Despite IEA Report, Renewables Unlikely to Threaten Oil Prices in the Next 5 Years

The International Energy Agency (IEA) recently released a new report modeling the expansion of renewable energy use globally. It forecasts the growth of renewable energies to 2027, according to current policies and markets.

It is worth noting that the IEA was originally established in reaction to the 1973 OPEC oil shocks as a consumer-nation counter to OPEC. The idea was that oil-consuming nations should create strategic petroleum reserves that could be deployed in cooperation with each other to counter supply shortages caused by OPEC or other means. Since then, the IEA has assumed a much broader role in energy analysis and provides supply and demand forecasts for oil and other forms of energy, like renewable energies.

The question for commodities traders is whether forecasts about the growth of renewable energies are worthwhile factors to consider when assessing the market and the future of oil demand.

Most proponents of renewable energies believe that these types of electricity generation will supplant fossil fuel use. Therefore, oil traders should typically assume that analyses forecasting significant growth in renewables would look like a bearish signal for oil over the long term.

However, a closer examination of this latest forecast reveals that traders should not take it as a sign that oil demand might stagnate or even decrease over the next five years.

The IEA analysis presents a very positive view of renewables and a relatively negative view of fossil fuels such as oil, natural gas, and coal.

According to the IEA analysis, renewables will “become the largest source of global electricity generation by early 2025, surpassing coal.”

It also states that the installed capacity of Solar PV (meaning the amount of energy that a solar photovoltaic plant is supposed to generate under ideal conditions) “is poised to surpass that of coal in 2027.” This claim is difficult to take seriously because global coal use has increased significantly in 2022 and is poised to grow in 2023.

Last month, the IEA issued a report stating that coal use has increased in 2022. Europe used 8% more coal in September 2022 than it did in September 2021. In fact, coal use is growing everywhere except in the United States.

Moreover, global coal use would have been even higher this year had China seen greater economic activity. China’s coal use will likely increase in 2023 in light of its turn away from its zero-COVID policies.

Much of this growth in coal use is due to the sanctions against the purchase of Russian natural gas by European countries, who are now turning to coal to replace some of that natural gas for power generation.

Additionally, Asian countries, like China and India, rely on imported liquified natural gas (LNG) to meet their natural gas needs, and the price of LNG has risen as Europe is now purchasing more LNG. Therefore, coal is replacing some of the LNG that Asian countries used to import. It does not appear that a resolution to the situation with Russia regarding its invasion of Ukraine is imminent, so traders can expect that this situation will continue into 2023.

This means that despite the official policies adopted by China, India, the U.S., and Europe that promote the installation of more wind turbines and solar farms, countries across the world continue to rely on fossil fuels.

They are turning to oil and coal—not wind and solar—when natural gas is unavailable or too expensive. This reality makes the future predicted by the IEA in its Renewables 2022 report even more unlikely to occur.

For traders looking to assess how the growth of renewables will impact oil demand in the next five years, the IEA’s forecast is not a reliable or useful source of information.

Policies are seldom implemented as crafted, so while solar and wind energy demand is likely to grow over the next five years with the support of governments and NGOs, renewables are not likely to displace traditional energy sources at anywhere near the degree predicted by the IEA.

Disclosure: The author does not own any of the securities mentioned in this article.