The IEA’s latest World Energy Outlook suggests the EU is set to wean itself off oil even as global consumption continues to rise. EURACTIV.com asked Georg Zachmann, a senior fellow at the Brussels-based think tank Bruegel, how he sees oil demand in the EU changing in the coming years.
When the director of the International Energy Agency Fatih Birol was in town earlier this month to present its 2017 version of the World Energy Outlook, he quipped that “talking about oil demand in Brussels is not the best thing to do” at the moment.
He was alluding to the fact that the public and political discourse has been dominated – since at least the 2015 Paris Agreement – by the theme of reducing CO2 emissions.
Yet a striking feature in the IEA report was a forecast, on the basis of current and proposed policy, that oil demand in the EU would fall by an annual average of 2.2% between 2016 and 2040. Only Japan is set to see a slightly sharper decline – of 2.3% annually – while the yearly drop in demand expected in the US was 1.1%.
For the rest of the world, the predicted trend is upwards, bringing the global average to an increase of 0.5% a year for the next two decades and more.
The European Commission this month followed its ‘clean energy’ package with the first installment of a ‘clean mobility’ package, which proposed stricter emissions limits for cars and vans. However, to the disappointment of many – European power generators as well as environmentalists – it did not include a binding quota for electric or zero-emissions vehicles.
EU climate and energy commissioner Miguel Arias Cañete even conceded that 80% of Europe’s cars and vans would still have an internal combustion engine in 2030.
Whether or not Birol is right about a reluctance among Brussels policy makers to discuss EU oil demand, Eurostat figures show that it remains the largest energy source, with petroleum products contributing 34.4% of energy consumed in 2015.
In this interview, Georg Zachmann, a senior fellow at think tank Bruegel responds to questions from Robert Hodgson.
Where will European oil demand go in the coming years?
The new IEA baseline scenario is that oil demand in the EU will decline by 2.2% per year. Accordingly, the EU’s share in global oil demand would fall by two-thirds from 17% in 2000 to 6% in 2040.
What are the main drivers today?
In Europe, oil is mainly consumed in transport and to a lesser degree as a feedstock of the petrochemical industry. Oil consumption for heating and power generation has already been largely phased down in the past decades.
What are the main uncertainties for the future?
The main uncertainty is the oil price. Low supply and high oil demand outside Europe could imply significantly higher oil prices than today. This would push Europeans to move away from remaining oil-heating and switch to less or zero oil-consuming vehicles. On the other hand, a continued supply glut could depress oil prices and hence slow down investments into energy efficiency.
Another uncertainty is the availability of competitive alternatives. In terms of fossil fuels, cheap gas could not only replace oil in power generation and heating as it did in the last decades, but also replace oil in transport – especially shipping and vehicles.
So is the transport sector moving away from oil?
In the longer term, decarbonisation efforts and technological development are expected to have a substantial impact on oil consumption in transport. A big uncertainty is the speed and direction of this development.
The current push for electromobility is expected to only show substantial results in terms of oil demand towards the 2040s. The IEA expects that aggressive policies with up to 900 million electric vehicles by 2040 globally can reduce road vehicle oil consumption by about a fifth. One can assume that the switch away from conventional engines will be faster in the EU – as for example France, the Netherlands and the United Kingdom have announced to phase them out.
In the medium term fuel efficiency standards of conventional cars might reduce oil demand – but we saw that much of those savings in the past were counteracted by larger and more powerful vehicles.
In addition we should not forget that switching the fuel of cars is not the only solution to reduce transport emissions. Avoiding transport altogether and changing to different transport modes such as rail or cycling can make a substantial contribution to reducing greenhouse gas emissions.
Which policies could help to reduce oil demand?
The political focus appears to be on a push for electric vehicles through public innovation and deployment programs as well as sunset clauses for conventional engines.
But we should also look beyond. Our current scheme of energy taxation is a product of the last century. Tax breaks for company cars, tax-credits for car-commute and high taxes even for renewable electricity are all not aligned to support decarbonisation of transport.
Also the electricity market design is not fit for purpose. Public interventions make it cheaper to use oil for heating, than excess electricity during night-time. Public infrastructure and urban planning are another element. This is not only about charging infrastructure but also about the shares of public budget that go to roads and subsidised airports compared to bike lanes and railways.
So why do we not see more aggressive polices targeting oil demand in the EU?
Given the extraordinary role of the automotive industry – that is responsible for about one fifth of German exports for example – this prioritisation is politically understandable.