Oil at a Crossroads: IEA and OPEC+ Fight for Interpretative Authority

Last Updated: 30. November 2023By

As an investor, you simply cannot avoid dealing with the International Energy Agency (IEA) and OPEC+. The influence of these two organizations is simply gigantic. What is interesting is that the two powerful actors have been in an unrelenting conflict for years. At the center of the dispute is – you can guess – the transformation of the oil industry.

Oil twilight: IEA and OPEC+ fight for interpretation right So the IEA, after all the most powerful advisory organization for Western governments in energy matters, already hinted at the end of the oil age in October. According to this, the peak of global demand for oil, gas and coal will be reached in this decade. That means: from the 30s, according to the IEA, fossil fuels will become increasingly irrelevant. The experts of the energy agency justify their forecast above all with the climate protection goals of many states, which stand diametrically opposed to oil and Co.

OPEC+ obviously sees it differently. After all, the member states of the cartel are enormously dependent on a functioning and above all profitable oil market. The organization, to which oil producers such as Saudi Arabia, Iran, Iraq, Nigeria, Venezuela, Kuwait, Algeria and Russia belong, does not see the fossil age coming to an end yet.

On the contrary: According to new estimates by OPEC+, global oil demand will rise to 116 million barrels per day (bpd) by 2045. In the graph you can see the forecast of the oil cartel and the development of demand of individual sectors:

Source: OPEC (https://www.thenationalnews.com/business/energy/2023/10/09/oil-industry-needs-investments-of-14-trillion-until-2045-amid-growing-energy-demand/ )

Consequently, the global economy would have to continue to invest high or even higher sums in the expansion of oil capacities. OPEC+ now speaks of 14 trillion US dollars by 2045.

The conflict over CO2 separation However, the dispute between the two powerful organizations is not only based on different assessments of the future of the energy sector. Both actors also make serious accusations against each other. While the IEA reproaches the oil cartel for prolonging the oil age artificially through its forecasts, the OPEC+ criticizes the energy agency because, according to its assessments, the economy would invest less in oil, which would ultimately exacerbate energy scarcity.

A central point of contention is, however, the CO2 separation. Simply put, the carbon dioxide produced in industrial processes is captured before it reaches the atmosphere as a greenhouse gas. The separated CO2 can then be stored underground and practically stored or used in other industrial processes – for example in the chemical industry or for the remaining exploitation of oil deposits (EOR process).

Above all, the US oil players see this technology as an excellent lever for decarbonizing climate-damaging industrial sectors and at the same time for their own enrichment. Exxon Mobil, for example, is investing large sums in CO2 separation and is forecasting a multi-billion dollar market and profit margins in the double-digit percentage range. As early as this summer, Exxon announced that it was buying pipeline operator Denbury, whose assets were suitable for transporting CO2.

Carbon separation as a brake? The IEA, on the other hand, sharply criticizes the separation technology and recently called it an „illusion“. According to the energy agency, 32 billion tons of carbon must be separated for use or storage by 2050 in order to limit global warming to 1.5 degrees Celsius. This resulted in two problems.

First: electricity consumption. In order to separate such a large amount, the corresponding companies would have to use 26,000 terawatt hours of electricity by the middle of the century, according to an estimate by the agency. That would be more than the total electricity consumption of humanity in 2022 (24,398 TWh). Since the technology only makes sense climatically if the electricity needed for it is also generated ecologically, the IEA logic would lead to the CO2 separation exacerbating the scarcity of renewable energies in perspective.

Second: the investments. According to the IEA, horrendous sums would have to be invested in the expansion of CO2 separation. Specifically, the experts forecast expenditure of 3.5 trillion US dollars by mid-century. The energy agency finds that this sum should rather flow into new ecological capacities – for example into wind and solar power.

Generally, the IEA sees in CO2 separation a technology that unnecessarily prolongs the fossil age. The criticism is directed in particular at the US players mentioned above such as Exxon Mobil. In Europe, the oil companies such as Shell or BP are more investment-friendly when it comes to clean energy. Ultimately, the global oil industry must invest half of its investment spending in green energy projects by 2030, the IEA demanded. In 2022, however, it was only around 2.5 percent.

My conclusion for you The public dispute between the IEA and OPEC+ is a symbol of the comprehensive conflict in which the oil industry is currently located. On the one hand, the industry has to decarbonize, not least to avoid state restrictions. On the other hand, the fossil fuels are still very important for the functioning of the world economy and not least a lucrative source of income – also for you as an investor (keyword: dividends).

Which of the two sides will be right in the end can hardly be estimated at present. But what can be said is that renewable energies have recently been in trouble due to the difficult macroeconomic environment, while the fossils continue to generate relatively strong profits. In this context, it is utopian, in my opinion, to speak of an early end of the oil age.