Can a plan to destroy oil demand work? It has to


RESPONDING to Russia’s invasion of Ukraine, the International Energy Agency (IEA) unveiled a 10-point plan last week to slash oil demand in developed economies by about 2.7 million barrels a day within four months. Reducing demand will make it a lot easier to impose tough sanctions on Russian exports, but the proposals also serve the longer-term goal of putting energy use on a more sustainable path.

If achieved, the reduction would represent about 5.5% of the agency’s forecast for oil demand in the countries of the Organisation for Economic Cooperation and Development this year. Even more could be cut if measures were adopted by less-developed countries as well.

Many of the 10 points are things that have been done before, either during the oil-price crises of the 1970s or more recently during the Covid-19 pandemic. There’s good evidence that they work. The biggest impact could come from sharing more rides and reducing fuel use through practices such as ensuring correct tire pressures and increasing the temperature of the air conditioning.

Average vehicle occupancy currently stands at about 1.5 people per car. An increase of about 50% in one out of 10 trips, along with using less fuel, can save around 470,000 barrels a day of oil in the short term, the IEA calculates.

Reducing speed limits by 10kph on motorways would save a further 430,000 barrels a day. Reduced speed limits were introduced by the US and many European countries during the 1973 oil-price crisis, and variable limits now exist on many motorways to reduce congestion or air pollution.

Ride-sharing is a lot easier to arrange now than it was 50 years ago, with a range of phone apps already in use. But lingering concerns over the Covid-19 pandemic may undermine people’s willingness to share cars and even use public transportation. Passenger numbers on metro networks in most large cities remain well below pre-pandemic levels and governments are looking to reduce their financial support.

More fuel-efficient use of trucks for long-haul freight transport and short-haul deliveries could bring savings of 320,000 barrels a day, the IEA says. But although that would seem obvious amid rocketing fuel prices, the drawback is that.

Unlike private cars, freight drivers don’t feel the immediate pinch of higher diesel prices and so don’t share the same incentive to alter their driving habits.

Working from home and avoiding business air travel both sound like promising ideas for cutting fuel use. But the scope for increased home-working is much lower than it was before the pandemic, with many companies already allowing staff to operate remotely for at least part of the week. And if fewer business travellers mean half-empty planes rather than fewer flights, the impact will be limited.

The IEA is not making these proposals to merely cut the flow of funds to the Kremlin. It is also extremely worried about an impending oil supply crisis.

Its latest market outlook, published last Wednesday, warned of the possibility of the biggest supply disruption in three decades, with the potential for the loss of at least three million barrels a day of Russian exports starting as soon as this week. With Saudi Arabia appearing unlikely to open the taps more quickly and spare capacity among other OPEC+ members limited, there is little hope of additional supplies to offset a loss.

US shale producers aren’t raising output either. An initial release of emergency stockpiles will cover about two weeks of Russian oil exports and further releases may be approved. So, if the IEA is right about a supply shock, demand reduction will have a critical role to play in balancing oil markets. But the extent to which its suggested measures will be adopted is far from certain.

As abhorrent as Russia’s invasion of Ukraine is, it is not clear whether people in Europe and the US feel that changing their oil consumption habits is a necessary, effective or appropriate response.

The calls for action to combat rising fuel prices centre on governments cutting taxes or supporting domestic oil production. There are few, if any, calls for mandatory fuel-saving measures. Beyond the current crisis, oil demand has to be tackled if the world is to meet its longer-term carbon-reduction goals.

The added spur of depriving President Vladimir Putin’s war machine of foreign funding through oil sales may be just what’s needed to kickstart the process. If it does, the IEA’s Path to Net Zero may start to look less like a road to La La Land. — Bloomberg

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