Did COVID-19 accelerate timeline for peak oil demand?

Did COVID-19 accelerate timeline for peak oil demand?

/ Oil & Gas / Sunday, 05 July 2020 06:08

Still in the midst of the COVID-19 pandemic, the oil industry is beginning to ponder the long-term consequences of a sudden halt in global economic activity and whether it might bring forward oil's long-term decline.

Oil execs and experts are starting to ask if the industry has crossed the Rubicon of peak demand.

The plunge in the price of crude oil during the first wave of coronavirus lockdowns was due to the drop in global demand as planes were parked on tarmacs and cars in garages.

Prior to the pandemic, S&P Global Platts Analytics predicted oil demand, which had reached 100 million barrels per day in 2019, would grow annually by 1.5 million barrels per day through 2025 before slowing to 1.0 million bbl/d through 2030, eventually peaking by 2040.

That peak could shift 15 years earlier "if behaviors shift dramatically and permanently across all sectors in response to COVID-19," Platts analysts wrote May 5. But that scenario is "highly unlikely, particularly as some of these behavioral changes will have to overcome weaker fuel prices."

In addition, many of the vehicles on the road today will still be carrying goods and ferrying passengers for the next decade and a half.

In contrast, Mark Mozur, an analyst at S&P Global Platts Analytics said that in light of the pandemic, it is worth reevaluating past assumptions about the relationship between income and consumer spending habits. The pandemic has hit the air travel market particularly hard, and the industry says it could take years for the sector to recover.

"If your income goes up in a post-pandemic world, would you still pay to go on that vacation to the Caribbean?" Mozur said. "Then, if economic growth slows down as people pull supply chains out of China, if consumers are more cautious in general, or if there is another pandemic," it would compound that effect, he added.

The International Energy Agency (IEA) forecast that average daily oil demand will drop by eight million barrels per day this year, a decline of around eight percent from last year.

While the agency expects an unprecedented rebound of 5.7 million barrels per day next year, it still forecasts overall demand will be lower than in 2019 owing to ongoing uncertainty in the airline sector.

Some are questioning whether demand will ever get back to 2019 levels.

"I don't think we know how this is going to play out. I certainly don't know," BP's new chief executive Bernard Looney said in May.

The COVID-19 pandemic was in full swing then with most planes grounded and workers giving up the commute to work from home.

"Could it be peak oil? Possibly. I would not write that off," Looney told the Financial Times.

The concept of peak oil has long generated speculation.

Mostly, it has been focused on peak production, with experts forecasting that prices would reach astronomical levels as recoverable oil in the ground runs out.

But in recent months, the concept of peak demand has come into vogue, with the coronavirus landing an uppercut into fuel demand for the transportation sector followed by a knock-out punch from the transition to cleaner fuels.

Michael Bradshaw, professor at Warwick Business School, said environmental groups are already lobbying to prevent the Paris agreements becoming another casualty of the pandemic, stressing the need for a Green New Deal for the recovery.

"If they are successful, demand for oil might never return to the peak we saw prior to COVID-19," he said in comments to journalists.

The transport sector may never fully recover, Bradshaw posited.

"After the pandemic, we might have a different attitude to international air travel or physically going into work," he said.

Other experts say we haven't reached the tipping point yet, and might not for a while.

"Many people have said, including some CEOs of some major companies, with the lifestyle changes now to teleworking and others we may well see oil demand has peaked, and oil demand will go down," IEA executive director Fatih Birol said recently.

"I don't agree with that. Teleconferencing alone will not help us to reach our energy and climate goals, they can only make a small dent," Birol added.

Moez Ajmi at consulting and auditing firm E&Y dismissed as "science fiction" the idea that a definitive drop in oil demand could suddenly emerge.

He expects a slow recovery in demand even if the coronavirus leaves the global economy weakened.

That weakness would also likely slow adoption of greener fuels.

"It will take time for fossil fuels, which today still account for some 80 percent of primary global consumption to face real competition" from rival energy sources, he said.

Meanwhile, the oil industry could face financing challenges.

Bronwen Tucker, an analyst at Oil Change International, says the industry is now under pressure from investors.

After "a pretty big wave of restrictions on coal and some restrictions on oil and gas, the risks to oil and gas investment right now feel a lot more salient," she said.

The industry is already writing down the value of assets to face up to the new market reality of lower demand and prices.

Royal Dutch Shell said this past week that it will take a $22 billion charge as it re-evaluates the value of its business in light of the coronavirus.

Last month, rival BP reduced the worth of its assets by $17.5 billion.

"This process has further to run, and we expect further large impairments to occur across the sector," said Angus Rodger of specialist energy consultancy Wood Mackenzie.

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