π Geopolitics π Economics π Energy
Oil to lithium, the energy transition is shuffling the cards for global politics

Oil in murky waters: pressure on prices and uncertain demand

Patrice Geoffron, Professor at the University of Paris-Dauphine and Director of Center of Energy and Climate Change Economics (CGEMP)
On May 13th, 2021 |
3 mins reading time
Oil in murky waters: pressure on prices and uncertain demand
Patrice Geoffon
Patrice Geoffron
Professor at the University of Paris-Dauphine and Director of Center of Energy and Climate Change Economics (CGEMP)
Key takeaways
  • For the first time, due to the pandemic, investments from oil majors in low-carbon technologies are higher than budgets allocated to oil and gas exploration and production.
  • It looks like the downturn on the oil market is here to stay – the crisis appears to have altered demand in a lasting way, due to our lifestyle shifts (remote working, e-learning, telemedicine).
  • The International Energy Agency (IEA) believes that total energy demand will increase by only 4% over this decade (versus 12% predicted before the pandemic), the lowest level of growth since the 1930s.

Pan­dem­ic and oil crisis

The oil mar­ket seems to have gone back to “nor­mal,” with bar­rels priced well above $50 since ear­ly this year and costs cov­ered in most pro­duc­tion zones. But it’s too ear­ly to know what to expect of the oil indus­try going through the 2020s because the pan­dem­ic will clear­ly leave last­ing scars. This is how the IEA has summed up the many seri­ous “sin­gu­lar­i­ties” of a year with­out precedent.

The oil majors’ finan­cial results also con­firm these con­clu­sions: BP, Chevron, Exxon, Shell and Total took loss­es of near­ly $80bn in 2020, com­pared to prof­it of near­ly $50bn in 2019. Need­less to say, this cri­sis direct­ly impact­ed invest­ments in oil and gas explo­ration and pro­duc­tion, which also dropped by more than 30% in 2020. For the first time, these invest­ments were over­tak­en by mon­ey poured into low-car­bon tech­nolo­gies: renew­able ener­gy, elec­tric vehi­cles, hydro­gen, etc. This is the biggest drop record­ed since the turn of the cen­tu­ry – in com­par­i­son, the bru­tal drop seen in 2014–2016 “only” reached 22% over two years (dur­ing the counter-shock sparked by the Amer­i­can uncon­ven­tion­al gas pro­duc­tion boom). 

Of course, eco­nom­ic sup­port bills have soft­ened the impact of the shock – the G20 pro­vid­ed up to $250bn in direct and indi­rect sup­port mea­sures to fos­sil fuel pro­duc­tion and con­sump­tion (for pro­duc­ers, air­lines and car man­u­fac­tur­ers), ver­sus $230bn for renew­ables, ener­gy effi­cien­cy and low-car­bon alternatives.

A long-term cri­sis for supply…

Even with these mea­sures, the scene is set for insta­bil­i­ty to become a fix­ture this decade, for both sup­ply and demand.

First­ly, because price reg­u­la­tion mech­a­nisms remain very weak, with the inter­na­tion­al mar­ket dom­i­nat­ed by the Unit­ed States, Rus­sia and Sau­di Ara­bia. Although it’s now almost for­got­ten, the March 2020 drop in bar­rel prices was not only due to Covid-19, but also because of Russia’s deter­mi­na­tion to engage in a price war against the Amer­i­can oil indus­try, break­ing an agree­ment with Sau­di Ara­bia that had been in place since 2016. With the glob­al econ­o­my grind­ing to a halt, the Rus­sians and Saud­is had to rebuild ties quick­ly. How­ev­er, the fact remains that any joint effort to reg­u­late vol­umes, while sup­port­ing prices, will allow Amer­i­can pro­duc­tion to climb again through­out the 2020s like in the last decade (even if, in the short term, Amer­i­can pro­duc­ers seem more con­cerned with reestab­lish­ing their mar­gins than increas­ing their vol­umes). That being said, Pres­i­dent Biden quick­ly dis­tanced him­self from his predecessor’s pol­i­cy by stop­ping the giant pipeline project (Key­stone-XL) which would have con­nect­ed Cana­di­an oil with refiner­ies in the Gulf of Mexico.

