Fast reading:
- The IEA revised its original forecast, with recent data indicating global demand is reaching record highs and is likely to plateau or fall by 2030.
- Rapid growth in ‘clean’ energy will lead to a decline in consumption of traditional fuels, signalling a new dawn for the global energy sector.
- Elsewhere this week, as the ECB raised interest rates for the tenth consecutive time, UK GDP figures for July sparked fears a recession could be on the horizon, and US CPI data showed higher-than-expected inflation in August.
New forecasts from the IEA suggest demand for the three major fossil fuels – oil, gas and coal –could be set to peak before the end of the decade as climate policies begin to take effect. The organisation points to several global trends as driving forces of this change: The Russia/Ukraine conflict has sparked a surge of interest in renewables for one, while structural changes in China have also seen a move towards less fossil-fuel-intensive forms of energy.
For Audra Delport, Head of Corporate Credit Research at Federated Hermes Limited, while the news is positive, the IEA’s projected timeframe may be too optimistic.
“Of course, we hope the IEA’s estimates are right as it will greatly benefit the planet,” she said. “However, it’s hard to imagine such a profound change coming in before 2030 as oil demand continues to hit record highs driven by transportation fuels. In June this year, oil demand reached 103 million barrels per day, higher than the pre-Covid peak of 102.9 million in August 2019.”1
Steady growth in clean energy sources – such as solar panels, wind turbines and EVs – over the last decade, and the last three years in particular, demonstrate a clear shift. Investment flows into clean energy technologies continue to overtake spending in traditional fuels following concerns around security and affordability triggered by the energy crisis, according to data from the IEA (see Figure 1, below).
Figure 1: Global energy investment in clean energy and in fossil fuels, 2015-2023
The IEA’s forecast arrives at a crucial time. Reports of record-breaking weather and climate-related events – including floods, forest fires and scorching temperatures – have dominated headlines in recent weeks, demonstrating all too well the devastating impact the climate crisis has on the planet and its inhabitants.
It’s hard to imagine such a profound change coming in before 2030 as oil demand continues to hit record highs driven by transportation fuels
Elsewhere this week…
The European Central Bank (EBC) announced a tenth consecutive interest rate hike on Thursday, lifting the deposit rate by 25bps to reach an all-time high of 4%2. The decision comes as the bank continues to struggle to tame stubbornly high inflation. The Fed and Bank of England (BoE) will meet next week.
Orla Garvey, Senior Fixed Income Portfolio Manager, Federated Hermes Limited, noted that the ECB’s statement accompanying its rate rise appeared to suggest a desire to maintain rates at current levels and emphasised the bank’s belief that this would ‘make a substantial contribution’ to returning inflation to target.
She added: “There was no change to the PEPP or reserve requirements, which likely prompted the strong outperformance of periphery spreads. The ECB clearly wants to be done now and growth data would probably support that, however, there are still some hurdles to get over as we get to year end, particularly as it relates to energy prices.”
Figure 2: The ECB's all-time rate high
Elsewhere, UK GDP shrank by 0.5% in July following a summer of unseasonably wet weather and ongoing strike action, according to new figures released by the Office for National Statistics (ONS) on Wednesday3. Figures fell more than forecast by analysts, continuing a trend of weak economic growth in the UK. The data can be attributed to bad weather impacting retail and construction services and staggered industrial action across the healthcare, travel and education sectors.
Across the Atlantic, meanwhile, August’s inflation figures doused hopes of the US Federal Reserve (the Fed) holding interest rates steady at next week’s meeting. Data showed consumer prices rose by 0.5% to 3.7% YOY, fuelled by an increase in petrol prices.4
Geir Lode, Head of Global Equities at Federated Hermes Limited, however, believes the trend of disinflation remains dominant despite August’s modest uptick, but points to longer-term pressures.
“Combined with more evidence of a weakening labour market, we believe the Fed will most likely not increase rates next week and US equities will rally in the short-term,” he said. “However, as the higher level of interest rates start to bite more, we also expect to see pressure on US corporate earnings sometime next year and possibly a mild recession. Investors should therefore be prepared to position their portfolios more defensively as the short-term rally fades.”
For more climate change insights, please read this excerpt from the Q2 Public Engagement Report, or visit our climate change hub.
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1 The Economic Times, as at 11 August 2023.
2 The Financial Times, as at 14 September 2023.
3 Office for National Statistics, as at 13 September 2023.
4 The Financial Times, as at 13 September 2023.
