Energy markets post-COVID 19: Recovery may take time, transition to continue

As oil markets have crashed, the experts believe the oil prices will come down drastically and continue making the energy transition a financial burden for many economies for a couple of years. However, the market alone was never the sole force behind the energy transition. Global warming and climate change played a major role in the energy transition and are the most likely to prevail as the biggest motivators in post-COVID 19 pandemic world.

Energy is the fundamental requirement for every developmental activity. Whether you plan for hospitals, schools, weaponry or artificial intelligence (AI) based technological innovations, you need the energy to make them operational. It has become an integral part of human life and also for the economies to remain operational and vibrant.

The worldwide lockdown caused by COVID 19 pandemic has adversely impacted the energy scenario by drastically reducing consumption. As millions of people are packed inside their homes the entire transport sector from air to water to road is paralyzed. The immediate impact of this lockdown has resulted in reduced air pollution and low carbon emission but scientists are wary about the energy scenario in the post-COVID 19 world. 

"It does not mean much for climate,” said Lars Peter Riishojgaard, a senior official of the United Nations’ World Meteorological Organization (WMO) to media persons. Putting an end to the speculations on long term impact of the pandemic related lockdowns on climate change, greenhouse gas emission, and global warming, he said, “While in the short term, carbon dioxide emissions would go down as cars stay put and aircraft fleets remain on the ground, “we expect the impact will be fairly short-lived,” Riishojgaard said. Though the exact assessment of the impact of COVID 19 pandemic on the energy sector could be made only after the situation will move towards normalcy, the happenings indicate emerging challenges which will be crucial for post-COVID 19 pandemic global energy scenario.

Global Oil Market Crashed 

The petroleum oil industry was already hit due to the price war between Saudi Arab and Russia and some other geopolitical factors. However, COVID 19 pandemic has made the situation the worst ever as there is no buyer for the oil in the international market.

“At the moment, about 5 million barrels of oil produced worldwide each day is not fetching high enough prices to cover the costs of getting it out of the ground (based on Brent crude at USD 25 a barrel, with variations to reflect the prices typically available to producers around the world). These operations are now losing money on every barrel they produce,” said a report of the International Energy Agency (IEA) on Wednesday, April 1. “Prices available to producers have fallen to single digits in Western Canada and there have even been incidences of negative pricing for some grades in parts of North America. For some producers, there could soon be no place for their oil to go,” added IEA. The agency estimates the oil prices will be very low for a couple of years because the world will revive very slowly in the post-pandemic period. This is because until a vaccine or sure shot treatment is not discovered, the people will prefer to stay away from transportation. The countries which are dependent on the oil industry for their economies will have no option but to reduce the oil prices for survival. 

“If you think this will be over in a couple of months, I have some luxury cruise tickets to sell you,” said Michael Liebreich in an analysis published on BloombergNEF on March 26. According to his prediction, the oil industry is staring towards the worst ever crisis of its history that will be worse than the previous crises of World War 2, 1975, 1982, 1991 and 2009. “COVID-19 is causing a massive drop in emissions this quarter, perhaps as much as 20 per cent; after that emissions will rebound, but remain significantly down until a vaccine enables a full recovery; even after that, they may well remain depressed for some years by an economy again hobbled by a colossal mountain of debt; and in the longer term, the stickiness of some of the new behavior, business models and technologies will certainly accelerate the transition to a low-carbon economy,” he predicted. The analysts also predict that some oil-producing countries will witness over 50 to 60 percent drop in their incomes. Besides, the projects will be stalled and companies will find it difficult to secure investment in the oil sector.

The international price of crude oil that was above US$60 per barrel on January 23, the day lockdown was announced in Wuhan city, plunged to about $25 per barrel on March 23, the UK announced 21 days’ lockdown. However, an improvement of 20 percent was witnessed after Saudi Arabia and Russia showed some signs of thaw from price war by cutting supplies. “The international benchmark, Brent crude, rose 21 percent to finish at $29.94 a barrel and the price of US oil, known as West Texas Intermediate (WTI), jumped almost 25 percent to $25.32. Both were record gains,” reported BBC.  UK’s The Independent reports,” Whatever happens, the industry will never be the same again after the double whammy of the pandemic and price war,”. The analysis went on to suggest that the oil industry will die paving the way for clean and affordable energy suited to climate action programs.  US-based Al-Monitor said that the experts suggest the price will drop to $10 per barrel by the end of the year.

As natural gas and cooking gas supplies are also linked to the oil supplier, the entire sector of hydrocarbons is most likely to face unprecedented recession due to COVID 19 pandemic. 

Impacts on Renewable Energy

The energy experts are unanimous that the recession in the oil industry will adversely affect the renewable energy market and energy transition. They only differ on the extent of the imminent damage.

“Changes in oil markets ripple across all parts of the energy sector, with implications for a range of different fuels and technologies. A sustained period of low oil prices would affect the prospects for clean energy transitions, easing some aspects of this transformation – such as the removal of fossil fuel consumption subsidies – while complicating others,” said IEA.  Rystad Energy, the Norwegian analyst group calculates growth in newly commissioned renewables projects will now be “wiped out” for 2020 and cut by a further 10 percent next year, reversing its pre-COVID-19 expectation of some 140GW of PV and 75GW of wind capacity being added this year.

