The energy landscape remains fragile. But effective ways to improve energy security and tackle emissions remain strong. While some immediate pressures from the global energy crisis have eased, energy markets face geopolitical influences, the instability of the global economy and the risk of further disruptions. Fossil fuel prices have fallen from their 2022 peaks. However, markets remain tense and volatile.
The ongoing Russia-Ukraine war and the heightened risk of protracted conflict in the Middle East keep energy security risks fresh. Contrary to expectations, macroeconomic developments have been stagnant; resilient inflation, high borrowing costs and high debt levels seem to be among the reasons.
Conflict and uncertainty provide a less than desirable backdrop for the new World Energy Outlook. Instability in the Middle East, driven by the Russia-Ukraine war, could lead to further disruptions in energy markets and prices. This once again highlights the vulnerabilities of the fossil fuel era and the energy security and emissions benefits of transitioning to a more sustainable energy system. The key to this transition lies in gradual and planned energy transitions.
Global natural gas use has grown by an average of almost 2% per year since 2011, but this growth could slow to 0.4% per year by 2030 according to STEPS (Stated Policies Scenario). Today’s largest consumers of natural gas, the power and residential sectors (39% and 21% of total demand respectively), have seen peaks in natural gas capacity additions for power plant and heating needs. Limited demand in these two sectors will lead to natural gas utilization peaking by 2030.
In 2022, natural gas power capacity additions exceeded 100 GW, accounting for around 65% of the total peak year additions. Capacity additions decline from 30 GW in 2022. Despite this slowdown in annual additions, global natural gas power installed capacity has continued to expand over time.
Gas is different from coal in this respect. This is because installed capacity is expected to decline in the future. In STEPS, however, demand for natural gas in the electricity sector declines from today to 2050, with a particularly strong decline in the 2030s, when co-firing in gas-fired power plants starts to be used at scale. At present, sales of natural gas-fired boilers for residential heating have also peaked. Natural gas boilers account for around 40% of total heating equipment sales. The decline in sales in recent years reflects the rapid rise of heat pumps, especially in developed economies.
This weakening demand is due to the shift to renewables in electricity generation, the rise of heat pumps and Europe’s rapid shift away from gas due to the Russia-Ukraine war. Demand continues to decline in STEPS, and by 2030 this will outpace continued demand growth in emerging markets and developing economies.
Geopolitical tensions undermine prospects for rapid and affordable transitions to energy security. Geopolitics and energy have been intertwined throughout the fossil fuel era: importers have become dependent on exporters for supplies and exporters have become dependent on importers for revenue. Political and commercial relations between producers and consumers have ebbed and flowed as a way of managing these dependencies. But the risks have been mitigated by open international energy markets, initially for oil and later for natural gas. Well-functioning markets, together with safety nets such as spare capacity held by key producers, have helped countries manage changes in supply and demand: they have also provided a buffer against disruptions due to extreme cyclical or geopolitical events. Trade provides access to a large balancing area to manage changes in supply or demand. Interactive and renewable energy has also become increasingly valuable for electricity security.
The Russia-Ukraine war has put today’s energy system to a serious test in terms of resilience to geopolitical shocks. The price hikes following Russia’s gas supply cut-off had major repercussions, but Russia’s attempt to use gas supplies as political leverage failed. Russia lost its largest customer, damaged its reputation as a reliable exporter and created incentives for consumers to consider alternatives to natural gas. This global energy crisis has led to a significant downward revision in natural gas demand and Russian gas exports.
Tensions in the Middle East following the invasion of Ukraine highlight the potential risks that oil and gas supplies continue to face. Reports reveal that many emerging markets and developing economies, particularly in Asia, have seen a significant increase in oil and gas imports, both in terms of volume and cost. A world of low confidence will create incentives for locally available resources in favor of limiting these vulnerabilities. It could create some opportunities for clean energy with some constraints.
When there are available resources, importing countries can also try to manage vulnerabilities, prioritizing local production of oil and gas by greenlighting new projects. This may marginally provide some support, but is unlikely to deliver additional production quickly. Historically, on average, it takes more than a decade for a conventional project to go from licensing to first production. Moreover, such an approach risks pushing global production beyond the 1.5°C threshold, with the possibility of new projects incurring losses if the world takes action to keep global warming below 1.5°C.
In a world of high geopolitical tensions, the outlook for natural gas will face additional uncertainties. Amid these uncertainties, LNG appears to be a major alternative. By the end of 2030, liquefaction operations are planned to start with a capacity of 250 billion cubic meters (bcm) per year. This is equivalent to almost half of the global LNG supply in 2022. The US and Qatar account for 60% of the additional LNG and Asia is the target market: China alone has contracted an additional 85 bcm of gas since 2022. Gas markets have become increasingly deep and liquid in recent years. This has bolstered investor confidence and increased the ability to respond to shocks. A reversal of this trend would reduce optionality and security.
Fossil fuel prices, which have been extremely volatile over the last period, moderated in the first half of 2023, but market balances remain fragile. Oil prices rose above USD 90 per barrel in September 2023 as the main producers in the Organization of the Petroleum Exporting Countries (OPEC+) cut production. In 2022, following the extraordinary price spikes in Europe, where natural gas regularly traded above USD 50 per MBtu, European prices fell to around USD 10 per MBtu, but these prices were still high compared to those seen in the last decade. On top of the extremely high prices a year ago, coal prices have fallen back below USD 150 per tonne.
Does this mean that the crisis period is behind us and the energy sector is back on the same path as before? Unfortunately, neither this proposition nor the proposition that the energy sector is back on track seems to be true. Russia’s war in Ukraine and instability in the Middle East increase the risk of further disruptions and upheaval. And the energy roadmap now looks different. There are signs of a major acceleration in the pace of energy transition around the world, even if macroeconomic conditions have become more challenging.
By mid-2023, the demand recovery in China has been quite strong. China is expected to account for a large share of global oil demand in 2024, despite a slowing economic recovery. And Russia’s production and exports continue to find buyers around the world, although its revenues remain significantly lower than a year ago. Oil demand growth is sustained by several segments, particularly in aviation fuels. Concerns about weak demand and prices may continue to drive a series of production cuts from Saudi Arabia and other members of the OPEC+ group.[1]
[1] “World Energy Outlook 2023”, IEA, https://www.iea.org/reports/world-energy-outlook-2023, (Accessed Date: 15.03.2024).
