The oil industry has been hit hard by a number of things this year that have led to a decrease in demand. The biggest one, of course, is the coronavirus pandemic. People aren’t driving as much these days as they stay close to home. The airline and cruise ship industries have been crushed by the virus, leaving airplanes and ships sitting idle waiting for business to return. Industrial activity has been greatly reduced as well, and don’t forget to factor in the switchover to electric vehicles and renewable energy, too.
Oil-carrying ships parked in the Pacific Ocean due to low demand and oversupply earlier this year. Image courtesy U.S. Coast Guard, from video by Petty Officer Third Class Aidan Cooney (public domain). The appearance of U.S. Department of Defense (DoD) visual information does not imply or constitute DoD endorsement.
Then there is the turmoil within the industry caused by plummeting prices amid wrangling between the members of OPEC about how much oil they each should produce. The upshot of all those factors has some people in oil producing nations wondering whether we are seeing “permanent demand reduction,” according to a report by Reuters.
Reuters interviewed 7 current or former OPEC officials, most of whom asked to remain anonymous. “People are waking up to a new reality and trying to work their heads around it all,” one said, before adding “the possibility exists in the minds of all the key players” that consumption might never fully recover.
One official, who works in energy studies in the oil ministry of a major OPEC member, said shocks to oil demand had in the past led to permanent changes in consumer behavior. He thinks this time is unlikely to be different. “The demand does not return to pre-crisis levels or it takes time for this to happen. The main concern is that oil demand will peak in the next few years due to rapid technological advances, especially in car batteries.”
In 2019, world oil consumption averaged just under 100 million barrels per day. But so far this year, with so many economic sectors affected by the virus, that number has fallen to about 91 million barrels per day. OPEC does not foresee demand rising to 2019 numbers again until 2021 at the earliest.
Producing nations, energy analysts, and oil companies have long tried to work out when the world would reach “peak oil,” the point after which consumption starts permanently falling. OPEC has been scaling back expectations for years. In 2007, it forecast world demand would hit 118 million bpd in 2030. By last year, that forecast had dropped to 108.3 million bpd. Its next report, coming in November, is expected to show another downward revision, an OPEC source says. Consulting group DNV GL believes demand may have actually peaked in 2019.
“Once aviation recovers by the end of 2023, demand will go back to normal — aside from the competition from other sources of energy,” said another OPEC official involved in forecasting. The International Air Transport Association has similar expectations. It says it does not expect air travel to reach 2019 levels until 2023, if then. To some, even those expectations may be too optimistic and may be little more than whistling past the graveyard, hoping against hope that things will return to normal — eventually.
OPEC has weathered many challenges in the past, but now it may have to learn how to live with long term decline. “This trend will put a stress on the cooperation between OPEC members, as well as between OPEC and Russia, as each strives to maintain its market share,” Chakib Khelil, Algeria’s oil minister for a decade and twice OPEC’s president, tells Reuters.
Many nations depend almost entirely on oil revenues to balance their budgets, particularly Russia and Venezuela. “Many challenges are ahead, and we have to adapt,” said one OPEC delegate, who said the group’s handling of past crises proved it was able to respond.
Hasan Qabazard believes OPEC might have a little more time to adjust before demand peaks, but the deadline for the group to adapt is fast approaching. “I don’t think it will go higher than 110 million barrels per day by the 2040s,” he says, noting that the COVID-19 virus may have changed consumer habits for good.
We can only hope. As CleanTechnica noted recently, getting back to normal is the last thing the world needs, if normal means extracting every drop of fossil fuel and burning it to add to the atmospheric pollution that is already choking the environment — and many humans as well. Don’t weep for the oil producing nations. They, more than anyone, have conspired to create the existential crisis posed by a warming planet.
Sickness, shorter lifespans, unequal impact on the poor and communities of color — the focus going forward must be on climate justice, social justice, and racial justice. Anything else is just a self-serving excuse for the wealthy to help themselves to an even bigger slice of the pie than they already have. It’s not fair to blame oil and other fossil fuels for all the world’s ills, but it’s a good place to begin analyzing where we are, how we got here, and what a sustainable path forward looks without carbon emissions.
Saudi Arabia abruptly altered its oil production strategy in early March and began to flood the market with cheap oil. Financial markets worldwide haemorrhaged value at the prospect of a protracted and painful price war, and American oil firms immediately cut back spending and dividend payments as the price for their primary product halved. As of this morning, WTI Crude (a pricing benchmark tied to U.S. supply) was barely north of $20/bbl, prices not seen since 2002.
