Planes are grounded, cars remain parked in garages, and people are confined to their homes. With global lockdowns entering month five, the demand for crude oil (transportation fuel) is lower than ever. Oil and gas companies must now cope with falling oil prices, and a sharp drop in revenues.
What does this mean for the environment, and future of big oil?
Black-Gold, No More
For the last 45 years, the price of oil has fluctuated from price wars, recessions and the growth of American shale production. Growing environmental consciousness has been a great fear of oil producers for years. But no one expected anything like covid, which swiftly cut-off demand for oil and left the industry in hot water. As 2020 began, Brent crude oil – the global oil benchmark – cost $64/barrel. By April 21st, 2020 the price had dropped to $17/barrel. How did this happen?
Since January the price of oil had been declining due to gradual COVID-19 shutdowns throughout Asia. But the sudden global shutdown in early March sharply stopped all transportation and cut off crude oil demand while producers continued drilling and fracking at the same rate until early April. With no buyers, oil reserves started reaching capacity and the price of oil plummeted as supply exceeded demand. A face-off between two of the biggest oil producers – Saudi Arabia and Russia – began. The duel delayed supply cuts and decreased prices.
On April 20th, May oil futures briefly dropped below zero. That means oil suppliers would pay consumers to take abundant oil off their hands. A commodities analyst at S&P Global Platts determined the negative price was a short-term anomaly. Still, the price drop exposed the pandemic’s effect on crude oil.
Finally, in April 2020, the Organization of Petroleum Exporting Countries (OPEC) and its allies agreed to cut production by 9.7m barrels a day – approximately a 10% reduction – but still less than the drop in demand for May and June. In June, they extended production cuts for another month. The price of Brent crude eventually recovered to $41 on July 1st but remains well below pre-pandemic prices. Big Oil’s problems continue though.
Falling oil prices
Oil producers’ revenues and the value of their holdings have decreased because of low oil prices. To cut spending, many are delaying new projects. For example, British Petroleum (BP) expects to write down $17.5 billion – the reduction in the value of their assets – because they lowered projections of long-term oil prices. They also wrote off investments in Canada and the Gulf of Mexico. Internationally, countries like Saudi Arabia that depend on nationalized oil production, may diversify their economies and draw money away from the expansion of oil.
American shale producers are particularly hurt because shale oil extraction has a higher operating cost than other techniques. Even before the pandemic, shale producers were struggling as The Economist reports that in 2019, shale bankruptcies increased by 50%. With low oil prices, many fields that halted production may close permanently. Recently, shale oil pioneer Chesapeake Energy declared bankruptcy.
However, bankruptcies could pave the way for Big Oil to expand their holdings. Although oil giants like ExxonMobil and Chevron cut spending this year, they will eagerly open their corporate purse. Big players will purchase shale patches at throwaway prices to become even bigger.
The pandemic may also decrease investment in American shale, which would decrease shale oil production down the road. Although the shale boom of the 2010s turned the U.S. into the world’s leading oil producer, returns for investors were not great. In four of the last six years, energy was the worst performing sector in the S&P 500 index. A crash in oil prices from 2014 to 2016 made oil an unappealing, risky investment with low returns. As a result, in 2019, upstream spending on oil and gas was 43% below 2014 levels. The volatility of shale oil during the pandemic underscores how it’s a low-return, unappealing investment.
What does this mean for the environment?
Climate change poses a great threat to the oil and gas industry. As The Economist wrote in January 18th, 2020, ”Big Oil has a do-or-die decade ahead because of climate change.” With the potential for comprehensive climate policies targeting the energy industry in the next decade, Big Oil either must adapt to and transition to renewables or face its end.
Big Oil will survive the pandemic, but oil and gas sector growth could stagnate or decline. And renewable energy poises itself to fill the void. With low oil prices and no sign of a significant increase in the future, new renewable energy projects have similar profit margins for investors and don’t destroy the planet.
The volatility of oil has also exposed the economic danger of putting all your eggs in the fossil fuels basket. Economies dependent on oil and gas as the main industry have been vulnerable during the pandemic. Investing in renewables may be the best way to diversify and strengthen their economy.
Economically, renewable energy is more secure for investors and consumers. While OPEC, a cartel that limits supply and controls prices, controls the oil market, renewable energy sources like wind and sunlight are accessible to all. Therefore, renewables are less susceptible to monopolization and price manipulation. Renewable energy contracts also often span a decade and fix prices so price fluctuations don’t hurt consumers.
Lower gasoline prices could set back progress on the transition to electric transportation. But renewable energy and battery costs are the lowest they have ever been, so consumers may not be lured by oil this time.
In fact, governments could reduce fossil fuel subsidies without hurting consumers too much. Those funds could then support renewable energy, which creates domestic jobs to lift economies out of the current recession.
The future of falling oil prices
It’s hard to predict exactly what will happen next. Currently, the number of active oil rigs and fracking sites is lower than before the shutdowns. If the pandemic fundamentally alters human society and reduces travel for years to come, oil consumption may never recover. Although Big Oil will survive this blow, it may not for much longer.
For decades, the oil and gas industry has feared its end at the hand of climate change awareness. If governments strike now with policies to revive the global economy, it could mean the end of the oil and gas industry’s dominance in energy. One thing’s for sure, renewable energy has a strong outlook. Clean tech can now give oil & gas a run for its money, not only in its greenness, but also in its economics.