are, at best, distorted and, at worst, dangerously wrong.

The 2024 WEO’s core “outlook”, has been widely reported as a credible forecast, i.e., something likely to happen: “[T]he continued progress of transitions means that, by the end of the decade, the global economy can continue to grow without using additional amounts of oil, natural gas or coal.”

The WEO itself states it does not forecast, but has scenarios—i.e., explorations or models of possibilities—and cautions: “Our scenario analysis is designed to inform decision makers as they consider options… none of the scenarios should be viewed as a forecast.”

Scenarios that usefully “inform” need to be based on realistic possibilities and assumptions. But there is one foundational assumption, one that the IEA has for decades included in its scenarios, that has been banished from the WEO: the possibility of business as usual (BAU).

Instead, the WEO’s baseline scenario now assumes nations are undertaking the transition plans promised in “stated energy policies” (STEPs). Yet none of the Paris Agreement signatories are fully meeting their promises, and most are a long way behind schedule.

Assuming something that is not actually happening in the real world is not just problematic, it meets the definition of a delusion.

It is fanciful to forecast that, over the next half-dozen years, growth in the world’s population and economy will not continue a two-century-long trend and lead to increased use of the fossil fuels that today supply more than 80% of all energy, only slightly below the 85% share seen 50 years ago. Because, globally, the share of fossil fuels in primary energy consumption is little changed, the energy system is operating essentially along BAU lines and not only far off the STEPs scenario, but even further away from the more aggressive transition aspirations the WEO also models in its Announced Pledges scenario and its Net Zero Emissions scenario.

The report focuses on 23 flawed assumptions that are relevant specifically to the WEO’s oil scenarios and the widely reported “forecast” that the world will see peak oil demand by the end of this decade.

1. Assumption: STEPS is a useful baseline: The baseline scenario, rather than BAU, assumes a future based on countries’ STEPS, which no country is implementing in full.
2. Corporate transition policies are real and durable: Many companies, having earlier proclaimed fealty to energy-transition goals, are either failing to meet such pledges or overtly rescinding them. BP is a very recent example.
3. Higher economic growth is unlikely: Ignoring the possibility of higher economic growth, based on historical trends and the goals of all nations, leads to scenarios that underestimate future oil demand.
4. Transition financing will continue to expand: Alternative energy projects have become more expensive and difficult to finance, and wealthy nations are increasingly reluctant to gift huge amounts of money to the faster-growing but poorer nations, many of which have governance issues.
5. Efficiency gains and structural changes will lower global demand for energy: Long-run trends show that energy-efficiency gains make energy-centric products and services more affordable and thus do not reduce, but instead generally stimulate, rising demand.
6. Solar and wind power are 100% efficient: The 2024 WEO assertion that “most renewables are considered 100% efficient” contradicts fundamental physics and is, arguably, a silly PR-centric rhetorical flourish.
7. China’s actions will follow its pledges: The scale of China’s role in present and future energy and oil markets requires scenarios that model what China is doing—and will do, in fact—rather than what China claims or promises.

Assumptions regarding oil’s future

8. The oil growth in emerging markets will be low: The fact of low demand in some poorer regions—e.g., Africa uses one-tenth the per-capita level in OECD countries—points to the potential for very high, not low, growth in those markets.
9. The electric vehicle (EV) market share will accelerate: Slowing market adoption and retrenchments in automakers’ EV plans or promises are evident, calling for scenarios that model realities that could persist.
10. Governments will stay the course on EV mandates: Recent trends in many countries and US states show policymakers weakening or reducing mandates and subsidies.
11. China’s EV ‘success story’ leads quickly to lower oil demand: Data point to the fact that in the real world, EV sales and gasoline consumption are both rising.

