Oil Demand's Turning Point Threatens Global Instability

Oil demand is approaching a turning point, but governments are not prepared for the global impacts of declining revenues for producing countries. According to a report by E3G, energy markets are being reshaped by changing demand, geopolitical conflict, and supply disruptions. The major risks arise from the disorder in the transition, rather than the rate at which demand declines.

The report highlights that peak oil demand is a risk to producer economies, with 17 countries relying on oil and gas for more than 40% of their government revenue. These revenues pay for public salaries, subsidies, imports, debt service, and political settlements. However, global 'peak oil' is expected between 2030 and 2035, and China, the largest source of global oil demand growth in recent decades, is also approaching a turning point.

The oil endgame requires a shift in risk management to address the likelihood of instability in the political economies built around oil revenues. Declining producer revenues can lead to unrest, debt distress, and migration pressures. Producers will not simply accept lower income and may act strategically to protect their economies, including maximising short-term revenues and maintaining market access.

The report emphasizes that governments and other international actors can shape a more orderly oil endgame by creating alternatives to doubling down on oil production. This can be done through transition finance, diversification investment, and clearer demand signals. A new architecture will be needed to manage oil decline, comprising coordinated action between producers, consumers, and international financial institutions.