Oil demand fell due to an outbreak of the Coronavirus faster than expected, but the energy economy could shift sooner rather than later.

In an article published by the American Foreign Policy Magazine, the author, Eduardo Campanella, said that the oil industry is recovering slowly after it suffered the most dramatic setback in its history. Last March and April saw low demand, as well as excessive supplies, limited storage capacity, and intense financial speculation that made the price index negative.

Although fears about the second wave of coronavirus infection remain high, demand is currently back on the rise, and supplies are under control.

But this does not mean that the industry has become out of danger, in other words, the greatest source of uncertainty for oil producers is structural and not cyclical, as there is a growing sense that the peak of oil is coming.

Since the 1950s, there has been a lot of speculation about the imminent shortage of crude oil, and these predictions have proven to be constantly wrong, as all expectations tend to underestimate the true size of global oil reserves and the ability of technology to overcome material constraints.

Wrong expectations

Over the past 60 years, oil demand has risen almost unabated in both developed and developing economies, and at present, global oil demand has nearly quadrupled compared to 1960.

However, before the outbreak of the Coronavirus, many structural factors were expected to affect oil consumption, ranging from energy efficiency gains in emerging economies to mass marketing of electric vehicles, to socio-political pressures to reduce carbon emissions and globalization.

Despite the consensus that there are such trends, there was a high degree of uncertainty about the timing and how to increase oil demand. Small changes in assumptions about the many factors that determine oil demand in the long run, such as population growth, economic activity, mobility, or energy efficiency, can generate completely different paths.

Given the diversity of demand scenarios, in the long run, energy companies usually ignore the controversy over peak demand, however, the Covid-19 virus may change this situation if it successfully transforms individual behavior and community priorities.

Influential Factors

The writer pointed out that mobility is the most important factor that will tip all estimates, and although tourism activity is likely to recover and return to pre-crisis levels within two years, remote work arrangements may relieve millions of workers from the trouble of traveling hundreds of kilometers To go to work.

Furthermore, Covid-19 may lead to a significant decrease in business trips after being replaced by video platforms that will not only reduce operating costs but can also bring productivity gains thanks to the time spent in the office more than the airport.

Some industrial activities may be restored to reduce exposure to shocks that affect business partners located elsewhere in the world, especially in the production of goods in sensitive sectors such as health or national security.

The lack of facial masks, which were produced mainly in China during the first days of the epidemic, forced governments not only to find new suppliers but also to encourage the transformation of some local companies into producers of masks alike.

New digital technologies that tend to reduce dependence on low-skilled workers will reduce incentives for companies to split their production around the world.

Finally, the positive effect of closures on air quality may stimulate behavior that is more beneficial to the environment in the future. Last April, when about four billion people were stranded in their homes, air pollution suddenly decreased around the world, which calls on policymakers to take a clear direction to reduce carbon dioxide emissions and take this issue very seriously.

In this regard, governments may offer tax incentives to urge companies to rely more on flexible arrangements for those jobs that can be done efficiently remotely, and all of these behavioral changes will have a major impact on oil demand. In the United States, about 80% of oil demand Crude is fuel-related, i.e. petroleum, diesel, or jet fuel.

Peak demand for oil

It will be sufficient to see the oil demand permanently decrease by 5 million barrels per day due to changing transportation habits, which impose a fundamental adjustment to the supply. Let us not forget that Russia and Saudi Arabia fought a price war again last March because of OPEC Plus' unwillingness to agree to cuts of only about two million barrels per day, whose impact was not only a collapse in oil prices but in financial markets in general.

No one knows whether peak demand is close, and in the short term at least the health crisis may increase oil consumption if people refrain from relying on public transportation to avoid possible infection.

However, energy companies are taking the scenario of maximum demand seriously, and according to the International Energy Agency, this uncertainty, coupled with the economic losses caused by the current recession, will lead to a 30% contraction in global energy-related investment in 2020.

The writer mentioned that the average age of American shale gas wells is about 18 months, and with drilling activity in new fields reduced in part, prices may head in an upward trend by 2022, if production in North America decreases as a result of a lack of investment, In the long run, however, the trends may be reversed.

In the extreme case of a rapid decline in oil demand, such as that envisioned by the IEA sustainable development scenario, prices are likely to drop, creating a very competitive environment in which only the most cost-effective producers and US shale gas companies remain You will not necessarily be among them. Massive changes in the energy economy will not happen overnight, but the Covid-19 virus may speed up the process.

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