The IEA's Strange Oil Demand Forecasts

REVISING UP OIL DEMAND
In its October monthly oil report, the Paris-based energy watchdog agency group said it expected global oil demand to grow by 1 million barrels a day this year, an increase of 100,000 barrels a day above its previous estimate. It maintained its 2014 outlook for demand growth at 1.1 million barrels a day. These growth rates are well above 1%, and approach 1.33% a year. The IEA raised its forecast for demand growth in 2012 on what it claimed were signs of improvement in the European economy and higher-than-expected oil fired power production in other world regions.

Concerning the “signs of improvement” in the European economy, we can take the Eurostat report of October 31 stating that the number of unemployed in the 17-nation eurozone reached a record high in September as the bloc's “nascent recovery” failed to generate jobs. Jobless ranks in the eurozone countries swelled by 60,000 to a record 19.45 million. Eurostat also said annual inflation fell to 0.7 per cent in October from 1.1 per cent a month earlier, marking its lowest annual rate in four years. The ECB is tasked with “keeping inflation close to 2 per cent”.

The central bank, in late June, said euro area activity still lacks a functioning engine for growth. Private demand is still adversely affected by an ongoing deleveraging process, and public sector demand despite some recent austerity relaxation, remains geared towards austerity. External demand for EU exports has been subdued as the euro remains overvalued and emerging economies have slowed down, and the US and Japanese recoveries remain timid. The leading economies inside the euro area have suffered from this gloomy environment, most recently Germany. The ECB concluded that the end of recession in Europe “was possible but sustained recovery is unlikely”.

Concerning world electricity demand, around 70% of all demand growth in 2012, Enerdata.net reports, was due to China which overtook the US in power consumption in 2011. With the three other original BRIC countries, and four others including South Africa from 2010, this levered BRICS power demand to equal the G7's power demand of about 6800 terawatthours (billion kWh) in 2012. The BRICS' power demand growth, driven by Chinese demand, was an average 4.6% a year in 2000-2011, according to Enerdata, but since then BRICS power growth rates have slipped. Since 2008 several G7 countries have recorded an average annual decline of up to 1.6% in power demand. Since 2006 total EU power demand has fallen, on average at about 1% a year. In the US, since 2008, power demand has fallen 3 years out of 4 and the US EIA long term forecast for electricity sets an average of just 0.6% a year growth for industrial users and 0.7% for households through 2012-2040.

Chinafaqs.org reports that in 2012 close to 80% of Chinese electricity was coal-origin despite official government plans to firstly cap, then reduce electricity output from coal. According to the IEA, global electricity generation from oil fell to 5% of total in 2009 and the role of oil-fired power will continue to decline, both in developed and emerging economies. European data shows that about 0.8% of total power production was oil-fired in 2012. For the US, oil-fired power was about 1% of total in 2012.
For decades, electricity demand has been used as a “proxy” for economic growth but the link has become much less clear cut in recent years, both in developed and emerging economies. Reasons include major efficiency improvements in lighting and appliances, such as compact fluorescent lights and LED lighting, personal computers, cellphones and high-efficiency motors, as well as major legislative and regulatory impacts on power demand. In the US, Europe and Japan the erosion of manufacturing also contributes to the power consumption slowdown. Industrial electricity use, which includes manufacturing, usually accounts for about a quarter to one-third of a nation's total. For the US from 1998 to 2010, US EIA data shows electricity used for manufacturing fell 18% due to efficiency improvements, deindustrialization and recession.

WHY NOT TRANSPORT OIL DEMAND?
The IEA does not identify world goods and private transport as a major short-term driver of oil demand growth. IEA web sites say the agency conducts a range of transport research and analysis, focusing ways in which countries can reduce the energy and greenhouse gas intensity of their transport sectors. Policy advice is given to governments on implementing advanced transport technologies, improving fuel efficiency and shifting to lower carbon fuels and transport modes. The agency also says the major goal of its transport-sector policy is to reduce dependence on oil. Among the national policy shifts it recommends, the agency supports the development of urban transport systems and infrastructures using little or no oil and the intensive development of part-electric (hybrid) and all-electric cars. The IEA claims that 70% of global car sales (possibly 80-85 million per year) will need to be advanced vehicles by 2035 including hybrids, plug-in hybrids and all-electrics to meet its goal of 450 ppm (parts per million) CO2 in the atmosphere and less than a 2 degC rise in world average temperatures by 2045.

Curiously however, the IEA makes no firm policy support to natural gas-fueled transport, both of heavy and light road transport, shipping and rail, while it does actively support the rapid global development of “new gas” resources, including deep offshore and onshore stranded gas reserves, shale fracture gas, coalbed methane and biomethane. The agency currently forecasts that due to very fast-growing world gas supply, global gas prices may fall about 25%-33% from current price levels by 2017.

Two reports from the IEA in 2012 “Technology Roadmap: Fuel Economy for Road Vehicles” and “Policy Pathway: Improving the Fuel Economy of Road Vehicles,” describe the technologies needed and the policy packages that can help improve fuel economy. As the reports said, about 92% of world transport is presently oil-dependent, but the IEA sets an outline target of a 50% cut in fuel demand-per-vehicle by or before 2050. This would be able, the IEA claimed in these two reports, to substitute as much as “four fifths of current annual global oil consumption”. To be sure, this depends on the nation-by-nation total for transport oil demand relative to total oil demand, but oil dominates transport sector demand in all countries. In the emerging economies, oil demand for the transport sector often takes more than 75% of national total oil demand. Cutting transport oil demand will have a much bigger “bang for the buck” than cutting electricity demand.

The transport sector is therefore the largest unknown for estimating future oil demand, and oil demand growth – or decline – profiles for major regions and countries. The “proxy” for transport sector oil consumption by road vehicles is well covered by refinery runs, stocks, and prices. Recent IEA data on global refinery runs suggests that outside specific and local market and technology issues, especially in the US, global refining output is currently growing at less than 0.6% a year. Other data sources suggest the rate going forward may be as low as 0.4%. Inside the refining industry, any stock build or decline in demand will soon lead to price weakness, making refinery gate prices and refinery stocks a key “proxy” for transport oil demand, and in turn for world oil demand.