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The Oil Demand Outlook COP28 Leaders Would Hate

This week, a report from a climate organization warned that emissions from the combustion of hydrocarbons are set for a record this year.

This is despite the massive buildout of wind and solar capacity, hundreds of billions of investments in alternatives of hydrocarbons, and pledges for a lot more.

There appears to be a gap between stated goals and ambitions and reality. It might be more difficult to see looking at the oil futures market, but it is there. And it may be getting deeper.

Like emissions, oil demand rose this year. Yet the International Energy Agency said it is close to peaking, thanks to transition efforts and energy efficiency gains. Oil producers slammed the IEA for manipulating data. The investment world was divided. And some recalled the Jevons Paradox as proof that the hopes being pinned on energy efficiency, especially as it related to oil demand, were empty ones.

In their latest quarterly market commentary, contrarian natural resource investment managers Goehring and Rozencwajg did just that: they reminded everyone watching COP28 and listening to all the talk about efficiency and demand for hydrocarbons that gains in the former never lead to a decline in the latter.

“It is a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is the truth.” This is what William Stanley Jevons, a British economist and logician, wrote in the 19th century. He was talking about coal. Close to 200 years later, the paradox still stands.

Yet it is not just the mistaken belief that greater energy efficiency would lead to lower consumption of hydrocarbons that has led Goehring and Rozencwajg to predict that oil demand is set to continue strong for more than a decade yet. There is also an issue with the IEA’s demand forecasts: they have been underestimating oil demand for more than a decade.

In 12 of the past 14 years, the IEA, according to the investment firm, has underestimated oil demand by an average annual of 820,000 barrels per day. This is quite a substantial amount when something as important as oil demand is being estimated.

“If the IEA’s error were a country, it would be the world’s 21st largest oil consumer,” Goehring and Rozencwajg wrote. But this error can create a false narrative on the futures market that could end in a nasty surprise for many.

The IEA said in its latest World Energy Outlook that tripling generation capacity from wind and solar and other low-carbon sources must go hand in hand with an annual rate of energy efficiency improvements of 4%.
What it did not say is that even if this annual rate of efficiency gains is achieved, it will only lead to more energy demand, which would translate into more oil and gas demand. This is because the new low-carbon sources of energy that transition advocates favor cannot compete with hydrocarbons on supply reliability, at least not yet.

While all this is happening, the oil industry is not investing enough in future production, not least because of the transition pressures applied to it by activists, governments, and financing institutions.

As a result, Goehring and Rozencwajg write, “When the realization dawns that oil and gas demand is not in free fall, investors will be forced to confront how little the industry has invested to offset declines.” This will lead to a reversal in investor thinking and a rush to buy into oil and gas. Needless to say, this will not exactly be bearish for prices.

The rush will likely be a stampede, too, because of something else that tends to get overlooked amid all the transition commitment noise. China is the biggest wind, solar, and EV market. India has major ambitions in all three areas. Yet these two countries alone represent the biggest driver for oil, gas, and coal demand. And their role in global hydrocarbon demand growth is only going to become bigger.

Emerging markets as a whole currently account for 45% of global GDP. By 2040, this will rise to 53%, representing 70% of global GDP growth. And these markets are energy intensive, meaning energy demand will be rising over the next 17 years, at least, efficiency gains and all. With that, demand for hydrocarbons will be rising, too, whatever commitments current governments make at the COP28.

The reason for that last prediction is evident in the report on emissions cited earlier: when energy demand grows, so does hydrocarbon demand because they can supply energy quickly in the form of liquid fuels and reliably in the form of baseload electricity generation.

Predictions from the IEA and other transition-oriented outlets seem to assume that a reversal in these processes is possible. They seem to assume that it is possible to cut energy demand in the developed world by a significant percentage.

It is quite likely that these assumptions are wrong because they go against fundamental truths about human civilization, such as the fact that going from comfort to forced discomfort is not something many would readily embrace, to put it mildly. The implications of basing investment decisions on wrong assumptions should be obvious enough—as many offshore wind investors realized earlier this year.

By Irina Slav for