Being a grumpy old man, I have to start with the complaint that headlines which say “Peak oil demand ‘in sight before the end of the decade’ should include ‘a forecast says.’ Too often headline writers treat speculation as fact, including research results whose authors would usually not be so definitive. The former headline was from an op-ed in the Financial Times by IEA leader Fatih Birol where he actually said, “Based only on today’s policy settings by governments worldwide — even without any new climate policies — demand for each of the three fossil fuels is set to hit a peak in the coming years.“ The qualification might seem unimportant but is significant. And even with that qualification, it remains a forecast not a fact and the history of energy forecasting, including by the IEA, is a dismal one. (My record is pretty good but hardly spotless. See chapter 9 in my 2016 book where I include a list of my bad short-term price forecasts complied by a critic.)
To be fair, the International Energy Agency does a lot of attractive research and analysis on energy and their reports on electric vehicles, energy security and so forth include a lot of valuable information. But there is a big leap from data to their forecast of what they think will happen, or might happen, from what is happening. And a part of that problem, I would argue, is the horizon effect.
Many have noted the contradiction between headlines describing new peaks in oil consumption and greenhouse gas emissions and continuing predictions of a near-term peak. This is reminiscent of the repeated predictions of peak oil supply that kept being moved out further into the future and at a higher level. I first described this in a 1995 research paper (citation below) and it certainly held true when the new round of peak oil supply predictions began in 1989. (Most people don’t know about the first prediction, because it was in an obscure journal, Noroil. The author, Colin Campbell, predicted that the peak had arrived that year; not surprisingly, he didn’t mention that prediction in later publications.)
But my various papers analyzing oil market forecasts noted another phenomenon, often called the ‘horizon effect.’ This is where a near-term forecast resembles recent trends, but just beyond the visible terrain it is assumed that the trend would not just change but be reversed. Some examples: in the 1980s, when oil markets were weakening and demand for OPEC oil dropping by 3 mb/d per year, a historically large amount, typical price forecasts saw weakness—but only for a few years. Then, there would be a turnaround with a new trend of increasing prices, based on the widespread but mistaken consensus that ‘the easy oil’ was gone, so prices had to go up over the long term. The figure below, from the Department of Energy/EIA publications, demonstrates this.
Something similar was seen in oil supply forecasts, where nearly every forecast after 1980 predicted declining production in all areas except the Persian/Arabian Gulf. (Before you complain, I know that it is often referred to as the Persian Gulf, but the alternative of Arabian Gulf is considered acceptable by the gatekeepers of language.) Supply forecasting is extremely difficult given the influences of geology, technology, economics and politics that determine trends. Historically, forecasters have misunderstood geology and underestimated the role of technological improvements on lowering costs and adding reserves. Most egregiously, they tend to misinterpret political constraints on investment as physical or economic constraints which cannot be reversed.
Thus, as I noted in a 1989 paper, it became standard to assume that even production in the non-OPEC Third World would decline, despite the immaturity of their resource development. (Well density was a few percent of that in the U.S. in 1970, when our production peaked.) The figure below shows how this translated into predictions of near-term growth in production, followed a few years later by a decline.
The same appears to be happening now with the forecasts of peak demand for fossil fuels. Without a doubt, the renewable energy sector is booming, albeit from low levels which exaggerates growth rates. At the same time, though, there has been a lot of backsliding as consumers have made it clear that they not only want their energy but want it to be cheap. Germany is the poster child where coal consumption has increased in response to a loss of Russian gas supplies, despite the country’s avowed adherence to climate change goals. And around the world, opposition to the costs and land needs of solar and wind are growing, including from those who are much more rational than believers of the theory that wind turbines cause cancer.
The figure below demonstrates the horizon effect for the IEA’s forecast quite clearly. The Stated Policies scenario of the IEA is what Birol refers to when he describes peak fossil fuel demand by 2030. As the figure shows, from 2020 to 2030, the IEA doesn’t see much change in the energy industry from previous trends: solar and wind rise rapidly, albeit from low levels, while oil and coal show little change in their growth rates. In the Net Zero Emissions 2050 or NZE2050, there is a major change: renewable supply grows more rapidly while oil and coal decline sharply after 2020. (I exclude gas because of its role as a ‘bridge’ fuel. Supply is flat in the Stated Policies scenario, but drops sharply in the NZE2050 case.)
But things change after 2030 in the Stated Policies case, as the figure below shows (which focuses on oil, coal and total energy). Oil and coal demand drop off a cliff, while total energy supply drops by more than half, the new lower trend continuing after 2040. This appears to be due to the horizon effect: behavior remains steady in the visible future, but then changes abruptly afterwards. (The abrupt nature partly an artifact of projections presented on the decade, i.e., 2020, 2030, 2040.)
More detailed analysis would explain the particular factors that are involved, including assumptions about technological change (especially electric batteries and vehicles). But probably dominating this expectation is the assumption that “stated” policies will persist, which seems questionable. Even as many climate change activists insist that more needs to be done to reduce greenhouse gas emissions, the public and some governments show signs of backsliding as the draconian and expensive nature of many current policies become more obvious.
Historically, the public has resisted policies that inflict costs in terms of money or convenience, and the announced bans on vehicles using internal combustion engines stands out for this reason. Despite incentives including large subsidies, electric vehicle sales are struggling. In the U.S., they are growing but less than expected and inventories are piling up despite advocates’ insistence that availability was the primary constraint on widespread adoption. Resistance to many elements of the energy transition, including land greed from renewables, are likely heralding future resistance to bans on ICE vehicles and/or EV purchase mandates. They were, after all, abandoned in the U.S. a quarter-century ago despite fawning reviews of the GM EV1 from Hollywood stars and other proponents. Similar backsliding has been seen over things as mundane as oxygenated gasoline, which added pennies a gallon to the cost but proved so onerous that most American cities which had voluntarily opted into requiring it later opted out.
The fact that so many of the policies take effect ‘beyond the horizon,’ in this case, after 2030, could be viewed as reflecting development/adoption lags for new technologies and capital equipment. More accurately, I think, they could be thought of as politicians kicking the undesirable policy can down the road. Perhaps the public at large, and especially in growing countries like China and India, will decide to embrace sacrifices to reduce emissions, but the historical evidence is against this. Similarly, oil and coal demand might continue to be embraced until 2030, then begin to decline sharply. But, as Damon Runyon would say, “That ain’t the way to bet.
Citations:
Lynch, Michael C. “The Analysis and Forecasting of Petroleum Supply: Sources of Error and Bias,” in Energy Watchers VII, ed. by Dorothea H. El Mallakh, InternationalResearch Center for Energy and Economic Development, 1996.
More recently, Forecasting Oil Supply: Theory and Practice,” Quarterly Review of Economics and Finance, July 2002.
Also, The Peak Oil Scare and the Coming Oil Flood, chapter 9, appendix for (partial) list of my bad forecasts.
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