IEA Too Bullish On Global Oil Consumption

The International Energy Agency (IEA) released its latest medium-term outlook for the world oil market on March 11, and it’s no more likely to be prescient than those in the past for a simple reason: the IEA is a political organization.

Despite IEA analysts being world class, and their work always rigorous, well informed and thoughtful, as a rule their forecasted numbers don’t synch with their analysis. In particular, the agency’s global oil consumption numbers as a rule are relatively optimistic compared to their non-OPEC supply numbers, even since the 2014-16 oil price crash, with lower crude prices boosting demand and retarding supply.

This shouldn’t come as a big surprise, since the core mandate of the IEA since its inception in 1974 in response to the First Oil Shock has been the energy security of the world’s major consuming countries. Just think how many times Fatih Birol and the agency’s previous executive directors have “cried wolf” over the years.

In this two-part series (part 2 is located here), we will first explore potential headwinds global oil consumption is likely to face through 2024 — the end date of the IEA’s medium-term outlook — and provide what we believe is a more plausible outlook for demand. In part two we will explore the most glaring weakness in their non-OPEC supply numbers, relatively slow growth in U.S. oil production – despite the IEA’s claim to the contrary — and provide our own outlook for U.S. production, which out of necessity is based on alternate crude price assumptions.

IEA’s outlook

Growth in global oil consumption has been remarkably strong since the world economy rebounded from the Global Financial Crisis in 2010, and the IEA’s medium-term outlook reflects this strength. After growing 930,000 bbls/d per year between 2001 — the year China joined the World Trade Organization (WTO) — and 2009, annual growth in global demand increased to 1.6 million bbls/d over the 2009-18 period.

The IEA is forecasting global oil consumption to grow an average of 1.2 million bbls/d between 2018 to 2024 to 106.4 million bbls/d, with growth somewhat stronger at the beginning of the period than the end due to increased efficiency improvements — 1.4 million bbls/d versus 1 million bbls/d, respectively.

Economic growth

A core issue with the IEA’s global oil demand outlook is its relatively rosy outlook for the world economy, the major driver for oil consumption, courtesy of the International Monetary Fund (IMF), another political organization. The IMF is forecasting world economic growth to average around 3.6 per cent per year over the 2019-2023 period — with the IEA extrapolating this forecast out a year for the sake of its analysis — despite the IMF providing the following caveat to its economic outlook in its most recent update in January:

“Risks to global growth tilt to the downside. An escalation of trade tensions beyond those already incorporated in the forecast remains a key source of risk to the outlook. Financial conditions have already tightened since the fall. A range of triggers beyond escalating trade tensions could spark a further deterioration in risk sentiment with adverse growth implications, especially given the high levels of public and private debt. These potential triggers include a “no-deal” withdrawal of the United Kingdom from the European Union and a greater-than-envisaged slowdown in China.”

There’s a great deal of debate about the Trump administration’s motive for starting the Sino-U.S. trade war. One school of thought argues Trump is “simply” attempting to level the economic playing field between China and the the U.S., in which case there is hope for a permanent trade deal between the world’s two economic heavyweights, possibly even in the next year. Another school claims the administration is attempting to preempt the rise of a rival superpower, in which case the trade war is a permanent new fixture of the global economy. We at Geopolitics Central (GPC) side with the latter.

From our perspective, the Trump administration attempting to preempt the economic rise of China, the most powerful of its geopolitical rivals, with the trade war, is akin to President Ronald Reagan forcing the Soviet Union into an arms race it could ill afford back in the 1980s.

In the National Security Strategy of the States of America (NSS), released in December 2017, the Trump administration warned of a new era of “great power competition,” citing China and Russia in particular. These foreign powers are attempting to “reassert their influence regionally and globally,” and they are “contesting [America’s] geopolitical advantages and trying [in essence] to change the international order in their favor.”