Assumptions about other transportation markets

12. There will be significant electrification of heavy-duty trucks: There is no evidence of market adoption for any fuel option that leads to far higher capital costs and enormous degradation in performance.
13. There will be significant electrification and fuel alternatives in aviation: There are no trends showing non-oil options for even a tiny share of the aviation market, in an industry that forecasts booming demand.
14. There will be significant electrification and fuel alternatives for ships: The only modestly significant change in oil used for global shipping comes from the use of LNG, another (and generally more expensive) hydrocarbon.
15. There will be a rapid decline in oil used for Middle East power generation: Despite pledges and pronouncements, the year 2024 saw continued, and even higher, use of oil for electricity generation.
16. The growth in petrochemicals and plastics will be slow: Slower growth is anchored in recycling enthusiasms that markets are not adopting and expectations of new recycling technologies that remain expensive or unproved.
17. All scenarios lead to peak oil demand by c.2030: A WEO core conclusion that “combing all the high cases” leads to “global peaks for oil” by c.2030 is, prima facie, not based on all “high cases” but on unrealistic scenarios.

Assumptions regarding associated industries

18. The supply of critical minerals will meet transition goals: Many studies have now documented the fact of a looming shortfall in current and expected production and of the challenges in changing that status quo.
19. Prices of critical minerals will be low: It is fanciful in the annals of economic history to imagine that record-high demands will not lead to higher prices for the critical minerals needed to build EVs (as well as for wind and solar hardware).
20. China will not exercise minerals dominance as an economic or a geopolitical tool: China has already signalled over the past year that it is willing and able to implement export controls, or pricing power on critical minerals, where it holds significant global share.
21. Oil and gas annual investments are adequate to avoid economic disruptions: Current levels of investment are not adequate to meet demands under BAU scenarios, especially when combined with decline rates of extant oilfields.
22. The future decline rate from existing oilfields will continue historical trends: The much faster decline rate in output from now-significant US shale fields has altered the global average decline rate, pointing to the need for increasing investments to avoid a shortfall.
23. OPEC will be a reliable cushion to manage oil-supply disruptions: History suggests scenarios should include alternative possibilities to relying on OPEC to provide a cushion for meeting unexpected shortfalls in production or increases in demand.

While scenarios about other energy sources are critical as well, oil remains the single biggest source of global energy—tenfold greater than wind and solar combined—as well as an ongoing geopolitical touchstone. At the very least, our analysis points to the need for real-world scenarios in general, and in the case of oil the much higher probability that demand continues to grow modestly in the foreseeable future and, possibly, quite significantly.

Debating the intricacies in problematic assumptions about energy scenarios is no mere theoretical exercise. The IEA’s legacy reputation continues to influence not only trillions of dollars in investment decisions but also government policies with far-reaching geopolitical consequences.

The promotional aspirations and misleading assumptions underlying the IEA’s peak-demand scenarios have serious implications given the obvious global economic and security considerations in planning for and delivering reliable, affordable energy supplies.

Since the report was published on 27 January, there have been press reports that the IEA is considering reviving its Current Policies Scenario that was removed from the WEO in 2020. This scenario is close to BAU and will better reflect what is actually happening and likely to happen in energy markets in the next few years rather than what “stated policies” suggest should happen.

Another suggestion that the IEA is changing its direction came at the CERAWeek conference in Houston in March, when its executive director, Fatih Birol, stated that “there is a need for oil and gas upstream investments, full stop.”

In 2021, the IEA stated in its report Net Zero by 2050: A Roadmap for the Global Energy Sector that there would be no need for investment in new upstream projects if net zero was to be achieved.

The IEA now seems to have pivoted to a position where, in the face of global oil demand continuing to rise, we need investment not just to maintain existing production but to provide long-term growth. This pivot is justified on the basis of the need for more supplies to meet rising demand but also to ensure that energy security concerns are addressed. The geopolitical situation has changed since the Net Zero by 2050 report was published, mainly due to Russia’s invasion of Ukraine but also due to rising tensions between the US and China, and instability in the Middle East.

Clearly, the IEA is—in the face of real-world evidence and pressure from some of its most important members—changing its stance, and this must be welcomed if the watchdog is to maintain its gold standard status as a supplier of data and analysis.

Neil Atkinson has more than 40 years’ experience of oil and energy market analysis in the private and public sectors. Until 2021, he served as the head of the oil industry & markets division at the IEA and was responsible for the publication of the monthly Oil Market Report.

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