Reactions to the Covid-19 crisis have shared much in common with the stages of grief, but one key difference is the ability to believe that after the storm passes, we will return to “business as usual.”
In the energy world, reeling from the spectacular crash of global oil prices from about US$60 to $20 a barrel, the question is posed as to when something like a “normal” will price return.
I have news for you: It won’t. The oil price could again become spectacularly volatile, but will not rise above $30-40 a barrel for any sustained period again. Ever. Given the fundamental importance of oil to the global economy, government revenues, your pension funds, and much besides, that may be the most enduring shock of all from the crises.
Note the plural. If it were “just” Covid-19, oil would recover. But oil already faced two other challenges. Covid-19 has just prematurely thrown the world’s most valuable commodity over a cliff toward which it was anyway stumbling during this decade.
The first was oversupply. For the uninitiated, the oil price collapse started just before the Covid crisis broke, with the Saudi-led Organization of the Petroleum Exporting Countries (OPEC) unable to agree production cuts with Russia.
Prices close to $60 throughout 2019 were bringing in ever more US shale oil, threatening both. According to the textbooks, as the biggest and cheapest supplier, Saudi Arabia could win any price war as it has done before, thus stabilizing the game.
However, the Saudi regime depends on high oil prices to balance its books. Russia is much more diversified, and is equally concerned about US shale gas exports undermining its pipeline gas markets – which mostly involve oil-linked prices.
Global prices of liquefied natural gas (LNG) had already collapsed – first in the Atlantic basin and then more dramatically in Asia. One of the world’s leading gas research centers, the Oxford Institute of Energy Studies, projects the LNG glut will last a decade, at prices that can compete with coal for power generation and oil in key petrochemical uses.
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The stage was already set for battle – for Russia, crashing the oil price is a strategic game with an upside. Covid-19 has, however, turned the battle into a rout. Logically, shale oil should crumble first in the new price war – and the crashing price has enabled US President Donald Trump to “offer” enough cutbacks to create a façade of a deal.
But we can also bet that under Trump, a significant chunk of the world’s largest-ever stimulus package will try to maintain US production, come what may. So Covid-19 could indirectly impede the market shakeout and amplify the strategic supply glut.
The Saudis cannot win a price war. Under pressure from the US administration, they had to sue for a temporary peace – while losing both power and a shrunken share of a cratered market. As the reality dawns, it appears that even this unprecedented deal among the US, Russia and Saudi Arabia could not stop the price sinking back toward $20.
So to the second, strategic challenge – also amplified by Covid-19 – of the multiple pressures on oil demand. In oil’s premier market of transport, growth in the West had largely stalled anyway over the past 10-15 years. The short-run impacts of Covid-19 are obvious. The game-changer is that the pandemic seems peculiarly targeted toward this assumed bastion of demand.
Of course people will resume travel. Yet by then we will all be more than familiar with remote working and videoconferencing. It will be routine for businesses to ask if the time, strain – and for international meetings, cost and jet lag – of a physical meeting is really justified compared with a videoconference.
Domestically, Covid-19 will have accelerated the capacity for, and pre-existing trend toward, greater home-working. Even personally, having experienced that Zoom celebration or a curry evening shared with friends on Skype, we may think twice before traveling so far.
We have learned other things. Like the proverbial boiling frog, the citizens of developing-country megacities had become partly anesthetized to appalling levels of pollution; they have experienced again what clean air is like.
One great paradox of Covid-19 is credible evidence that the reduced air pollution in China has saved more lives – perhaps far more – than the virus has killed.
People will still travel and consume, but also with a renewed awareness of the fragility of our complex societies, of global interconnectedness, and the benefits of taking heed of scientific warnings and prescriptions.
The pandemic occurred against a backdrop of unprecedented concerns about climate change and accumulated impacts of extreme events. Anyone who thinks that Covid-19 has displaced this may be in for a shock: It could be precisely the opposite.
One huge psychological impact is discovering that many advanced societies are less resilient than we thought. Those societies that seem to have coped the best were those that had learned from the past – including severe acute respiratory syndrome (SARS) – and invested, prepared and then heeded the scientific evidence as it emerged.
Not least, all this has happened just as cleaner alternatives have become attractive. In 2019, more than 2 million electric vehicles were sold – still modest, but a growing force. EVs are cleaner, more efficient, and – given their intrinsically greater simplicity – on the cusp of becoming cheaper to buy than conventional cars. The pace of innovation, and the demand for cleaner transport, may easily outpace the falling price of crude.
Moreover, with wind or solar electricity now cheaper than fossil fuels in many regions, EVs might also sell valuable balancing services back to the power grid. As Covid-19 icing on the cake, in Europe and many Asian countries at least, stimulus money could well – and should – accelerate the technology, and charging infrastructures.
In 2019, oil demand breached 100 million barrels a day for the first time: It may well be the last. Covid-19 has already ensured that 2020 demand will be much lower. Some inevitable post-Covid-19 bounce does not mean that oil demand will ever again reach triple figures.
A previously unthinkable US-convened semi-cartel with Russia and OPEC could probably cause price spikes, but seems scarcely stable in the long run.
The cost of the dramatic and strategically premature price collapse could still be high volatility, particularly if Middle East regimes fall or take to conflict in fiscal desperation. But we have already entered a new world, and there is no way back to the old.
Michael Grubb is a professor of energy and climate change and deputy director, UCL (University College London) Institute for Sustainable Resources. From 2016-19, he was chairman of the UK government Electricity Market Reform Panel of Technical Experts.