This sudden tumult represents an opportunity for the renewable energy sector. At first glance, this may sound counterintuitive. After all, oil prices seem largely unrelated to the prospects of wind, solar, and other renewables in the electricity generation sector, because in the United States the primary fossil source of electricity is natural gas. Natural gas prices have been largely uncorrelated with the price of oil since 2007, when large-scale domestic shale-gas production began to come online (see chart). In other parts of the world, coal drives electricity generation, which is similarly decoupled. Virtually nobody uses oil as a primary electricity source, except in certain very specific locations, such as Hawaii, where the demands of unique geography and supply logistics align to make oil the best bet for power production.
Data from U.S. Energy Information Administration (EIA.gov) BRENTAN ALEXANDER
Oil’s link to renewables instead comes through competition in the financing marketplace. As new projects are developed and financing is sought, the infrastructure funds that provide capital to enable these developments naturally prefer projects that promise the most attractive financial returns. With relatively high prices over the last decade and unmatched value as a transportation fuel, oil exploration has beaten out renewable project development on the financial metrics time after time.Today In: Energy
The oil shocks over the last weeks could dramatically alter that calculus. Revenues for potential oil projects have suddenly dropped by over 50%, and futures contracts currently show only a modest improvement in prices by year’s end. The market is already pricing in the expectation that oil prices remain below $40/bbl for the foreseeable future, a dramatic change from the $55+/bbl that has been the norm for the last few years.
Even if prices do recover, the sudden volatility will still weigh on the minds of project investors. Oil markets haven’t resembled a purely competitive market since the mid-1960s, and since that time prices have been regularly impacted by sudden and unforeseen changes in supply by OPEC producers, primarily Saudi Arabia. The rise in shale-oil in the U.S. in the last decade has effectively put a cap on prices and provided a counterweight to OPEC’s pricing power. But the muscle being flexed now shows that the OPEC nations and Russia still maintain substantial influence over the fate of American oil producers. This ‘stroke of the pen’ risk, now that it has again bared its head, maybe unlikely to be forgotten in the near future.
Renewables, by contrast, have no supply risk whatsoever, and are primarily exposed to fluctuations in the price of electricity. Insomuch as this relates to the price of natural gas, investors in the U.S. will take comfort knowing gas is essentially a local market, with U.S. prices driven by supply and demand within North America; there is little ability to arbitrage against global markets due to limited export capacity. Therefore, as oil prices come down, project financiers should start to turn more of their attention to the new safe bets that offer more durable returns: wind, solar, and the like.
This isn’t to say that renewables don’t face headwinds in the current environment. Cheap oil also competes with renewables in the transportation sector. Electric Vehicles will be less competitive with their gasoline-powered cousins as the price for gasoline at the pump drops, lowering demand for new grid capacity and forcing renewables to wait for retirements of current assets. The price for natural gas in the U.S. is dropping as well, driven primarily by the sudden decrease in demand due to the shuttering of entire industries. These drops make fossil power from natural gas more competitive with their renewable counterparts.
Futures markets, however, are currently pricing in a full rebound of natural gas prices by year’s end, with the futures contract for Henry Hub for December 2020 currently priced above market levels at the end of 2019. This suggests that the drop in prices of natural gas will be temporary, and investors making long-term bets do not view the current situation as durable. Further, natural gas prices are just one component of the price paid by utilities to power producers, and so a drop in natural gas prices doesn’t necessarily imply a similar fall in the rates negotiated in new power purchase agreements. So the drop in natural gas prices evident in the market now looks to be temporary, and unlikely to dramatically alter the widespread conclusion that renewables are now the cheapest power source to build.
Altogether, the oil market has changed dramatically in the last three weeks, in ways unforeseen just a few short months ago. But despite the headlines and worrying drops across financial markets, opportunity lies in these disruptions. Renewables are well positioned to capitalize.
Brentan Alexander‘s words: I am the Chief Science Officer and Chief Commercial Officer at New Energy Risk, where I lead the detailed diligence of novel technologies and business models across the energy landscape. I have devoted my career to advancing solutions to the climate crisis and use my experience to help technology companies assemble everything they need to reach the market faster. I hold a PhD in Mechanical Engineering from Stanford University, where I studied gasification, thermochemistry, and electrochemistry, and Masters and Bachelors degrees in Mechanical Engineering from the Massachusetts Institute of Technology. When I’m not in the office, you can find me hiking the hills outside Oakland, California, or turning wood in the shop. All of my articles reflect my personal views and not those of my employer nor the volunteer initiatives that I am involved in. You can find out more about me via my website (brentanalexander.com) or follow me on Twitter or LinkedIn.
