Cutting oil demand can hurt Russia: IEA

Responding to Russia’s invasion of Ukraine, the International Energy Agency (IEA) unveiled a 10-point plan recently 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 per cent of the agency’s forecast for oil demand in the countries of the OECD 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 per cent 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 10 km per hour (about 6 miles per hour) 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.

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.

Working from home and avoiding business air travel both sound like promising ideas. 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 also extremely worried about an impending oil supply crisis. Its latest market outlook, published recently, warned of the possibility of the biggest supply disruption in three decades.

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. So if the IEA is right about a supply shock, demand reduction will have a critical role to play in balancing oil markets. 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 center on governments cutting taxes or supporting domestic oil production. There are few, if any, calls for mandatory fuel-saving measures.

Source: Business Standard