The world may never regain its thirst for oil

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The impact of the collapse of US oil 2:17

London (CNN Business) - The world is learning to live on less oil. It may never go back to before.

The coronavirus pandemic has shattered demand for gasoline and jet fuel, while billions of people are confined, and there is no guarantee that it will fully recover despite rocketing prices.

The oil industry is preparing for the effects of the crisis to persist. Employees continue to work from home. International travel is rare. And once-polluted city dwellers, having become accustomed to blue skies, demand tighter emissions controls, encouraging governments to redouble efforts to tackle the climate crisis.

Such changes would add to a push for investors to ditch the oil assets that had been gaining momentum before the recent price drop. Investments in sustainable energy, by comparison, appear to have held up relatively well despite volatility in the stock market.

All of this could mean that global demand never returns to its all-time high of 2019, a frightening prospect for oil companies and their employees from Texas to Western Europe, and countries like Russia, Nigeria or Iraq that are highly dependent on the sale of raw.

"I think the pressure to accelerate the forces driving the energy transition will only increase as a result of this crisis," said Mark Lewis, global head of sustainability research at BNP Paribas Asset Management in Paris.

The threat of a second wave of infections in the fall is also looming for growers. Prices have already fallen to their lowest levels in decades as producers grapple with oversupply and the worst drop in demand in history.

"There remains an exceptional level of uncertainty regarding the short-term outlook for product prices and demand," BP Chief Financial Officer Brian Gilvary told analysts this week.

Before the pandemic, analysts predicted that the peak in oil demand would occur around 2040 due to the increase in electric cars, increased energy efficiency, and the switch to alternative sources.

But the coronavirus has forced many assumptions about the future of oil to be ruled out.

Everything has changed

At a minimum, the impact of the coronavirus crisis will take years to prosecute the oil industry.

As governments around the world froze their economies to prevent the spread of the disease, energy demand collapsed. The International Energy Agency expects global oil demand to drop to a record 9.3 million barrels per day in 2020, as a result of efforts to contain contagion in 187 countries and territories.

The Paris-based agency estimated earlier this month that demand will drop in April to a level last seen in 1995, when the global economy looked radically different.

Such dynamics, combined with excess supply that resulted from a brief but brutal price war between Saudi Arabia and Russia, has dealt a major blow to oil markets. Last week, oil prices in the United States turned negative for the first time, as traders paid people to take the oil out of their hands, as the storage tanks quickly filled up.

To restore calm in the markets and start raising prices again, supply must drop significantly, and by far more than the record cut expected by OPEC and its allies starting on Friday. That means the wells will be closed and many companies will go bankrupt.

But industry participants also need demand to begin the recovery process in the second half of 2020.

"The key question is how quickly the covid-19 pandemic will be contained and come to an end, as that will determine the degree of movement around the world," said Jim Burkhard, head of crude oil research at IHS Markit, a research firm. "No one knows yet."

New behaviors

Wall Street's current predictions that demand will fully recover in a year or two are based on two main assumptions: that governments will quickly ease the rules that keep people confined, and that economic activity will recover very quickly a time restrictions are lifted.

In this case, demand could return to 2019 levels as soon as 2022, according to IHS Markit.

There is some evidence to support this optimistic view. Goldman Sachs notes that weekly refinery data indicates that demand for oil in China, the world's largest consumer, is only 5% lower compared to pre-crisis levels, suggesting a robust recovery.

But IHS Markit has also modeled an alternative scenario in which governments are slower to lift quarantine rules, or a second wave of the virus. In the event that occurs, demand may never fully recover.

"If we have a second wave, even if it is a quarter of its intensity, it will continue to keep oil demand low and further underpin changes in behavior," Burkhard said.

Lewis from BNP Paribas believes that it is inevitable that the coronavirus will have lasting effects on activity in developed countries. He predicts that the number of people working from home will remain high even after the crisis ends, reducing displacement. Road fuels, such as gasoline, account for about half of the world's oil demand.

He also says that the psychological impact of the virus will weigh on travel for a long time, encouraging companies to limit the number of conferences they attend and reducing the frequency with which people fly in general.

"I just don't see how aviation can return to the growth rates that we were seeing before this crisis arose," he said. Aviation represents a smaller portion of the demand for oil than land transportation, but it has been a key growth factor in recent years.

Operators like Lufthansa and British Airways have already warned that their businesses will have to shrink because the sector will not recover in years.

Last week Rystad Energy, an Oslo-based consultancy, moderated its predictions for an increase in oil demand in the second half of the year, taking into account a weaker outlook for gasoline and jet fuel consumption.

The great role of governments

Such behavioral changes, according to the opinions, could clear the way for governments to take more aggressive measures to promote renewable energy and move away from the use of fossil fuels, allowing countries to fulfill their commitments under the Paris Agreement as soon as possible. .

That could be especially true in Europe, which has pledged to cut emissions by at least 40% below 1990 levels by 2030. German Chancellor Angela Merkel said Tuesday that addressing climate change must be integrated into the solution to the coronavirus pandemic.

"'If we look at the severe damage caused by the coronavirus crisis to our economies around the world, we also have to encourage each other so that we do not forget climate protection," he said.

There are already indications that European cities will use the pandemic as an opportunity to reduce pollution. Milan said last week that as the city reopens, it will reserve more space on the street for bicycles and pedestrians.

"Of course, we want to reopen the economy, but we think we should do it in a different way than before," Marco Granelli, deputy mayor of Milan, told The Guardian newspaper.

It is also a great opportunity for China, Lewis said. The country recently extended its subsidies to electric vehicles until 2022, but then said it will cut them by 10% this year.

In the United States, much is based on the outcome of the 2020 elections. President Donald Trump has been a strong advocate of the United States oil and gas sector, and recently promised a rescue package. Joe Biden, the Democrat who will almost certainly challenge him in November, is much more likely to take a New Green Deal approach to rebuilding the economy.

Bjornar Tonhaugen, head of oil markets at Rystad Energy, is still waiting for demand to hit a new record in 2022, fueled by an increase in activity as daily life returns to normal. But government action in the wake of the coronavirus could "advance" the timeline for peak consumption.

The rest of 2020 will be crucial in setting the path. Some countries may prioritize their economic recoveries over efforts to reduce emissions, Tonhaugen said. That will be tempting since crude will be very cheap.

"Lower prices are slowing down this move towards renewable energy sources," said Giovanni Staunovo, an oil analyst at UBS, who does not believe that peak demand has been reached.

But Lewis noted that renewable energy has become much less expensive in the past decade, with prices falling from 70% to 90% depending on the technology. That has the potential to accelerate a transition that was already underway, in contrast to the aftermath of the 2008 financial crisis.

"What was already beginning to seem inevitable is being brought forward," Lewis said.