The coronavirus pandemic has taken no prisoners when it comes to the damage it has seemingly inflicted upon every industry under the sun, from hospitality and travel to retail and entertainment. Also hit hard was oil and gas, posing questions about the uncertain future of the once booming fossil fuel industry and what those question marks might mean for climate change efforts going forward.
On Monday oil prices took a nosedive to their lowest level in history, dropping into negative pricing as oil supplies overwhelm the globe’s storage capacity. First dropping below $5 a barrel, it hit $0.01 a barrel before falling to as low as negative $40 and eventually settling at negative $37.63, the lowest level recorded since the New York Mercantile Exchange began trading oil futures in 1983.
The key question is whether this free fall will permanently alter the course of the climate crisis for better or for worse. Some experts believe the pandemic will be responsible for pulling forward the peak demand for oil and gas, with bold estimates claiming that 2019 will go down in history as the peak year for carbon emissions. Some, on the other hand, take an opposing view, claiming that the fossil fuel industry will bounce back as it always has, and that rock bottom barrel prices and a massive halting in renewable energy installations will slow the much-needed transition to green energy.
Plunging demand
One thing that is for certain is that this unprecedented oil demand plunge is capable of changing the oil sector forever, as fewer companies holding high-quality assets emerge after the downturn, Goldman Sachs said on Monday.
“Big Oils will consolidate the best assets in the industry and will shed the worst … when the industry emerges from this downturn, there will be fewer companies of higher asset quality, but the capital constraints will remain,” Goldman Sachs analysts wrote in a recent note.
The Saudi-Russian oil price war has been rendered irrelevant in the face of enormous demand destruction as major economies remain in lockdown, and the unprecedented output deal by OPEC and allied members to curb supply is proving too little too late in the face of such a massive collapse in global demand.
Saudi Arabia and other Organization of the Petroleum Exporting Countries (OPEC) members are now even considering cutting their oil output as soon as possible, rather than waiting until May when the group’s recent production agreement with the U.S. and Russia is set to begin, according to sources as reported by the Wall Street Journal.
Oil and the campaign for cleaner energy
In the midst of the collapsing economies, climate campaigners are calling on governments to make relief for the fossil fuel industry dependent on tougher climate action, though the rush to protect businesses and workers from the impacts of the public health crisis is resulting in some polluters being bailed out with virtually no strings attached.
A report by Influence Map, which analyzes corporate lobbying on climate policy, found the oil and gas sector to actually be the most active in lobbying governments for financial support and deregulation in response to the pandemic.
Scared investors and negative oil prices leave the future of the industry on shaky ground, though, and may poise renewable energy options for a greener future. Experts such as Fatih Birol, the executive director of the International Energy Agency, say that the global crash has “fast forwarded some power systems 10 years into the future…suddenly giving them levels of wind and solar power that they wouldn’t have had otherwise without another decade of investment.”
“Investing in energy efficiency also has large benefits for employment,” said Birol. “Previous stimulus plans in the United States and elsewhere supported large numbers of jobs by fuelling demand for the labour-intensive work of upgrading buildings, so they use less energy to keep warm in winter or cool in summer.”
Oil companies are taking notice as well, with Royal Dutch Shell recently sharing details on its plan to reach net-zero greenhouse gas emissions by 2050. The future of green energy is progressing, and some say the coronavirus pandemic is the perfect time to forge environmental policies.
Green incentives for a greener future
The virus-driven economic slowdown is shining a light on the increasing competitiveness of renewable energy in the electricity markets and elsewhere, leading more oil companies wanting in on a piece of the pie. In many parts of the world power demand has fallen, increasing the percentage of renewable power being called upon in those markets, both because solar and wind-produced fuel is free and because of production subsidies they get. The fat rates of return projected for the oil and gas projects have also slumped from about 20 percent down to below 6 percent, putting them in line with what you can get from renewables like wind and solar.
“The price war and Covid-19 have really thrown the oil and gas sector into turmoil, and now we have companies really in survival mode,” said Valentina Kretzschmar, director of corporate research at analysts Wood Mackenzie to The Guardian.
“The oil and gas sector is already a very much unloved sector by investors and in this kind of oil price environment, it becomes low return, high risk and high carbon. It is not a very attractive proposition.”
With the oil industry already under pressure from investors concerned about widening awareness of the climate crisis and increasing regulation from governments to cut emissions, experts are saying after the crisis investments are now expected to flow increasingly towards companies perceived to offer wider social benefits. According to a report by The University of Oxford’s Institute for Energy Studies: “This is a market that is being tested to its limits.”
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