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11 September 2023

Fossil Fuel Demand Set to Peak This Decade: Implications for Climate Change

There's a prevailing taboo in the traditional energy sector when it comes to suggesting that demand for the three major fossil fuels—oil, gas, and coal—could enter a permanent decline. However, new projections from the International Energy Agency (IEA) indicate that this era of seemingly unending growth is poised to come to an end within this decade, carrying significant implications for the global energy landscape and the battle against climate change.

Annually, the IEA's World Energy Outlook provides insights into potential pathways for the global energy system. The upcoming report, set to be released next month, reveals a historic turning point. Based on current government policies worldwide, even without new climate initiatives, demand for each of the three fossil fuels is projected to peak in the coming years. This marks the first time that a demand peak is visible for each fuel within this decade, occurring earlier than many expected.

These profound changes will expedite the peak in global greenhouse gas emissions. Key drivers include the remarkable growth of clean energy technologies like solar panels and electric vehicles, structural shifts in China's economy, and the consequences of the global energy crisis.

Global demand for coal, which has remained high for the past decade, is anticipated to peak in the next few years. Investments outside China are dwindling as solar and wind power dominate electricity system expansion. Even in China, the world's largest coal consumer, the substantial growth of renewables and nuclear power, coupled with a slower economy, point to a decline in coal usage.

Although some speculated that global oil demand might have peaked during the pandemic, the IEA's latest projections suggest that the proliferation of electric vehicles, particularly in China, will lead to a peak in oil demand before 2030. The rise of electric buses and two- and three-wheelers, especially in emerging economies, will further erode demand.

The "Golden Age of Gas" forecasted in 2011 is coming to an end, with advanced economies witnessing declining gas demand later this decade. This shift is attributed to renewables surpassing gas in electricity generation, the emergence of heat pumps, and Europe's accelerated shift away from gas following the Russia-Ukraine conflict.

While the peaks in demand for these fossil fuels are encouraging signs of progress toward cleaner and more secure energy systems, they are not steep enough to limit global warming to the 1.5-degree Celsius target. Achieving this goal will require more robust and swifter policy actions by governments.

Demand trends will vary across regions, with growth in some emerging and developing economies partially offsetting declines in advanced economies. However, the global trend is clear: low-emission electricity, cleaner fuels, and energy efficiency improvements are increasingly meeting the world's rising energy needs.

It's important to note that declines in demand won't follow a linear path. Temporary fluctuations, spikes, dips, and plateaus may occur as external factors influence fossil fuel consumption. For example, heatwaves and droughts can temporarily boost coal demand by increasing electricity usage while affecting hydropower output.

As demand for fossil fuels wanes, energy security challenges will persist as suppliers adapt to these changes. The projected demand peaks based on current policies do not negate the need for investment in oil and gas supply, as existing fields can experience rapid declines. Additionally, this highlights the economic and financial risks associated with major new oil and gas projects, in addition to their environmental impact.

With fossil fuel demand peaks already in sight under current policies, decision-makers must remain adaptable. The transition to clean energy may accelerate further with stronger climate policies. The energy landscape is evolving rapidly and positively.