Advanced nations can cut oil use by 2.7 million b/d this spring: IEA

The International Energy Agency (IEA) proposed 10 ideas for cutting energy use—primarily gasoline and diesel fuel used by motor vehicles—that it says can be implemented by its member nations in the next four months to reduce global crude oil demand by 2.7 million barrels per day (b/d).

This would represent about 6% of oil consumption in advanced economies (45 million b/d) and about 3% of global consumption of about 100 million b/d.

In its most recent forecast, published on 16 March, the IEA said that up to 2.5 million b/d of Russian oil exports could be shut out of the market starting in April, and it could build from there. About 55% of Russia's oil exports go to Europe, and China takes another 20%.

"If fully carried out in advanced economies, the measures [would be] equivalent to the oil demand of all the cars in China," said the IEA in a statement on 18 March when the plan was released. "This would significantly reduce potential strains at a time when a large amount of Russian supplies may no longer reach the market and the peak demand season of July and August is approaching."

The "10-Point Plan to Cut Oil Use" is the latest set of policy ideas to emerge in response to Russia's invasion of Ukraine and the subsequent actions by many nations and oil companies to ban the importation of Russian oil and gas. IEA members have already committed to released nearly 63 million barrels of oil from strategic reserves.

In Europe, EU member states agreed to eliminate all dependency on Russian imports of oil, natural gas, and coal under the 11 March Versailles declaration. Russia supplies 40% of EU gas consumption, 27% of oil, and 46% of coal. The EU's executive on 8 March proposed a group of measures, entitled REPowerEU, to reduce consumption of natural gas by two-thirds this year, and in mid-May it will propose added measures to phase out Russian oil and coal for a tentative deadline in 2027.

10-Point Plan

The 10 points are:

• Reduce speed limits on highways by at least 10 km/hour (290,000 b/d reduction)
• Work from home up to three days a week where possible (170,000 b/d reduction)
• Car-free Sundays in cities (380,000 b/d reduction)
• Make the use of public transportation cheaper, and invest in infrastructure to encourage walking and cycling (330,000 b/d reduction)
• Alternate private car access to roads in large cities (210,000 b/d reduction)
• Increase car sharing and adopt practices to reduce fuel use (470,000 b/d reduction)
• Promote efficient driving for freight trucks and delivery of goods (320,000 b/d reduction)
• Use high-speed and night trains instead of planes where possible (40,000 b/d reduction)
• Avoid business class and other premium air travel where alternative options exist (260,000 b/d reduction)
• Reinforce adoption of electric vehicles (EV) and more efficient vehicles (100,000 b/d reduction)

The measures in the plan "have already been tested and proven" in multiple countries and by corporations, said IEA Executive Director Fatih Birol in announcing the program. "Governments have all the necessary tools at their disposal to put oil demand into decline in the coming years," he said.

In addition, Birol urged that the actions taken by various nations become permanent because they will reduce GHG emissions and air pollution as well.

Using a model developed by the Carnegie Endowment for International Peace, one barrel of oil results in emissions of 475-770 kg of CO2-equivalent, depending on the type of oil and the complexity of processing it into fuels. Using that estimate, a reduction of 2.7 million b/d of oil would reduce annual global CO2-e emissions by about 1.28-2.08 billion metric tons (mt)/year. According to IEA, global CO2-e emissions from fossil fuels in 2021 were about 36.4 billion mt, so the reduced use of oil could cut emissions by up to 5% in that category.

If the short-term demand measures are combined over the next two or three years with added requirements for EV purchases, higher fuel economy standards, and acceleration of heat pumps installations in homes and offices, Birol said the impact would sustain the drive towards a net-zero world by 2050.

Consumer behavior

Birol acknowledged that most of the short-term measures would require changes in consumer behavior, often supported by or mandated through government actions.

That is both its strength and weakness, said others.

"IEA's proposals are sound and well thought through," said Atul Arya, chief energy strategist for S&P Global Commodity Insights. "However, many of the proposed policies, such as car-free Sundays in cities and making public transport cheaper, will require policy changes that are politically difficult and therefore time consuming to implement."