In a speech to The Hudson Institute on October 4, U.S. Vice President Mike Pence reiterated these points, especially in regards to China. Pence said: “After the fall of the Soviet Union, we assumed that a free China was inevitable. Heady with optimism at the turn of the 21st Century, America agreed to give Beijing open access to our economy, and we brought China into the World Trade Organization … America had hoped that economic liberalization would bring China into a greater partnership with us and with the world. Instead, China has chosen economic aggression, which has in turn emboldened its growing military.”

In terms of the so-called Made in China 2025 initiative, Pence said: “[T]he Communist Party has set its sights on controlling 90 per cent of the world’s most advanced industries, including robotics, biotechnology, and artificial intelligence. To win the commanding heights of the 21st century economy, Beijing has directed its bureaucrats and businesses to obtain American intellectual property — the foundation of our economic leadership — by any means necessary.”

The Council on Foreign Relations (CFR), America’s preeminent policy think-tank, has referred to Made in China 2025 as “a real existential threat to U.S. technological leadership.”

The Trump administration may also smell blood with the Chinese economy dependent on U.S. trade and the IMF itself warning in a December 2017 assessment that China is now ripe for a financial crisis similar to the one the US suffered at the end of last decade.

“The system’s increasing complexity has sown financial stability risks,” the IMF wrote. “Credit growth has outpaced GDP growth, leading to a large credit overhang. The credit-to-GDP ratio is now about 25 per cent above the long-term trend, very high by international standards and consistent with a high probability of financial distress.”

The Chinese government has relied heavily upon higher public spending and easy credit to maintain relatively high rates of economic growth since the 2008-09 global financial crisis.

Assuming a continuing Sino-U.S. trade war, the world economy — and hence global oil demand growth — is bound to be significantly weaker than forecast by the IMF over the medium term, and that is assuming no financial crisis in China and hard landing of its economy. Global economic growth averaged three per cent per year during the 1947-91 Cold War, 0.6 percentage points less than forecast by the IMF over the medium term.

Anti-plastic movement

The IEA is projecting the petrochemicals sector to be the largest source of growth in oil consumption through 2024, accounting for over a third of the global total, with demand for petchem feedstock LPG, ethane and naphtha increasing an average of 2.6 per cent per year —over twice as much as petroleum products as a whole.

But rapid growth of the petchem sector may not be as bullet proof as suggested by the IEA, given the burgeoning global anti-plastic movement. Leading the charge is the Plastic Pollution Coalition, a growing worldwide alliance of individuals, organizations, businesses, and policy-makers, and Greenpeace, a bellwether of the global environmental movement. As Stephen Buranyi wrote in The Guardian this past November, “The most astounding thing about the anti-plastic movement is just how fast it has grown [since 2015].”

Scientists have long warned that toxins from plastics are finding their way into the human food chain. Based on research by the Ellen MacArthur Foundation, between five million and 13 million tons of plastic pollution ends up in the world’s oceans each year where it is ingested by sea birds, fish and other organisms. By 2050, the foundation warns, the oceans could contain more plastic than fish, if current trends continue.

In 2017, scientists at Belgium’s Ghent University estimated that people who regularly eat seafood ingest up to 11,000 tiny pieces of plastic each year. “(G)iven the potential for micro-plastic pollution in edible tissues of commercial fish,” the European Food Safety Authority has called for urgent research into its impact on human health.

The first wave of action against petrochemicals are focusing on single-use plastics, which according to British supermajor BP represent about 15 per cent of the petchem industry’s total output. A number of countries, states and municipalities have already banned the use of plastic grocery bags, including China in 2008 — not exactly a paragon of environmental stewardship — while a number of organizations are beginning to ban single-use plastics on their premises.

For example, the BBC, after airing its nature documentary Blue Planet II, which highlighted the harm plastic pollution is doing to the world’s oceans and wildlife, decided to ban the use of single-use plastics from its operations as of 2020.

Plastic bottles used for water and soft drinks are also being targeted, as well as plastic straws. More than 480 billion plastics bottles were sold around the world in 2016, and despite being highly recyclable, less than half were collected for recycling and just seven per cent of those were turned into new bottles. Most plastic bottles end up in landfills or in the oceans.