Following the recent oil price collapse, risks of a political and financial storm for MENA producers can easily be imagined but here is Waheed Abbas, Dubai, March 18, 2020, with his UAE best-positioned in GCC to absorb oil shock.
Nation will be able to finance current account deficit for 35 years even with prices this low
Oil prices have plummeted over the last few weeks, with Brent dropping 45 per cent in the past month. (Reuters file)
The UAE is best-positioned among GCC economies to weather the decline in oil prices as it can finance its current account deficit longer than any of its regional peers, says a new report.
According to Capital Economics, the UAE can finance its current account deficit for 35 years if oil prices stay at $25 a barrel. Kuwait comes second followed by Qatar, Saudi Arabia, Bahrain and Oman.
“In the four largest Gulf economies – Saudi Arabia, the UAE, Kuwait and Qatar – current account deficits could be financed through a drawdown of large foreign exchange savings for a considerable amount of time. Saudi Arabia could do so for around a decade and the other three countries for even longer,” said Jason Tuvey, senior emerging markets economist at
Capital Economics. The report said the UAE still runs a current account surplus at $30 a barrel.
Brent crude was trading down $3.37, or 12 per cent, at $25.35 a barrel by 1720GMT after dropping as low as $25.23, its weakest since 2003. US crude was down $5.19, or 19 per cent, at $21.76. The session low was the lowest since March 2002.
Data showed that UAE-based sovereign wealth funds held over $1.21 trillion worth of assets in August 2019 compared to $825.76 billion by Saudi Arabia, $592 billion by Kuwait, $320 billion by Qatar and $22.14 billion by Kuwait.
Oil prices have plummeted over the last few weeks, firstly due to coronavirus and then the collapse of Opec+ talks on production cuts. Brent has dropped 45 per cent in the past month from $57.60 a barrel on February 17 to $31.60 on March 17.
Tuvey noted that large foreign exchange savings provide substantial buffers and the likes of Bahrain and Oman, which are most vulnerable to a period of low oil prices, and can probably rely on financial support from their neighbours to avert devaluations.
He said dollar pegs in Bahrain and Oman are more vulnerable, with foreign exchange savings only able to cover current account shortfalls for a couple of years at most. Bahrain secured a $10 billion financing package from its neighbours in mid-2018.
In recent days, GCC governments have stepped up fiscal support in order to mitigate the economic hit from efforts to contain the virus. “If oil prices stay low even after the virus fears have subsided, austerity will come on to the agenda and this means that an eventual recovery in non-oil sectors will be slow-going,” he said.
Khatija Haque, head of Mena research at Emirates NBD, has said that the UAE posted a budget surplus of Dh37 billion ($10 billion) in 2019 and is well-positioned to withstand lower oil prices in 2020.
“If we strip out volatile oil revenues, we estimate the UAE’s non-oil budget deficit narrowed to just under 20 per cent of non-oil GDP, down from 27 per cent of non-oil GDP in 2015, and pointing to a tightening of fiscal policy in recent years,” Haque said.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, said the sharp fall in oil prices and the outlook for a price war adds significant downside risks to the economic outlooks of GCC countries.
“We estimate that all GCC countries will realise a significant fiscal deficit at the current oil price of $37 per barrel, with Oman and Saudi Arabia seeing particularly significant shortfalls relative to GDP. A weaker oil revenue backdrop will require a meaningful pull-back in government spending, as was the case in 2015 and 2016, to limit the size of the fiscal deficit,” Malik said.
She sees a forecasted increase in output from Saudi and Russia and the changing dynamics of oil market fundamentals will likely bolster global oil stocks significantly in 2020. A number of oil-importing countries are also likely to accumulate inventories at the current low price levels, which in turn would lower oil demand during second-half of 2020.
Furthermore, the outlook for inventories beyond 2020 will depend on global demand and coronavirus-related developments in the coming months, she added.
Edward Bell, commodity analyst at Emirates NBD Research, has said that dust has not entirely settled yet caused by travel restrictions and lockdowns due to coronavirus.
Oil price pressure: Iranian President Hassan Rouhani Photo: REUTERS/SCANPIX
OPINION: The epic oil price slump, if prolonged, is bound to prove calamitous for the upstream sector of the financially strapped Middle Eastern and North African producers and those with high production costs.
The consequences will go beyond the energy sector for the more populous nations, where autocratic governments have long used oil windfalls to shield themselves from social unrest through generous handouts and subsidies.
World Bank warning
“As the world struggles with the fear of recession, the Middle East and North Africa could be the hardest hit by what is arguably a perfect storm: the coronavirus spreads to the region and oil prices collapse,” the World Bank says.
