The Future of Oil

Covid-19 has caused a shift in consumer behaviour globally whether it be travelling, shopping, or working from home we all had to adjust to life in lockdown. These radical changes to daily life have had a notable impact on many oil-dependent industries including aviation, travel and tourism. All these changes caused a 30% contraction in global demand for oil and consequently a historic price collapse of such an important commodity (Tverberg, 2012). Crude oil hit negative prices for the first time in history on the 20th of April when the closing price for 42-gallon barrel WTI crude was -$37.63. The reduction in demand, accompanied with the high opportunity cost of storing oil led to producers running out for storage space to hold the oversupplied commodity, forcing them to pay buyers to take on the barrels they could not hold (Ambrose, 2020). In May the top oil producers Saudi Arabia and Russia massively cut oil production in an attempt to support prices and ease this massive oversupply.

According to data in China, oil consumption is now back to pre-pandemic levels, but it is still down across Europe in countries like Italy and Spain.

When/will Oil recover?

This begs the question "When will oil demand recover?" As transport and petrochemicals make up half of all oil used, the downward shift in consumption in these sectors is the determining factor of whether oil demand will rebound to pre-pandemic levels. A more important question for us to ask perhaps is whether the decrease in consumption of oil will be permanent. It is still too early to say what changes to consumer attitudes and behaviour we will see globally post lockdown. Although there has certainly been public opinion against returning to normality and looking to instead take it as an opportunity to move towards a greener society (Binding, 2020), after seeing the positive impacts of changing our actions for just a small period of time have had on the environment with dolphins returning to the Venice canals and deer roaming across typically busy London streets.

Among oil company’s opinion is divided, British Petroleum is assuming that the long-term price of Brent crude will be about $55 per barrel. Prompted by the current crisis earlier the oil giant wrote off $18 billion worth of assets which points to an important change in the oil industry and perhaps important change overall, having enjoyed extortionate control and profits in the market for years.

The stock market more generally has recovered due to the expectation that many countries will return to life as normal, but oil stocks have not. On the flip side companies focusing on alternative forms of energy and renewables such as Enphase Energy Inc. whose net income grew 2,393% in Q1 (Ambrose, 2020), have seen promising high levels of growth. The hard reality for oil might be that production never returns to its previous levels and companies have to either adapt to greener alternatives or accept lower future profits.

Why Oil Matters

The oil industry has had a bad reputation with connections to environmental destruction and climate change for many years, huge oil firms including Saudi Aramco are well aware of the damaging impact growing climate awareness may have on them going forward (Murphy, 2020). These firms and many others argue this reputation to be unfair as oil is the single most important resource to the wellbeing of the world economy which is de facto built on oil. Oil products and derivatives are a cheap energy solution which have brought prosperity to those countries with resources of it and improved living conditions globally, not without drawbacks. In these unusual times countries are going to face a perhaps unprecedented opportunity to diverge from oil and invest in a carbon-neutral economic recovery.

This would not come cheaply. According to a study by Fuels Europe, the cost of replacing oil-derived road fuels in Europe by 2050 would be around $735 billion. Given the cost of such a massive undertaking and the current economic situation, an oil-powered V-shape recovery seems unfortunately more likely, than any attempts for a switch to green. The UK and other major European economies are facing a historic economic contraction and the additional expense of a CO2 reducing project might be one too many for the taxpayer and debt-ridden governments at the moment.

By Bozhidar Dinkov

References:

Tverberg, G., 2020. Recession Fears Cap Oil Prices In 2020 | Oilprice.Com. [online] OilPrice.com. Available at: <https://oilprice.com/Energy/Energy-General/Recession-Fears-Cap-Oil-Prices-In-2020.html> [Accessed 26 July 2020].

Ambrose, J., 2020. Oil Prices Dip Below Zero As Producers Forced To Pay To Dispose Of Excess. [online] the Guardian. Available at: <https://www.theguardian.com/world/2020/apr/20/oil-prices-sink-to-20-year-low-as-un-sounds-alarm-on-to-covid-19-relief-fund> [Accessed 26 July 2020].

Binding, L., 2020. Coronavirus: Only 6% Of Public Want Life To Return To Pre-Pandemic Times. [online] Sky News. Available at: <https://news.sky.com/story/coronavirus-only-6-of-public-want-life-to-return-to-pre-pandemic-times-12017151> [Accessed 26 July 2020].

Ambrose, J., 2020. Oil Prices Dip Below Zero As Producers Forced To Pay To Dispose Of Excess. [online] the Guardian. Available at: <https://www.theguardian.com/world/2020/apr/20/oil-prices-sink-to-20-year-low-as-un-sounds-alarm-on-to-covid-19-relief-fund> [Accessed 26 July 2020].

Murphy, D., 2020. Aramco Chief Adds To Bullish Calls For An Oil Demand Rebound In Late 2020. [online] CNBC. Available at: <https://www.cnbc.com/2020/07/01/aramco-chief-adds-to-bullish-calls-for-an-oil-demand-rebound-in-late-2020.html> [Accessed 26 July 2020].