The report finds that higher electrification would lead to a peak in oil demand by 2030, and reduce harmful local air pollutant.
From that point onwards, the IEA expects US oil production to decline and the market share of the Organization of the Petroleum Exporting Countries will climb to 45 percent by 2040, from closer to 30 percent today.
"The biggest change in our projections this year is China", Tim Gould, Head of Division at the IEA's WEO said at the launch of this year's edition of the WEO.
Cumulatively, this is a downward revision of 8.3% in just two years, a downgrade equivalent to three times Australia's entire export volumes in 2017.
The report states that investment in new conventional upstream oil projects is well below what would be required to meet demand in the New Policies Scenario, which represents the agency's main scenario in three scenarios in the publication.
The agency's demand forecast to 2040 is based on the assumptions of rising incomes, an extra 1.7 billion people in the world - majority in urban areas in developing economies - and a "new policies scenario" in which current efficiency and carbon reduction targets are enacted.
"The shale revolution continues to shake up oil and gas supply, enabling the U.S.to pull away from the rest of the field as the world's largest oil and gas producer", it said.
Without major government policy interventions and investment in oil supplies, there is likely to be a supply crunch in coming years.
In power markets, renewables have become the technology of choice, making up nearly two-thirds of global capacity additions to 2040, thanks to falling costs and supportive government policies.
The oil market has turned very volatile in recent months, with US President Donald Trump pressing OPEC - and especially cartel kingpin Saudi Arabia - to increase output so as to offset reduced supply from Iran following the reintroduction of tough US sanctions.
Continued development of fossil fuel alternatives should gradually help wean the world from oil and gas dependence; however, there are still no legitimate replacements, be they solar, wind, electricity or bioenergy, with the properties needed to displace fossil fuels from their predominance atop the heating and transportation power pyramid.
However, the expansion also brings associated challenges that policy makers need to address quickly.
The report states: "With higher variability in supplies, power systems will need to make flexibility the cornerstone of future electricity markets in order to keep the lights on". This takes legislation and policies to decrease emissions and limit climate change into consideration, and also assume further energy efficiencies in the use of fuel, buildings, etc.
The IEA said that energy-related carbon dioxide emissions will continue to grow at a slow but steady pace to 2040. Electricity will account for a quarter of energy used by end users such as consumers and industry by 2040, it said.
There must be an "unprecedented global political and economic effort" to shift energy towards more sustainable means if climate targets are to be reached, the International Energy Agency (IEA) has warned. "We can create some room for maneuver by expanding the use of Carbon Capture Utilization and Storage, hydrogen, improving energy efficiency, and in some cases, retiring capital stock early".
"In other words, the United States alone would need to add the equivalent of another Russian Federation to global supply by 2025".