“If the decline in oil prices persists, it will erode the fragile macroeconomic and social stability of countries, especially in the Middle East and North Africa, that have been hit by the novel coronavirus.”
Only the wealthy Persian Gulf producers with small populations — such as Qatar, Kuwait and the United Arab Emirates — can be expected to weather a prolonged storm thanks to their enviable financial position.
Iran position precarious
The major losers will primarily be Iran as well as Iraq, Libya Algeria, Oman, and Saudi Arabia.
Iran, whose economy is being seriously squeezed by unprecedented US sanctions against its vital oil sector, will find itself struggling to pay for basic imports as the price collapse will further reduce income from the crude sales achieved through circumventing the stifling sanctions.
Iran’s exports have fallen to a fraction of the 2.5 million barrels per day that the Islamic Republic used to export before May 2018, when US President Donald Trump tore up the landmark 2015 nuclear agreement and imposed draconian punitive measures against the country.
The Iranian Central Bank has just put out an international distress call amid rising cases of the coronavirus outbreak by asking the International Monetary Fund (IMF) for $5 billion in emergency funds to cope with containment.
Iran is fast becoming the global epicentre of the endemic, with more than 500 dead and 11,000 afflicted.
Severe economic problems have led to widespread unrest in the past two years, with the clerical leadership employing heavy-handed tactics to quell dissent.
Iraq set to suffer
Neighbouring Iraq is in the grip of growing political unrest with protesters demanding jobs and end to endemic corruption.
Iraq, Opec’s second-biggest producer, has been without a functioning government for months, disrupting planning and delaying major upstream projects.
Rising tensions between the US and Iran — both of which are fighting for influence in Iraq — have added to the security and political woes.
Algeria, often seen as a hostile destination for international oil companies, will find it difficult to attract fresh investment in the face of the price collapse and social unrest.
Algeria’s Prime Minister Abdelaziz Djerad said the North African country is faced with an unprecedented “multi-dimensional crisis”, while also urging the public to make fewer demands of the government and reduce their presence on the streets.
Libya’s civil war, which has crippled the oil industry, is showing no signs of ending.
Oman has so far been spared social unrest but the future remains bleak since the Persian Gulf sultanate has the highest production costs among regional producers because the bulk of its oil production is ultra-heavy heavy, which needs robust commodity prices in order to compete with other blends.
The oil price rout, arising from the collapse earlier this month of Opec+ talks to persuade Russia to agree to new production curbs, is also a real threat to Saudi maverick ruler Crown Prince Mohammed bin Salman, who has pinned his success as the future king on delivering on an ambitious economic diversification scheme funded by oil money.
Oil market rout as Saudi Arabia and Russia launch a price war and the coronavirus pandemic sparks an equities meltdown.
Oil prices were headed for their worst weekly loss in more than a decade Friday after Saudi Arabia and Russia launched a price war and the coronavirus pandemic sparked an equities meltdown.
US benchmark West Texas Intermediate reversed earlier losses in afternoon trade, rising about two percent to around $32 a barrel after the US military launched air strikes in major crude producer Iraq.
But prices are still down more than 20 percent this week and on course for their biggest weekly drop since the global financial crisis of 2008.
Brent crude, the global benchmark, also jumped about two percent to about $34, erasing earlier losses — but is still down 25 percent for the week, Bloomberg News reported.
Crude markets were plunged into turmoil at the start of the week after top exporter Saudi Arabia began a price war amid a row with Russia over whether to cut output to support the virus-battered energy sector.
That triggered the biggest one-day drop on Monday since the start of the Gulf War in the 1990s.
The virus outbreak then added to downward pressure, as growing concerns about a global recession and travel restrictions — including a temporary ban on travel from mainland Europe to the US — dimmed the outlook for demand.
“The scale of the oil price crash would have economists and analysts revaluating their forecast for growth, and even increase the urgency among central bankers to cut interest rates,” said Phillip Futures in a note.
Emergency measures by central banks Thursday failed to douse concerns about the economic toll from the outbreak, and markets suffered their worst day for decades.
The rout continued in Asia Friday with stocks and oil plummeting in morning trade, although they pared their losses in the afternoon.
Analysts said oil prices were boosted after US air strikes against a pro-Iranian group in Iraq, a member of the oil-exporting cartel OPEC.
The price war started after Saudi Arabia and other OPEC members pushed for an output cut to combat the impact of the virus outbreak.
But Moscow, the world’s second-biggest oil producer, refused — prompting Riyadh to drive through massive price cuts and pledge to boost production.
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