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What does the geometry of a recovery mean for the energy industry?

Energy use depends on economic activity, but the type of energy used varies greatly

18 January 2022
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What does the geometry of a recovery mean for the energy industry?
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Early in the coronavirus crisis, economists, investment banks, and other specialists debated a strange abstract phenomenon: the form of economic recovery. Various hypotheses propose a U, V, W, or L form, as well as more exotic shapes such as a square root or the Nike swoosh. What does recovery geometry signify for the energy industry?

The ideas concerning the form of recovery may be traced back to previous recessions. Global economic activity has taken its steepest and quickest drop in history. Will the economy swiftly recover to pre-viral levels after the virus is substantially confined, or when a treatment or vaccine is discovered — a V-shaped recovery? Will it languish for a long time before resurrecting (a U)? Will there be a double-dip W-shaped recession, either because the epidemic resurfaces when lockdown measures are relaxed and must be re-imposed, or because debt and dislocation produce a future financial crisis? When pandemic waves reoccur for years to come, will it be a sequence of Ws? Perhaps no rebound, in the form of an L – a sharp decline followed by protracted stagnation? Or, maybe, a square root indication — a rapid drop followed by some rebound before flatlining?

For the time being, most forecasts appear to favor the V-shape, followed by a few more dismal possibilities. This reflects a natural human propensity to regard a return to perceived normalcy as the worst-case scenario. Assets and infrastructure are still intact, the crisis has been relatively brief, and governments have spent trillions of dollars into keeping firms solvent, sustaining employment, and sparing ordinary people from financial devastation.

Former US Federal Reserve Chairman Ben Bernanke has stated that banks are stronger today than they were during the global financial crisis and that the current slump would be considerably shorter than the one experienced in the 1930s. The stock market appears to agree: the S& P500 has returned to its May 2019 levels. The worst economic catastrophe since the Great Depression is estimated to have cost us only a year.

However, as my colleague at Columbia University’s global energy center and former ADIA Global Head of Research Christof Rühl points out, the fact that everyone’s forecasts continue to deteriorate is concerning. Recovery will not take the same form or occur at the same time in all countries: while Spain and Italy appear to be on the mend, Russia and Brazil’s epidemics are accelerating. What would the sum of a Chinese V, an American W, and a Russian L look like?

China, which was the first to be infected, has mostly suppressed the virus via a concerted national effort, though it has flared again in some regions. However, while business is improving, it is also facing the impact on its primary export markets: North America took 20% of its goods last year, Europe 20%, and oil exporters, which have been hard hurt by the price fall, another 10%.

The shape of the energy industry’s recovery is threefold unknown. Energy consumption is influenced by economic activity, although the sort of energy consumed varies widely. Oil demand in aviation and commuting has been the most affected. Petrol consumption is increasing again as lockdowns are lifted in China, the United States, the United Kingdom, and the Gulf, according to Chevron CEO Mike Wirth, who stated, “It appears the market has reached a bottom.” However, the sector is now facing a possible trade slowdown, which will affect diesel for vehicles and fuel oil for ships.

Natural gas prices were already low last year, but the virus has had less of an impact because people still need to heat their houses and power their laptop computers. Because of the low cost of gas, polluting coal has been able to continue to be squeezed out.

Renewable energy has fared the best of all, thanks to its near-zero operational costs and, in many cases, priority access to the grid. Some projects have been pushed back due to practical concerns, but post-viral stimulus funding is expected to be mainly focused on green energy.

Second, views about recovery have an impact on the oil market. To prevent flooding the market, the Opec+ group is reducing over 10 million barrels per day, while US and Canadian producers have also cut back considerably since their output has become unprofitable. However, with West Texas oil prices recovering to around $30 per barrel, several businesses have already begun to restart their wells. Higher prices will make it more difficult for Opec+ to agree to prolong current cutbacks until the end of the year and will tempt certain members to “cheat” on their objectives.

Such behavior, along with a significant inventory overhang, may keep oil prices low for a lengthy period of time. Despite the poor market environment, lower-cost producers may gain in the long run if their competitors are forced out of business. The road to recovery for oil-producing enterprises, and even countries, is not always the same as that of the industry.

Third, habits and work routines are likely to be permanently altered. Even when the coronavirus is well suppressed, around 86% of those polled stated they would postpone plane travel. Companies and workers are expected to warm to working from home, at least part-time, and to forego costly and time-consuming in-person conferences.

I’ve attended more online conferences and webinars in the last month than on-site events in a year, and they’re less expensive and more comfortable – even if they lack personal connection and serendipity. Commuters will prefer private automobiles to public transportation for a while, boosting fuel use, but this will fade as cost and congestion force people back to buses and metros.

Simple diagrams depicting the journey to recovery might be helpful if not taken too literally. Flexibility, adaptability, and an eye for possibilities are more beneficial in this chaotic world than a strict long-term strategy. For many, the letters U, V, W, and L signify peril, but for others, they spell prosperity.

 

CEOforLIFE – We promote life. We support the SDGs
Source: Robin M. Mills - CEO of Qamar Energy, and author of The Myth of the Oil Crisis
Tags: homeSDGs13SDGs7SDGs8SDGs9
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