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.