Don’t expect oil industry to fully recover from coronavirus
Oil prices rose faster over the past six weeks than at any time in history, and an OPEC-Russia alliance has promised to keep nearly 10 million barrels a day of oil off the global markets to keep prices up.
Whoopee, the price for a barrel of West Texas Intermediate is nearly $40! Too bad most U.S. companies need $50 to make a profit.
Oil and gas industry cheerleaders are ecstatic that the world’s largest producers are driving up prices. They are thrilled that people around the world are beginning to drive again, even if they remain reluctant to board aircraft.
The oil business, though, will not return to normal anytime soon. It may never.
The world still has 1 billion barrels in storage, according to S&P Global Platts, which tracks the data. We have more than 12 million barrels a day of excess capacity, and people around the world are doing their best to
break their reliance on fossil fuels.
The data firm Fitch Group projects the global oil industry will lose $1.8 trillion in revenue this year.
The COVID-19 pandemic will accelerate the fight against climate change. As governments around the world consider ways to stimulate their economies, policymakers are concentrating on clean energy.
If President Donald Trump loses in November, Americans can count on a Democratic White House slashing support for fossil fuel companies, placing a price on carbon, and providing incentives for the development of renewable energy sources.
A new study shows the U.S. could meet 90 percent of electricity demand with clean energy by 2035 at no additional cost if politicians adopt the right policies, according to researchers at the University of California at Berkeley.
Analysts at the consulting firm Wood Mackenzie have theorized a “Greener Growth” scenario that forecasts little or no growth in the oil and gas industry.
“After the post-pandemic rebound, world oil demand is essentially flat in the 2020s before starting a steep decline in the 2030s,” their model shows. “Demand for gas grows as it drives out coal for power generation and domestic use. The combined share of oil, gas and coal in total primary energy drops to 68 percent in 2040, down from 84 percent in 2019.”
Even if you doubt governments will do what’s necessary to slow global warming, other trends bode equally ill for oil and gas.
The new coronavirus demonstrated that extended supply chains that rely on sometimes-hostile nations are vulnerable. We need to make stuff closer to home.
If we have achieved what some call peak globalization, then people and goods will not travel as far or as much. Since oil is primarily used for transportation, any reduction in global trade is bad news.
Large corporations are also anxious to appease customers by relying solely on clean energy. Amazon, UPS and other shipping companies are all buying electric vehicles and green power to reduce carbon footprints.
Lastly, investors are increasingly reluctant to put money into oil and gas. When Energy Secretary Dan Brouillette draws parallels between big banks’ refusing to participate in Arctic drilling projects and red-lining discrimination against African Americans, you know the industry is entering panic mode.
The most revealing indicators that oil and gas will never be the same are the layoffs and bankruptcies. Energy executives never can say it out loud for fear of hurting stock prices, but they are downsizing for a lower-forlonger environment. They know peak oil demand is close at hand.
BP is shedding 10,000 workers, mostly in administrative roles. Chevron is eliminating 6,700 jobs. Nationally, 90,000 oil and gas workers have lost their jobs, while in Texas alone, the industry shed 26,300 jobs in April. Those cuts were on top of layoffs in 2015 and 2016.
Fourteen oil and gas companies declared bankruptcy in April and May, compared with five over the same period last year, the law firm Haynes and Boone reported. The corporate bond default rate is up to 12.5 percent, mostly because of oil companies unable to pay their debts, S&P Global Platts reports.
Forecasters do not see any relief on the horizon. The production cuts by OPEC and Russia are only intended to keep prices from dropping below $30. Russian officials are committed to keeping prices low so American shale oil drillers will not steal their market share ever again.
Chris Midgley, global head of analytics at S&P Global Platts, sees prices dropping back to $35 in August and remaining there for the rest of the year as OPEC and Russia adjust their supplies to meet demand.
We all want the Coronavirus Recession to end, but we must remain realistic. The world’s energy markets have fundamentally changed, and Texas must keep up with the times by developing industries beyond oil and gas.