Matt Gray, Managing Director, Carbon Tracker Initiative, also fears that in the post-COVID 19 world, the economies will swiftly move towards cheap energy sources for short time gains that would hit the climate action initiatives. However, he recommends a rejuvenating China to ‘seize this opportunity and act on the risk by deploying stimulus capital efficiently and avoid investing in coal power - which is economically redundant and environmentally disastrous’. According to the US Energy Information Administration (EIA), the USA was the world’s biggest oil producer in 2018 at 17.9 mbpd, followed by Saudi Arabia at 12.4 mbpd and Russia at 11.4 mbpd. The market loss and price war between these countries will also have an impact on the renewable energy market.

Besides, the global renewable energy market is primarily dependent on imports from China that was the biggest supplier in the pre-COVID 19 periods. An analysis published by the World Economic Forum on June 24, 2019, said, “China built more solar and wind electricity generating capacity than any other nation. Three of the world’s five largest floating solar plants are in China,”. A reviving China will also make an all-round effort to recapture its renewable energy market. How will these pull and push factors to decide the future of renewable energy, is still a matter of time. 

The market is not the sole force behind Energy Transition

The pandemic is indeed adversely affecting every component of the energy sector from coal to oil to gas to renewable energy. The market forces seem to have an adverse impact on energy transition in the future, however, the market alone was never a sole force behind the energy transition. Global warming and climate change played a major role in the energy transition and are the most likely to prevail as the biggest motivators.

In fact, most of the Sustainable Development Goals (SDGs) of the United Nations were conceptualized against the prevalent market forces of which ‘Affordable and Clean Energy' is the seventh global goal (SDG 7). Even in the pre-COVID 19 periods, the experts were nervous about meeting the targets of the energy transition by 2030.

The clean energy experts have already started their work to guide the policymakers for the post-COVID 19 world. Recommending the governments and companies to honor their commitments on energy transition, Fatih Birol, Executive Director, of the International Energy Agency said, “sustained reductions in emissions will happen only if governments and companies fulfil the commitments that they have already announced – or that they will hopefully announce very soon,”. This recommendation for stimulus for energy transition is not a new phenomenon. In fact, the entire process of the energy transition is about climate responsibilities, commitments, stimuli, and financial packages. COVID 19 may slow down but the process of energy transition and energy innovations are likely to get a push from various platforms and forums. Furthermore, the new age demand for clean and affordable energy will never die as hydrocarbons will aggravate the problem of air pollution locally.  This will also cause all the other kinds of pollution-related health problems compelling the economies towards long term solutions (Waste Management Series of Summits (WMSS) held in January 2020)

Inward Looking Energy Policies

It appears the energy experts are missing non-energy phenomena created by the COVID 19. In this worldwide lockdown, several nation-states are suffering from the short supply of energy and other commodities. The pandemic is no less than a war for the smaller countries dependent on international firms for their fossil fuel energy supplies. From the perspective of producers, crude oil is not being sold but from the perspective of buyers, it’s a case of short supply.

The countries in the Southern Hemisphere where COVID 19 is not so devastating as in Europe are more concerned about their local issues such as food security, electrification, water, sanitation, transport, health, and education, etc. They have been blocked due to this shutdown. These were the countries that had protested against the lockdown during the Ebola outbreak in 2013-16 that killed over 10,000 people. In those days, the WHO was pressurized not to declared Ebola an international health emergency to save the economies. 

Now, they will be forced towards inward-looking energy policies. This will also create a market for alternative indigenous energy sources. Solar energy, waste to energy, agriculture waste to energy, sea wave energy and wind energy, etc. use indigenous inputs. Several developing countries in Africa, Latin America, and Asia are facing the problems of municipal waste and agriculture waste. There will always be scope for innovative technologies providing clean fuel and electricity from these sources as a replacement to fossil fuel. Interestingly, renewable energy companies are coming up with technologies that are beneficial for farmers and affordable to electricity consumers. These forces are likely to prevail over the recession caused by COVID 19.   

Energy Consumption Pattern

As the entire transport sector is collapsed, the energy consumption pattern is changing. The electricity demands have dropped in the most vibrant cities as offices, commercial places and industries are closed. However, the market for ‘storage batteries’ is increasing as people are working from home and governments are struggling to maintain essential supplies through robots and drones. This indicates a hope towards the market of energy storage products.

There also seem better prospects for artificial intelligence-based technological innovations that will increase energy demand in that sector. Furthermore, an increasing market for health products will also need energy. However, a comprehensive study will be required to estimate the exact consumption pattern of energy. According to Energy Storage, the production had begun at commercial storage system provider Tesvolt’s new factory in Wittemberg, Germany. These are some good indications. 

The Bottom Line

Nobody can deny that the COVID 19 pandemic will cast a long-lasting psychological and political shadows on individuals, organizations, and economies. The policymakers and implementing agencies from the nation-states to the United Nations will be affected by this.

However, no pandemic can make the policymakers ignore the imminent threat of climate change caused by global warming. The extreme weather conditions have caused several devastations on the planet. Their impacts on narratives will not evaporate overnight. Though challenges will come, the energy transition is going to stay and overcome them. Besides, the energy transition has also created jobs, made the economies better, and promoted innovations. We hope the policymakers throughout the world will think about long term gains and take the challenges of COVID 19 as an opportunity for the post-pandemic world to avoid natural disasters in the future.  

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Centre of Excellence on Emerging Development Perspectives (COE-EDP) is an initiative of VisionRI and aims to keep track of the transition trajectory of the global development sector and works towards conceptualization, development, and mainstreaming of innovative developmental approaches, frameworks, and practices.