World Need for Oil Expected to Ease

The International Energy Agency next week will make a “substantial” downward revision to its long-term forecast for global oil demand, a person familiar with the matter said, marking the second year running the group has slashed its view of the world’s thirst for oil.

The forecast of slower growth in oil demand puts the IEA increasingly in a camp of contrarians bucking the popular view that crude demand will grow briskly in a postrecession world. That view holds that long-term demand will grow at a fast clip because of rising emerging-market wealth and consumption in places like China and India.

The IEA, which advises rich nations, such as the U.S., on energy matters, is set to use its closely watched annual World Energy Outlook report to forecast that improved energy-efficiency measures in developed nations, as well as climate-change legislation, will help to slow the rate of global oil consumption.

A person familiar with the Paris-based IEA’s plans said “demand-management policies” are having more impact than previously expected in the developed world, which accounts for about 55% of world oil consumption. The IEA outlook, a guidepost for industry trends, is scheduled to be released Nov. 10.

A drop in industrial activity from the recession is also a big factor in the revision. Baseline assumptions used in the previous long-term outlook have to be adjusted down to account for the tough economic conditions of the past year.

Last year, the IEA shaved 10 million barrels a day off its long-term forecast and projected consumption in 2030 would hit 106 million barrels a day, or about 25% above current levels. It isn’t clear how that compares with the cuts expected in this year’s forecast by the IEA.

In the past, the IEA has been criticized for being too optimistic in its projections. Its current stance puts it in line with a growing list of industry analysts taking a more bearish view on future demand. Philip Verleger, a veteran independent energy economist based in Colorado, thinks consumers will keep a tight leash on oil demand over the next decade, in part as a result of policy makers battling climate change by mandating new energy-efficiency standards for everything from vehicles to building codes.

“The rise in global oil consumption over the next 10 years could be minimal,” says Mr. Verleger.

If demand pessimists are correct, future increases in the price of crude could be damped as weaker consumption stretches world oil supply by billions of barrels. Various analyst estimates maintain that the roughly 2% a year average growth rate in world oil consumption seen earlier this decade — the biggest reason for crude prices hitting a record $147 a barrel last year — may turn out to be an anomaly and that annual growth in the neighborhood of 0.5% to 1% is more the norm.

Still, a lot more energy, including nuclear power and raw crude, will be needed to power rising economic activity in China, the world’s second-biggest oil consumer after the U.S., and other markets.

Cost savings gleaned from more-efficient products and processes may yield more commerce and, thus, more demand for oil. And there is this: The world has seen previous periods of energy-efficiency gains almost vanish after new oil supply hits the market and pressure prices lower, as happened in the 1990s.

Some analysts believe crude could rise to $200 a barrel within a few years from today’s $79 level. They say a speedier-than-expected economic recovery could make open consumers’ wallets to higher crude prices. Still, price increases are bound to reinforce conservation.

“There is a market assumption today that we will head back to the old days of rapid oil demand, but we think we are heading into new days,” in which the growth in consumption will be more subdued, said Dan Yergin, chairman of IHS Cambridge Energy Research Associates.

Mr. Yergin says several factors are prompting companies and consumers to make the most of their energy dollars. Among them: the sting of record oil prices in recent years, the threat that political obstacles in many oil-producing states will slow delivery of new barrels to the market, and the battle against climate change.

The energy-research group said last month it thinks oil consumption in the industrialized world peaked in 2005. Mr. Yergin believes the same will probably happen globally in two decades.

Deutsche Bank says global demand will peak by 2016 as consumption reaches around 90 million barrels a day, versus about 85 million currently, due to efficiency gains and technology improvements in electric vehicles.