World's reduced thirst for oil may be foiled by developing countries' challenges

The International Energy Agency (IEA) predicted last month that the demand for energy is nearing its peak in 2026 for transport uses and 2028 for other uses. However, the fate of the world's oil demands largely rests on the economies of developing countries.

What are the prospects for oil demand?

An IEA medium-term report released this year forecasted global oil demand will "slow almost to a halt" in the next few years. "The shift to a clean energy economy is picking up pace, with a peak in global oil demand in sight before the end of this decade as electric vehicles, energy efficiency and other technologies advance," according to IEA Executive Director Fatih Birol. Much of this is attributed to Russia's war in Ukraine prompting a global energy crisis.

On the flip side," the IEA noted that the "burgeoning petrochemical demand and strong consumption growth in emerging and developing economies will more than offset a contraction in advanced economies." In addition, the agency predicted that oil and gas investment will hit a record high in 2023, surpassing the "amount that would be needed in a world that gets on track for net-zero emission." Reaching net-zero emissions would greatly slow the speed of climate change. Despite this, "over the medium term … all these policy measures that governments have put in place … are making an impact," Toril Bosoni, the head of the oil industry and markets division at the IEA, told CNBC. "There's a real transformation coming."

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In the short term, the IEA cut its global oil demand growth forecast for the first time this year, meaning "global oil demand won't grow as fast as previously expected," Bloomberg reported. This is largely due to the "faltering economies of developed nations." However, 2023 will still hit a record high with demand expected to increase by 2.2 million barrels per day to an average of 102.1 million barrels per day, and China is expected to account for 70% of the demand growth, according to a monthly IEA report.

Where is there uncertainty?

While the IEA predicts a slump, some experts worry that the demand for oil from developing nations is understated and could "foil expectations for years to come," according to The Harvard Gazette. Developing nations could prove to be a "wild card" in shifting away from fossil fuels. These nations tend to rely on oil as a source of electricity more than developed nations.

"Rich countries can do what they choose to do. Poor countries do what they have to do," Joe Lassiter, a retired professor at Harvard Business School, told The Harvard Gazette. "And I think that poor countries have told us consistently that their objective is to deliver their citizens 365 by 7 by 24 energy in the form needed for their economies to develop and for the well-being of their citizens." He concluded that he would be "very surprised if oil usage peaks in the foreseeable future, meaning a few decades from now."

However, it's much too soon to count developing nations out. Global implementation of policy, including the promotion of electric vehicles, is "expected to powerfully moderate annual growth in oil demand throughout the forecast," per the IEA, and developing nations are no exception. Harvard Kennedy School Environmental and Natural Resource Program's Henry Lee was "surprised at how quickly parts of the world are moving toward EV adoption," including China, according to The Harvard Gazette. The country has a growing electric vehicle market that's expanding internationally, reported The Associated Press.

While strides are being made globally, China, India and other developing regions in Southeast Asia and Africa will be "central determinants of coming decades' energy balance," concluded Professor Lauren Cohen to the Harvard Gazette.