The Future of Oil after Covid-19
Updated: Jun 7, 2020
How Covid-19 has permanently affected the future of the oil industry and chartered a new course for energy consumption
Covid-19 has wiped out more the 30% of the global oil demand through lock down and travel bans, contributing to the already growing insecurity in the sector. With oil demand threatening to peak and environmental activists threatening to mutiny, the industry was already dealing with its own crisis before the added financial strain from the pandemic. The oil market has naturally experienced peaks and troughs before but many in the industry argue that this pandemic will alter the industry irrevocably. One school of thought argues that this pandemic will reshape the world to such an extent that oil prices will never re-establish their upwards trajectory whilst others predict a spike in prices caused by lack of investment in the industry, amidst ethical and environmental concerns. Mark Lewis, the global head of sustainability research at BNP Asset Management says that “the oil industry is already changing, the question is now whether this accelerates” [after the pandemic].
Transport and petrochemicals comprise more than half of total oil consumption, resulting in the industry taking a huge hit after pandemic induced travel restrictions were implemented. Lord Browne, chair of LetterOne, co-owner of Wintershall DEA and a member of the board of a biomedical institution researching potential vaccines for Covid-19, remarked that “we’re seeing just how fragile the world is in this pandemic, and awareness of fragility is a very important thing in shaping human behaviour”. He suggests that even after these restrictions are lifted people will not immediately revert to pre-pandemic mobility having begun to adapt to a more local, sustainable existence. For those jet setters who are anxious to travel again, international flight restrictions will likely last much longer than local lock downs and Goldman’s Courvalin estimates that the 16 million barrels of oil a day required for air travel might “never return to its prior levels”. It is likely too that businesses will be more reluctant to fund travel budgets having learnt what can be achieved through video conferences.
Furthermore, the work-from-home set up might be adopted permanently, avoiding rent costs for office space, and Gavin Thompson, Asia-Pacific vice-chairman for consultancy Wood Mackenzie LTD suggests that "in Western Europe and the U.S., at the very least, you’ll see a sustained and permanent move toward more working from home.” According to BNEF analyst David Doherty if every American worked from home one day a week this would reduce gasoline consumption by 376,000 barrels a day, more oil than produced by OPEC members Gabon and Equatorial Guinea combined.
However, whilst our movement might become more localised, it might also grow more cautious with the notion of social distancing at the forefront of people’s minds. Cuneyt Kazakuglu, a London-based oil analyst for consultancy FGE has argued that the population is likely to want to avoid overly crowded public transport long after the peak of the pandemic. Our increased reliance on cars and private transport may elevate gasoline demand as has been the case in China, the second largest consumer of oil, where 50 million fewer people are using inter-city buses since mid-January and the number of vehicles on the highways daily has increased several million since this time last year.
The global increase in online shopping necessitated by lock down has also contributed to increased traffic but contrary to what one might expect, this is likely to create a net-negative for oil demand in the long term. This is because individuals tend not to pay much heed to the fuel efficiency of their quotidian activities, but large delivery firms do and thus corporations may turn to more energy efficient electric vehicles. Jeffrey Blair and Andy Hoffman write that “fleets can also speed the transition to electric vehicles because they use their trucks more often than individuals, which means the savings from lower energy prices can more quickly offset the higher up-front purchase cost” . This suggests that the Covid-19 might catalyse the mass movement towards environmental sustainability which will necessarily involve an increase in oil demand.
The environmental impact of Covid-19 does not make up for its devastating death toll however the huge decrease in air pollution will have huge long-term health benefits following this pandemic. Economist Marshall Burke suggests that the lives saved from the subsequent reduction in air pollution may exceed the death toll of the virus itself. Before the pandemic air pollution exceeded malaria as a global cause of premature death by a factor of 19, violence by 16, HIV/AIDS by 9, alcohol by 45, and drug abuse by 60. Burke writes that the two months of pollution reduction has probably saved the lives of 4000 children under 5 and 73,000 adults over 70 in China alone.
Companies are already beginning to shift away from oil towards more environmentally sustainable methods of operation. BP has spoken of a faster shift towards renewable energy resources and starting measures like carbon capture and storage to offset CO2 emissions. BP’s chief executive Bernard Looney has even “staked his tenure on a promise to set the company on a path to “net zero” emissions”. David Sheppard, writer for the Financial times, identifies the crux of this plan is one simple tenet “one of the world’s most famous oil and gas companies is pinning its future on producing less oil and gas”. We must learn from Covid-19 and accept that the oil industry will become one of its many victims.
Kristy Richards is graduate from the University of Oxford, currently studying for her Masters in Near and Middle Eastern Studies with Intensive Arabic at SOAS. Her main areas of interest are migration and diaspora studies, inter-sectional politics and human rights discourse.