Fossil Fuel Demand Resumes Post-Pandemic, Undermining Climate Efforts – Reuters

By Noah Browning and Bozorgmehr Sharafedin

LONDON – Coal demand has surpassed pre-COVID-19 levels, with oil demand not lagging far behind, raising concerns that the pandemic might not lead to an accelerated shift to clean energy from fossil fuels.

A surge in global energy requirements, marked by record prices for gas and coal, an energy crisis in China, and oil prices reaching a three-year high, reflects a revival in energy demand and a continued reliance on fossil fuels.

"The dip in demand during the pandemic was solely due to governmental movement restrictions and was not indicative of a transition in energy consumption," stated Cuneyt Kazokoglu, head of oil demand analysis at FGE. He added, "The transition towards cleaner energy and decarbonization are long-term initiatives that cannot be achieved overnight."

Fossil fuels still account for over three-quarters of global energy demand, while non-nuclear renewables constitute less than 20%, as reported by the International Energy Agency (IEA).

Energy transition policies have faced criticism for contributing to rising energy costs. For example, in Europe, high carbon prices intended to lower emissions have led to hesitancy among utilities to activate coal-fired plants, exacerbating shortages. In China, emission reduction measures have resulted in energy rationing for heavy industries.

However, much of the current energy price surge stems from producers having drastically cut back on capacity last year when the pandemic resulted in an unprecedented demand drop.

Several factors suggest that current supply shortages might be temporary. Possible increases in production from OPEC, new liquefied natural gas (LNG) sources set to come online after a price decline, and changes in China’s price regulation that affect coal production could all alleviate the current crunch.

Producers of fossil fuels, especially gas and coal, were caught off guard by the rapid economic recovery, largely driven by government stimulus in energy-intensive sectors. National policies further complicate supply issues; in China, mandated coal prices prevent utilities from using coal profitably as costs have surged.

Chinese utilities are operating below capacity not because of inability but to avoid financial losses. Moreover, gas projects require years to develop, meaning that the current shortages reflect pre-pandemic investment decisions made before the energy transition gained significant political traction.

The IEA’s chief remarked that energy transition policies did not cause the current crisis, asserting that "well-managed clean energy transitions are a solution to the challenges observed in gas and electricity markets today, rather than the root cause."

Recent data from the IEA indicates that global coal demand, the largest source of CO2 emissions, has exceeded pre-pandemic levels. Tight supplies, particularly from China—which produces about half of the world’s coal—are also a contributing factor, as increased safety regulations have led to reduced output. Consequently, China has started importing more coal from Indonesia, leaving less available for other countries like India.

Global coal demand is projected to rise by 4.5% this year, surpassing levels from 2019. Meanwhile, even though global natural gas demand fell by 1.9% last year, it is expected to recover by 3.2% this year, reaching over 4 trillion cubic meters and reversing the decline from 2020.

Cold weather patterns in the northern hemisphere have driven increased demand for coal, LNG, electricity, and even some oil, a trend that looks set to continue. LNG, constituting over 10% of global supply, is more easily traded and can help address short-term supply gaps.

Expectations are for oil demand to recover toward pre-pandemic levels, with projections indicating it could surpass 100 million barrels per day next year. High oil prices persist due to OPEC and allied producers maintaining substantial production cuts established during the pandemic to respond to drastically reduced demand.

Looking ahead, most analysts predict that fossil fuel demand will peak within the next two decades, while the IEA has advised against new fossil fuel projects to meet net-zero emissions targets. This scenario could lead to wider supply gaps and more price volatility.

"Fossil fuel prices are likely to remain unstable," noted Nikos Tsafos, a senior fellow at the Center for Strategic and International Studies. "In a contracting market, the risk of supply-demand imbalances increases, particularly where further investment seems uncertain, which could trigger short-term price spikes."