If its near-term growth were to slow by another percentage point, 2030 coal demand would be reduced by an amount equivalent to almost all the volume now consumed by Europe, oil import volumes would decline by 5 per cent and LNG imports by 20 per cent.
Thus, China’s economic performance is arguably the most important influence on the future of energy markets and global carbon emissions.
China’s economic performance is arguably the most important influence on the future of energy markets and global carbon emissions.
The IEA’s forecasts/scenarios aren’t out of kilter, albeit marginally more pessimistic than those of many external analysts, who expect that Xi Jinping’s shift away from economic ambition to the security of the Communist Party (and his own authority) towards more values-based goals, along with a structural reorientation away from investment and exports to domestic consumption, will result in growth rates below 5 per cent in future.
Whether that helps the world reach peak fossil fuel demand by 2030 or not is debatable. IEA’s projection for oil prices, for instance, is hotly contested by OPEC, which sees demand for oil continuing to rise through to at least 2045.
Where the IEA says that its expectations don’t mean the end of investment in fossil fuels, but rather undercut the rationale for increased spending, OPEC says there needs to be $US14 trillion ($22 trillion) of new investment to meet its expected increase in demand from around 100 million barrels of oil a day now to 116 million barrels a day by 2045.
However the timing plays out, there is an underlying logic to the IEA position, largely because its analysis of China’s position and of the global momentum that has developed in investment in EVs and renewables seems quite logical, given the observable trends in both.
If it is right that demand for fossil fuels will peak this decade, or perhaps early next, there are obvious implications for major coal and LNG producers like Australia. Its central scenario sees the share of coal, oil and gas in the global energy supply falling from around its long-term level of 80 per cent to 73 per cent by 2030.
That’s not enough to meet the Paris Agreement goal of limiting the increase in average global temperatures to 1.5 degrees, but it would be sufficient to have a very significant impact on the demand for and the prices of those commodities.
One of the more notable outcomes of the IEA’s modelling is the outlook for LNG: It expects a wave of new projects, more than half of them in the US and Qatar, are going to “re-model” gas markets, with 250 billion cubic metres a year of new liquefaction capacity added by 2030 – nearly half today’s global LNG supply.
As the IEA says, most of the focus on gas has been on the security and adequacy of supply after Russia’s invasion of Ukraine effectively resulted in Europe being cut off/walking away from the source of 40 per cent of its gas supplies. LNG prices rocketed as the Europeans scrambled to find new sources of supply in what was predominantly an Asia market for LNG.
The surge in new LNG capacity, which will impact most between 2025 and 2027, will hit even as global gas demand slows, with the IEA believing there will be a global glut of gas as European demand declines. Emerging markets, it says, may not have the infrastructure to absorb large volumes if the demand from China slows.
That conclusion won’t please Russia which, having largely lost its former major market, has been trying to reorient its gas sales towards Asia. A glut would reduce the available markets for its gas, along with the prices. The IEA says Russia’s share of international traded gas would be halved from its current 30 per cent by 2030.
More broadly, with the war in Ukraine and now tensions in the Middle East at boiling point after the Hamas attack on Israel, the Europeans – and China – may well decide they need to accelerate a push towards greater economic security by lifting the rate at which they reduce their exposure to energy sources beyond their control.
That would mean more renewables and nuclear power, and an even faster displacement of oil and gas.
Whether or not the IEA’s depiction of the energy markets plays out precisely as outlined, the world is committed to reducing its use of fossil fuels, both for climate-driven and purely economic reasons.
Whether peak demand for fossil fuels is reached this decade or beyond, the inexorable trends – and the slowing growth and evolving character of China’s economy – will generate both economic and geopolitical fallout, most obviously for the Middle East and Russia – but also for the major fossil fuel producers, particularly those, like Australia, that are largely dependent on China.
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