Is the globe’s thirst for oil finally topping out?
A major international energy watcher says yes, predicting last month that demand for global oil for transport will peak around 2026, plateau for all uses by 2028, and possibly hit a zenith by the end of the decade.
Harvard experts say the forecasts track with what’s going on in the developed world, where climate change concerns have fostered a push to electrify transportation, boost renewables, and reduce fossil fuels. But, they say, the energy needs of less-wealthy nations pressing to develop their economies could foil expectations for years to come.
The International Energy Agency, established by the Organization for Economic Co-operation and Development in the 1970s to provide energy data and policy advice, predicted that demand for oil for transportation would peak in 2026 as a result of electric-vehicle (EV) adoption, biofuel growth, and improved fuel economy. It predicted increases in demand in all sectors would slow from 2.4 million barrels per day this year to just 0.4 million barrels per day in 2028, with a potential overall peak by 2030.
Henry Lee, the Jassim M. Jaidah Family Director of the Harvard Kennedy School’s Environmental and Natural Resource Program and senior lecturer in public policy, said despite many variables at play, he wouldn’t be surprised if the peak of oil use for transportation is achieved by 2026. Even if that proves too rosy, it’s still likely to be achieved by early in the next decade, he said.
Lee said he’s been surprised at how quickly parts of the world are moving toward EV adoption. In China, the world’s largest auto market, electric vehicle sales in the first five months of 2023 were up by 26 percent. Sales by BYD Auto, China’s largest EV maker, are up 92 percent this year, he said.
“Rich countries can do what they choose to do. Poor countries do what they have to do.”
Likewise, American companies have poured resources into EV design and manufacturing. Both Ford and GM are planning to release new models in 2025, 2026, and 2027, Lee said, while Volkswagen, with new vehicles planned for 2026 and 2027, expects the majority of its fleet to be electric soon.
“Ford and GM, driven by the California regulations, have invested billions of dollars in developing electric vehicles,” Lee said. “There is this huge investment, and it’s too late to change it.” Last August, officials in Sacramento declared that by 2035 all new passenger cars and light trucks sold in the state—the nation’s largest auto market—must be electric or emission-free.
But this momentum doesn’t mean the pieces are all in place, nor does it guarantee a smooth transition, Lee said. Significant hurdles remain regarding electricity pricing and building charging infrastructure.
The cost to charge vehicles is artificially low, Lee said, which is alright for now because EVs are a small part of the market. But the situation will need to be fixed as more electric cars hit the road, and the solution is unclear. In addition considerable investment is still needed to ensure there will be sufficient charging stations, transmission lines, smart transformers, and energy storage, Lee said.
Some of the necessary funds were approved in the 2022 Inflation Reduction Act, but Lee said private investment seven or eight times greater is still needed. Automakers recognize this, and Ford and GM announced in June an agreement to adopt Tesla’s charging technology platform, which means their cars will be able to use Tesla’s nationwide network.
Industrialized nations are using regulation and market forces to foster a shift away from fossil fuels, but the wild card for the IEA’s forecast involves the developing world, experts said.
Globally, oil isn’t used heavily for electricity generation, but that’s less true in some developing nations where gasoline and diesel generators supplement small or unreliable grids and where liquified petroleum gas (LPG) is used for cooking, transport, and even heating. A 2014 study by the World Bank, for example, estimated that electricity demand in Nigeria was 8,000 to 10,000 megawatts, but just 3,500 of those came from the national electric grid. Much of the shortfall was made up by gasoline and diesel-powered generators, the report said.
Joseph B. Lassiter, the Senator John Heinz Professor of Management Practice in Environmental Management, Retired, at Harvard Business School, said leaders of developing nations make no bones that their top priority is rapidly improving their economies and living conditions for their citizens, which will require vast supplies of cheap, reliable energy.
Lassiter said he sees a disconnect between value systems in the developed and developing world, where an activity as mundane as cooking supper carries significant health consequences. According to the World Health Organization, the global death toll due to indoor air pollution—with cooking fires a major culprit—was estimated to be 3.2 million in 2020.
“Rich countries can do what they choose to do. Poor countries do what they have to do,” Lassiter said. “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, now not tomorrow.”
And that’s why, he says, fossil-fuel power plants and refineries will continue to be built, and coal, gasoline, LPG, and diesel used as fuels. And a peak for global oil demand will remain many years, if not decades, off, Lassiter predicts.
“I will be very, very surprised if oil usage peaks in the foreseeable future, meaning a few decades from now,” he said. “There’s no reason to believe that the global South won’t take any barrel that’s produced anywhere in the world.”
Lassiter, whose work focuses on nuclear plant development financing, said nuclear remains an option for relatively inexpensive, reliable, carbon-free power. Regulatory hurdles have all but closed the door to significant, rapid nuclear power plant expansion in the industrialized world, but the option remains potentially viable in the developing world, and comparatively inexpensive plants of Chinese and Korean design are available.
Also the developing world’s transition to electric vehicles will be hampered by the fact that power infrastructure to homes is not as robust as in industrialized nations, which will make it harder for consumers to charge their cars, according to Lee. That will create yet another potential bind in the coming decades, Lee said, because many developing countries have no domestic automakers and so must import their cars from foreign manufacturers, which will be increasingly focused on producing electric models.
“The great news is that many of these places are also developing healthy hubs of alternative energy innovation and experimentation for larger scale implementation.”
While developing nations will play an important role in determining any potential peak in oil demand, that doesn’t have to mean those regions will be a roadblock in the global shift to renewables, according to Lauren Cohen, the L.E. Simmons Professor of Business Administration. The industrialized world, he said, doesn’t have a monopoly on energy innovation.
“Fast-growing countries, such as China and India, along with dynamic and fast-developing regions of Southeast Asia and Africa, will be central determinants of coming decades’ energy balance,” Cohen said. “The great news is that many of these places are also developing healthy hubs of alternative energy innovation and experimentation for larger scale implementation.”
Whenever the peak is reached, oil companies—some of the world’s wealthiest organizations — are unlikely to vanish from the global energy scene. Some will maintain a fossil-fuel focus, betting they can compete even in a shrinking market.
Hardest hit will be mid-level oil producers without the financial cushion to endure a downturn or shift their business to alternatives. Some companies, though, are intent on remaining players even in an altered energy landscape and shouldn’t be counted out in the shift to greener sources.
A recent study Cohen conducted showed them already playing a strong role in developing and filing patents for green technology.
“These energy producers produce more—and significantly higher-quality—green innovation,” Cohen said. “In many green technology spaces, they appear to be first movers, not easily substitutable, and to produce ongoing foundational aspects of innovation on which other alternative energy innovators build.”
“Harvard Business School is the graduate business school of Harvard University, a private research university in Boston, Massachusetts. It is consistently ranked among the top business schools in the world and offers a large full-time MBA program, management-related doctoral programs, and executive education programs.”
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