Wednesday 16 November 2016 10:45 am

The world will reach peak oil within years, the IEA warns, as it declares the era of fossil fuels is “far from over”

The world could reach peak oil and face a supply shortage within years, causing it to enter a new phase of boom and bust prices, the International Energy Agency (IEA) has warned.

Investment in crude oil development fell to its lowest level since the 1950s in 2015 and 2016 data so far shows no signs of picking up the pace, the organisation said in its annual World Energy Outlook report.

If new project approvals remain low for a third year in a row in 2017, it becomes "increasingly unlikely that demand and supply can be matched in the early 2020s" without the start of a new era of volatile price swings.

Fatih Birol, the executive director of the IEA, said:

We are entering a period of greater oil price volatility. If oil prices rise in the short term, then shale producers can react quite quickly to put more oil on the market, producing a see-saw movement.

And if we continue to see subdued investments in new conventional oil projects, this could have profound consequences in the longer term.

US tight oil output, which has gained attention for "remarkable resilience" through the current commodities downturn, has limits and should not be relied on to meet a supply gap, the IEA added.

Oil prices have been beset by persistent oversupply levels in recent years. The price of Brent crude, the global benchmark, fell from a high of more than $100 a barrel in 2014 to $27 a barrel in January of this year. Prices are currently hovering around the $46 mark.

Overall, global oil demand is expected to grow until 2040, mostly because of the lack of easy alternatives to oil in road freight, aviation and petrochemicals.

However, when it comes to passenger cars, oil demand is projected to decline even though the number of vehicles is forecast to double in the next quarter century.

Biofuels and the rise of electric cars will be contribute to this decline, with the IEA estimating the number of electric cars to reach 30m by 2025, up from 1.3m by the end of 2016.

Fossil fuel era "far from over"

The IEA also said an analysis of the pledges made for the 2015 Paris Agreement, which came into force this month, showed that the era of fossil fuels "appears far from over" and natural gas and oil will continue to be a "bedrock" of the global energy system for many decades to come.

A radical shift in the energy sector, cutting emissions to zero by around 2040, would be needed to limit the global rise in temperature at 1.5 degrees, the IEA said.

Government energy policies and cost reductions in the sector enable a doubling of renewable energy and improvements in general energy efficiency in the next 25 years, the organisation added. Natural gas will will expand its role, as the shares of coal and oil begin to recede.

"We see clear winners for the next 25 years – natural gas but especially wind and solar – replacing the champion of the previous 25 years, coal," Birol said. "But there is no single story about the future of global energy: in practice, government policies will determine where we go from here."