How­ev­er, Biden’s pow­er to direct­ly restrict the activ­i­ty of nation­al oil com­pa­nies is lim­it­ed by the fear of increas­ing imports and rekin­dling con­cerns over depen­den­cy, assuaged since the late 2000s oil and shale gas boom (an indus­try which pro­vides ten mil­lion well-pay­ing jobs), espe­cial­ly since the White House only has direct con­trol over oper­a­tions under­tak­en on fed­er­al territory.

… and demand

Sec­ond­ly, if we look at demand, the “bou­quet” of uncer­tain­ties is also com­plete­ly unprece­dent­ed. Some fac­tors were already there, of course, par­tic­u­lar­ly con­cern­ing the speed of devel­op­ing and adopt­ing green tech­nolo­gies. In this area, the Unit­ed States’ return to the Paris Agree­ment and Biden’s stim­u­lus strat­e­gy (specif­i­cal­ly invest­ments into “green” infra­struc­ture) will cer­tain­ly act as an accel­er­ant. If the US reach­es its objec­tive of reduc­ing emis­sions by 52% (com­pared to 2005) by 2030, dai­ly oil con­sump­tion could be reduced from 19 to 10 mil­lion bar­rels a day in the Unit­ed States.

But oth­er fac­tors, direct­ly trig­gered by the pan­dem­ic, were not sup­posed to affect demand for oil. The intro­duc­tion of new socioe­co­nom­ic sys­tems that are like­ly to last, with growth in dis­tance activ­i­ties (remote work­ing, e‑learning, telemed­i­cine), has changed both trans­port needs and con­nect­ed ener­gy con­sump­tion. To this, we can add shifts in tourism and inter­na­tion­al trade, whose impact on oil demand has not yet been cal­cu­lat­ed. At this point, the IEA is sim­ply stat­ing that inter­na­tion­al demand for oil in 2021 should remain around 3% below 2019 lev­els, due to both low­er lev­els of road trans­port and, most­ly, air trav­el (down 20–30% com­pared to pre-pan­dem­ic lev­els). Beyond that, it fore­sees only 4% growth in total ener­gy demand over the decade (com­pared to its pre-pan­dem­ic pre­dic­tion of 12%), the low­est lev­el of growth since the 1930s.

Could the envi­ron­men­tal tran­si­tion be the solution?

Such pre­dic­tions, even more chaot­ic than before the pan­dem­ic, have pushed some oil majors to start trans­form­ing their busi­ness mod­el. Those in Europe (BP, Shell and Total) recent­ly set objec­tives to reach car­bon neu­tral­i­ty by the mid­dle of the cen­tu­ry. How­ev­er, faced with skep­ti­cism from NGOs, they will have to put their mon­ey where their mouth is. Even Sau­di Ara­bia, with its “Vision 2030,” seems to have acknowl­edged the lim­i­ta­tions of exclu­sive depen­den­cy on oil (and the uncer­tain­ty regard­ing the val­ue of its 50 years of reserves).

But beyond these efforts for an “organ­ised” tran­si­tion, con­cerns main­ly cen­ter on the most frag­ile pro­duc­ing coun­tries (Iraq, Iran, Nige­ria, Alge­ria, Libya), which were struck hard by the pan­dem­ic at a time when the pre­vi­ous decade had already left them in a weak­ened posi­tion. Fail­ing that, decar­bon­i­sa­tion efforts may just make the geopo­lit­i­cal sit­u­a­tion even more chaotic.


Patrice Geoffon

Patrice Geoffron

Professor at the University of Paris-Dauphine and Director of Center of Energy and Climate Change Economics (CGEMP)

Patrice Geoffron has been acting president and international vice-president of the University of Paris-Dauphine. He also directed the Economics laboratory and has been a visiting professor at Bocconi University in Milan for several years, as well as a member of the Cercle des Économistes. He heads the energy-climate team at LED which runs several research chairs (Climate Economics, Gas Economics, European Electricity Markets) and a Master's degree (Energy-Finance-Carbon). Previously, he was a member of the World Council of the International Association for Energy Economics and an expert for the Citizen’s Climate Convention.