What Is the Oil Industry’s “New Normal”?

By Johnny Wood
COVID-19 is redefining global oil’s future

“The stone age did not end because the world ran out of stones, and the oil age will not end because we run out of oil.”

While uncertainty surrounds the origins of this wisdom – it has been attributed to several people, including Ahmed Zaki Yamani, Saudi Arabia’s ex-Minister for Oil – its message points to an uncertain future for oil. Like most other sectors, the global oil industry has not escaped unharmed from the impact of the COVID-19 pandemic. And when combined with longer-term trends, some of the wounds inflicted could be terminal.

Lockdown restrictions across the globe bought an unwanted “first” for the U.S., as oil prices dipped into negative territory, albeit briefly. And while the market has since recovered, this was more than the usual rise and fall of the oil price cycle.

At the same time, the pandemic has exposed the vulnerability of countries whose economies are heavily dependent on oil exports. With post-lockdown barrel prices hovering around $40, OPEC oil revenues are half what they were a year ago; too low for some exporting countries to support weakened economies. A number of OPEC member states have recently turned to the International Monetary Fund for emergency financial support.

Peaking Earlier Than Expected

Of course, the energy sector has been in metamorphosis for some time, but the COVID-19 outbreak has fast-tracked long-term trends like decarbonization and digitalization, fundamentally reshaping the future.

The pandemic will accelerate many of the technologies and behaviors that were going to come anyway,” Amy Myers Jaffe, managing director of the climate policy lab at Tufts University’s Fletcher School of Law and Diplomacy, told World Oil.

“The idea that we’re going to have some up-cycle that lasts for a decade, and produces oil prices between $80 and $100, and all these countries can collect up the rent again – that seems less likely,” she said.

Post-lockdown OPEC oil revenues are half what they were a year ago
Early Warning

Oil giant BP has warned that the coronavirus crisis has led to an earlier-than-expected decline in oil dependency. Oil demand is anticipated to peak in the early 2020s then plateau, or it may never fully recover, according to two scenarios outlined in the company’s annual energy outlook. This marks a complete U-turn from the previous report’s base case that forecast oil consumption to grow steadily in the coming years and peak in 2030.

“No one knows the precise path – but the energy mix is changing – oil and gas are going to be increasingly challenged – and other forms of energy are going to see incredible growth,” said Bernard Looney, Chief Executive Officer of BP, speaking at BP Week 2020. “Rewiring and replumbing the global energy system for a net-zero future is going to require trillions of dollars of investment.”

While hydrocarbons will continue to play a role in the future energy mix, their center-stage status is under threat. As remote working cuts transport demand and countries around the world ramp up electrification efforts, oil’s relevance in the global energy mix is gradually diminishing, causing industry reference points to shift.

For many years, BP has expressed energy consumption in “million tonnes (metric tons) of oil equivalent”, for example. As a comparator, this works for oil, and to a lesser extent for natural gas and coal but has little relevance to renewables. But recently things have changed. The company now expresses consumption using “exajoules”, which more accurately reflects the changing energy mix. One exajoule is equivalent to 24 million metric tons of oil equivalent.

The new measure moves away from comparing energy in terms of what is extracted from the ground in favor of measuring what is consumed, altering the way we think about energy.

Backing a Winner

Growing awareness of sustainability issues is also reflected in the willingness, or not, of investors to back fossil fuel projects. A Goldman Sachs report predicts that for the first time, spending on renewable projects will outstrip oil and gas exploration in 2021, driven by a gap in the cost of capital – with finance rates of up to 20% for oil and gas projects, compared to between 3 - 5% for renewables.

Spending on renewable projects looks set to outstrip oil and gas exploration in 2021

With investment in renewable energy projects on an upward trajectory, some may question whether a U.S. and global energy security framework built around oil security is still fit for purpose.

While new energy sources can help reduce oil supply vulnerabilities, they can also introduce new risks, which must be mitigated.

“We've got a security system that has been built up for 50 years on oil,” says Mark Finley, Fellow in Energy and Global Oil at the Baker Institute Center for Energy Studies. “The oil framework provides a good roadmap, but we need to gather similar data on other energy sources, too. If you want to manage something the first thing you have to do is measure it.”

Governments publish vast quantities of data on oil production, demand and oil prices. There is nowhere near the same level of data available for natural gas or renewables – two key energy sources in the energy transition. A successful energy transition rests on learning the best lessons from oil-dependent economies and investing in truly understanding the fuels of the future.

“If we start paying attention to the new security vulnerabilities and risks that could be introduced into the economic system through the transition, and how we can undertake smart policies to mitigate them, we can actually speed up the switch to sustainable energy,” says Finley.

This switch is one that both oil majors and investors alike increasingly believe will happen before the world runs out of oil.

Johnny Wood has been a journalist for over 15 years working in different parts of the world – Asia, Europe, and the Middle East. As well as an accomplished features writer he has edited several prestigious lifestyle magazines and corporate publications.