The purpose of the World Energy Outlook demand forecast is to show future energy market trends assuming no new government intervention takes place. This is a useful exercise because it tells governments what they need to do now to prevent the realization of an undesired scenario presented by IEA. Such an exercise is useful only if the underlying assumptions sufficiently resemble reality. If not, politicians can be lulled into complacency and/or issue the wrong type of policy response, resulting in disastrous consequences.

In this post I review the demand model of the World Energy Model (WEM) used in IEA's World Energy Outlook (WEO) 2008. My analysis indicates that the model has major deficiencies of a number of types. These include treating economic growth as an exogenous variable, when it is really depends on other variables, including the amount of fossil fuels available; inadequate analysis of the speed and price at which low grade fuels can be produced; and inadequate review of model outcomes compared to real-world data. Because of these and other issues, in my view, the model is not serving its intended purpose.