IEA forecasts risk stalling low-carbon momentumNigel Topping, CEO
Every year The International Energy Agency (IEA) produces its World Energy Outlook, offering predictions for the global energy system over the coming years and decades. And every year, it runs the risk of steering the industry in the wrong direction.
George Soros calls this the principle of reflexivity: when what people expect to happen shapes what they do, which in turn makes those expectations come true. In Soros’s words: “distorted views can influence the situation to which they relate because false views lead to inappropriate actions. That is the principle of reflexivity.”
People’s expectations of the future really matter and the IEA arguably has the dominance over energy modelling – they are the source of truth for many people. So when the latest IEA World Energy Outlook declares that “global oil demand continues to grow until 2040”, this is taken as a central scenario for planning for a significant number of companies and investors. It has a magnetic pull.
When even The Organization of the Petroleum Exporting Countries (OPEC) is saying oil demand will likely peak by 2029, it is clear that the IEA is at risk of being loudly wrong. It could even be seen as irresponsibly steering the global economy in the wrong direction. That is not intentional of course, they are trying to be rigorous and cautious, but I don’t think they understand the momentum of the low-carbon transition and just how much they shape policy makers’ expectations.
It’s time to consider whether the IEA is actually exacerbating a problem that they are supposed to be charged with solving. It potentially delays the serious and necessary conversations about the terminal decline of the oil industry. It also potentially puts hundreds of billions of dollars of pension funds at risk of being invested in unwise places based on these assumptions. Anything that says “beyond 2040” means forever in investment terms. So we have a situation where the oil and gas industry remains in denial. Shell CEO Ben van Beurden told investors in June 2015 that energy demand will be significant because, “The IEA says it will be up by almost 40% by 2040.” Shell even cited this as the justification for their ill-fated Arctic drilling venture.
Basically, the IEA’s message reads: ‘there’s nothing to worry about, there’s no disruption coming’. It is wrong, just as the IEA has been annually, consistently wrong on photovoltaics. But even more important than being wrong is that if you don’t even contemplate the entrepreneurial future, then you actually lessen its chances of success. That is a public disservice. I’m not alone in thinking that. The Financial Times recently wrote, “To maintain credibility the IEA should now look hard at the changing patterns of energy demand and should consider shifting its view of the future.”
Arguably the IEA has started to listen to the mood music when it comes to global coal demand. In its Medium-Term Coal Market Report 2016, the IEA forecasts that growth in global coal demand will stall over the next five years, driven by lower demand from China and the US, which is a marked change from their business-as-usual stance. The IEA also calls into question China’s latest rash of new coal plants, stating that there is “no real economic sense in building more”.
People who shape expectations have an important leadership role, whether they like to admit that or not. I recently attended the C40 Mayors Summit in Mexico City and saw the positive potential of leaders who commit to powerful visions of the future. One of the boldest pledges to emerge came from the Mayors of Paris, Mexico City, Madrid and Athens, to ban diesel vehicles by 2025.
As we see more and more mayors committing to 100% renewable power, those commitments build momentum and shape the future positively. You shape the future by speaking it and committing to it. It is also what entrepreneurs do – Elon Musk is a classic example. He didn’t wait for any economic rationale, but rather said: I know what the future looks like, so I’m going to build it.
In a time of disruption, entrepreneurial and Mayoral commitments are part of creating the future. We need to beware the very powerful voices who are undermining that future. If our imagination is anchored in the past, it takes us backwards. The IEA has no stake in the future, technocrats will be around forever; but if CEOs and Mayors mess up, their organisations cease to exist or cities depopulate. Their stakes are higher, and those are the people we should be listening to.
This is about leadership. Leaders who take risks, who are willing to create the future through their words and actions. Signals from the future come to policy makers’ desks today because they start to be able to believe. Our research shows that the companies with the boldest targets are getting the highest return on investment. You can commit to a goal without knowing 100% how you’re going to achieve it; but you will never achieve it, unless you commit to it.