What doesn’t the IEA’s 10-point plan to reduce oil demand tell you?

What doesn’t the IEA’s 10-point plan to reduce oil demand tell you?

What doesn’t the IEA’s 10-point plan to reduce oil demand tell you?
IEA Executive Director Fatih Birol speaks during the closing media conference at the International Energy Agency (IEA) ministerial meeting in Paris, Thursday, March 24, 2022. (AP)
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The International Energy Agency announced a 10-point plan to cut oil demand earlier this month, which included curbing car use, lowering speed limits, and restricting air travel.

The measures were announced after Russia’s military action against Ukraine. IEA executive director Fatih Birol said: “The world could face the biggest oil supply shock due to Russia’s aggression in Ukraine.”

He added that these measures are necessary as the oil market is in an emergency and could continue to deteriorate if action is not taken. The report highlighted that Russian oil exports could fall by around 2.5 million barrels per day, possibly phasing out as early as April. The body said its 10-point plan would reduce oil demand by as much as 2.7 million bpd over the next few months to make up for lost supply and restore market balance.

These measures are mainly aimed at the transport sector, especially road and air transport. However, questions still remain and further challenges need to be addressed.

I set out six key points below.

First, the IEA said its measures, “achieve significant reductions in oil demand in a matter of months, reducing the risk of a major supply crunch.” But focusing on the demand side of the market would be counterproductive. Correcting the wrong part of the equation and, perhaps, getting it wrong will harm the oil market going forward.

The IEA recognizes that the root cause of the current energy crisis is supply. This is a direct result of underinvestment that has limited global capacity, and caused demand erosion due to the emergence of the COVID-19 pandemic two years ago, which has in fact delayed the current energy crisis.

The Organization of the Petroleum Exporting Countries and its members, led by Saudi Arabia’s energy minister Prince Abdul-Aziz bin Salman, have raised concerns about underinvestment in the upstream oil sector on several occasions. He has said that ambitious green energy transition policies around the world are not closely aligned with realities on the ground, leaving a gap between oil supply and demand.

According to the International Energy Forum, upstream investment in the oil and gas industry has remained low for the second year in a row at $341 billion in 2021, down 23 percent from the pre-pandemic level of $525 billion. In 2020, investment plummeted by around 30 percent. These are alarming figures.

Second, IEA recommendations mainly address member states of the Organization for Economic Co-operation and Development, or advanced economies, but total consumption and increases in demand usually come from non-OECD countries, such as China and India.

According to OPEC’s latest monthly report, OECD countries consumed 46 percent of global oil in 2021, whereas non-OECD nations soaked up 54 percent of demand in the same period. Consumption is expected to strongly grow this year, especially in non-OECD countries — driven by steady economic development, especially in oil-producing countries, and a return to more normal usage patterns. The reduction in demand outlined by the IEA should its 10-point plan be followed, may be offest by rising consumption in non-OECD regions.

Third, the IEA encourages the use of high-speed trains rather than planes and avoiding business travel where possible, which could further damage the airline industry and delay its expected recovery.

The global aviation industry has experienced an unprecedented two years due to travel restrictions during the pandemic. According to the International Air Transport Association, estimated annual losses for airlines around the world totaled $137.7 billion in 2020. This figure is 16 percent higher than the $118.5 billion of losses originally forecast at the end of 2020.

However, a new report by consultancy Oliver Wyman last month suggests that the industry may soon be on the mend, returning to pre-pandemic levels by 2023. But IEA recommendations may hurt an industry that supports nearly 11.3 million jobs and contributes $961.3 billion to global gross domestic product.

Fourth, there is pent-up demand for oil that will be released, especially in non-OECD countries. The accumulated personal savings by households over the past two years will support growing demand for oil over the summer.

We have seen some of this demand recovery in the OECD countries, but there is potential for greater recovery elsewhere. Even in OECD countries, such as the US, the pandemic has brought benefits to those on higher and middle incomes. In these households, savings increased while debt has been paid down. Also, US government stimulus payments have lifted 11.7 million people from the poverty line, according to the Census Bureau, which will ultimately lead to increased demand for oil.

Fifth, in its February monthly report, after reassessing historical data from 2007, the IEA adjusted Saudi Arabia’s oil consumption — in liquefied petroleum gas use — by up to 500,000 bpd, approximately 17 percent of the Kingdom’s total oil use. Such a major adjustment raises further questions about the IEA’s assumptions and forecasts

Last but not least, OECD governments receive revenue from fossil fuel taxes, and the impact of this forgone revenue is an open question. In 2020, a liter of pump fuel sold in G7 countries was taxed by as much as 54 percent of the retail price, according to OPEC’s website. In the UK, France, Italy, and Germany, this figure rose to more than 60 percent.

OECD countries are accelerating the replacement of oil as their main energy source, driven by debates over CO2 reduction and energy security. Nonetheless, energy market fundamentals tell us that oil will remain the most reliable and cost-effective energy source, which will support world economic prosperity for years to come.

• Hassan M. Balfakeih is an oil demand specialist and former chief oil demand analyst at OPEC Secretariat

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point of view