Ramping up sales of EVs is limited by supply-chain constraints in manufacturing, he pointed out.

In fact, Arya said, the greatest driver of consumer behavior is the problem that is driving IEA's plan: the cost of fuel. "The immediate impact of these measures in the next 90 days is likely to be minimal. In the short run, high oil price will be the biggest deterrent to demand," he said.

High prices are a "point of pain" for drivers, said Claudia Adriazola-Steil, director, Health and Road Safety Program, World Resources Institute, in an interview with Net-Zero Business Daily. "Because oil prices are skyrocketing, … we can get them [drivers] back to more sustainable transportation," she said.

IEA's proposal that speed limits be lowered is an example of an idea that has direct fuel efficiency benefits, but also improves safety for cyclists and walkers, which is another part of the 10-point plan, Adriazola-Steil said. Paris reduced speed limits this year, and she said that surveys indicate a million more people have starting cycling. "Getting people back to more sustainable transportation … is a gift," she said.

Investing in mass transit is another solution, Adriazola-Steil said, especially as a bounceback for transit systems that lost 70-80% of ridership during COVID-19. She applauded New Zealand, an IEA member country, for reducing fares on mass transit as a low-cost alternative to driving. "Better quality, more affordable, safer forms of transportation," she said. "I think this [IEA plan] can work."

Market conditions and political backlash

S&P Global Commodity Insights estimates that without the market disruption, global oil demand would have increased by about 1.5 million b/d in 2021, according to Kurt Barrow, ENR's oil markets, refining and LPG/NGLs lead.

How much high prices already are influencing demand is difficult to assess, he said, and so is predicting how new measures will change behavior. "The modeling of this is quite complex as market response is being clouded by emerging market governments' reluctance to let market prices flow through to the consumer prices due to serious concerns with inflation and civil unrest," he told Net-Zero Business Daily by email.

With economic stimulus packages for COVID-19 recovery still operating in some OECD markets, households have additional spending capability as well, Barrow said. "Bottom line, some of the typical price/demand elasticity responses will be blunted this year, but we do expect demand to be impacted by higher oil price this year," he said.

When it comes to high prices, Birol noted that economic justice concerns should be factored in to how policies are developed by each nation. As an example, he said value-added taxes often represent a large portion of energy prices for consumers, so a temporary reduction in taxes or direct payments to consumers can help the poorest members of society.

In the EU, a newly proposed carbon market for vehicle and heating fuel suppliers is intended to encourage the uptake of EVs and lower-carbon heating systems. The policy was proposed within July's Fit for 55 carbon neutrality measures. At a meeting on 17 March, Sweden, Denmark, Germany, the Netherlands, Finland, and Austria supported the new carbon market, while Poland and Hungary opposed it on the grounds it would raise costs for consumers.

In France, environmental taxes on diesel are a contentious issue. Protesters brought parts of the country to a standstill during the 2018 "Yellow Vest" movement in response to such a tax. This led to the tax's cancellation.

Sensitivity to the price of gasoline and diesel is high in the US, too. Democrats and Republicans in Congress have raised the idea in recent weeks of suspending the federal tax on gasoline and diesel, and several states already have implemented "tax holidays" on their fees.

The US Senate has called in oil executives for a hearing on 6 April about whether gasoline prices have increased more than is justified by the surge in oil prices.

"Over the past few weeks, as war in Ukraine began, the price of a barrel of oil rose precipitously. That immediately translated to oil and gas companies raising the price for Americans at the pump," said Sen. Chuck Schumer, Democrat-New York, on 17 March. "But something is happening that Americans shouldn't overlook. Over the past few days, oil prices have actually been decreasing, but the price of gas at the pump has not."

West Texas Intermediate (WTI), the benchmark US crude, closed above $123/bbl on 7 March. At close of trading on 17 March, WTI was trading at about $103/bbl, or a drop of nearly 20% from its high. During that same time period, average retail gasoline in the US fell from about $4.33/gal to $4.30/gal, or less than 1%, according to data from AAA cited by Schumer.

Posted 18 March 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability and

Kevin Adler, Chief Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.