Ellen MacArthur is currently promoting a so-called circular economy for plastics bottles — a 100 per cent rate of recycling and reuse. “Shifting to a real circular economy for plastics is a massive opportunity to close the loop, save billions of dollars, and decouple plastics production from fossil fuel consumption,” she said.

Biodegradable, non-toxic bioplastics are currently expensive and relatively rare compared with petro-based plastics — accounting for less than one per cent of the global market — and hence are unlikely to put a significant dent into oil consumption growth in the medium term. Legislative and consumer action on the other hand, likely will.

New green deal

Another potential threat to oil consumption growth is the adoption of some form of a Green New Deal (GND) in the U.S. post-2020, following the next presidential and congressional elections. The concept of a GND has been kicking around in various forms in the U.S. for the past decade, and obviously takes its inspiration from President Franklin D. Roosevelt’s New Deal to combat the Great Depression of the 1930s through a series of social and economic reforms and public works projects to increase employment.

Until recently, the Sunrise Movement’s GND to eliminate human generated greenhouse gas (GHG) emissions from the U.S. economy within 10 years, including a job guarantee program “to assure a living wage job to every person who wants one,” partly in an all-encompassing renewable energy industry, was the best known.

But on February 7, Congresswoman Alexandria Ocasio-Cortez (D-NY) and Senator Ed Markey introduced a pair of GND resolutions into the U.S. Congress. Their resolutions provide a vision for the GND including a number of economic stimulus programs with the twin aims of combating global climate change and economic inequality in the U.S.

The broad aim on the environmental front is to make the U.S. carbon neutral through a “10-year national mobilization.” On the social front, the GND calls for guaranteed jobs with fair pay, universal healthcare, free higher education, amongst many more programs common under social democracies.

The GND resolutions have generated massive media attention, as well as criticism, including by President Donald Trump who referred to it as “a high school term paper written by a poor student.” There is no doubt the 10-year target to end human generated GHG emissions in the U.S is implausible, while the price tag of the GND, including its social components, is bound to be astronomical. The American Action Forum, albeit a right-wing think-tank, pegs the cost of this GND at between US$51 trillion and US$93 trillion over 10 years.

The Democratic Party in the U.S. has taken a decided turn to the left since the 2016 general election, and some form of GND is bound to a central plank of the party’s presidential candidate in 2020. For example, Bernie Sanders, again a presidential candidate for the party, is currently working on his own, more plausible, version of the GND. The IEA has forecast U.S. oil consumption to grow a modest 300,000 bbls/d between 2018 and 2024 to 20.8 million bbls/d, but to still account for a fifth of the global total at the end of the projection period.

GPC’s outlook

Slower economic growth than assumed by the IEA translates to global oil consumption growth of one million bbls/d per year over the 2018-24 period utilizing gap analysis — the average annual per cent difference between global economic and oil consumption growth since 2010. The impact of the rising anti-plastic movement is more difficult to estimate, but could easily negate another 300,000 bbls/d annually from global oil demand growth by 2024.

The implementation of a GND in the U.S. is less certain as it would require the Democratic Party to win the presidency and majorities in the two chambers of Congress, and its potential impact on oil consumption even more difficult to predict, partly because we don’t know the winning plan at this time. But even without incorporating a GND into our outlook, and assuming the “second machine age” — to be discussed in Part 2 in context of U.S. oil production — does not negatively impact oil demand in earnest in the interim, global oil consumption growth will slow to a mere 650,000 bbls/d in 2024.

Assuming 3.3 per cent world economic growth this year and three per cent thereafter, and the anti-plastic movement cutting 300,000 bbls/d from petchem growth on a straight line basis through 2024, GPC is forecasting global oil consumption to grow an average of 810,000 bbls/d per year to 104.1 million bbls/d over the period, compared to 1.2 million bbls/d annually for the IEA.