S&P Global‘s article by Dania Saadi with a statement-title that World oil demand may have peaked in 2019 amid energy transition as per IRENA does not come down however informative as a surprise anymore. Its use will plummet by more than 75%, and its production to have plunged by 85% by 2050. It is even earlier, 2025, for the Natural gas demand.
World oil demand may have peaked in 2019 amid energy transition: IRENA
Dubai — Global oil demand may have hit the peak in 2019 and natural gas will follow suit around 2025, the director-general of International Renewable Energy Agency said March 16, as the energy transition gathers pace, echoing forecasts made by BP last year.
Under a 2050 scenario that meets the Paris Agreement’s commitment to limit global warming to 1.5 C, fuel use is forecast to decline by more than 75% if energy transition policies are enforced now, IRENA said in its World Energy Transitions Outlook.
Under the 1.5 C scenario, global oil production is projected to plummet by 85% to slightly above 11 million b/d by 2050 from current levels, with natural gas remaining the largest source of fossil fuel at about 52% of current levels, the Abu Dhabi-based organization said.
“In the last eight years, the installed capacity of renewables has been outpacing systemically the installed capacity of fossil fuels-related plants,” Francesco La Camera, director general of IRENA, said in a virtual media briefing. “There is a structural change that is already there. The energy transition is already in place, it is unstoppable.”
IRENA’s prediction of peak oil mirrors BP’s projection last year that the world may never return to the pre-pandemic oil demand level of about 100 million b/d. Demand for oil will be the biggest casualty from lower energy demand in the coming three decades as weaker economic growth and a faster shift to renewable energy accelerates the demise of oil-based transport fuels, BP said in its Energy Outlook 2020 published Sept. 14, 2020.
Natural gas will still be needed in the future for power generation and in some industries, IRENA said. Coal will be phased out by 2050, with gas supplying around 6% of power generation and nuclear energy around 4%.
“Fossil fuels still have roles to play, mainly in power and to an extent in industry, providing 19% of the primary energy supply in 2050,” IRENA said. “Around 70% of the natural gas is consumed in power/heat plants and blue hydrogen production.”
IRENA’s bearish view of fossil fuel demand contrasts with predictions from the International Energy Agency and OPEC.
Under the IEA’s last central forecast scenario published in November, world oil demand will rise to 106.4 million b/d in 2040 from 96.9 million b/d in 2018, with growth flattening out by 2030.
Last year, OPEC said for the first time that peak oil demand may be nigh, estimating that the world’s thirst for oil will stop growing in about 20 years.
With the pandemic prompting a re-examination of the oil market and countries becoming more aggressive on their sustainability targets, OPEC on Oct. 8 estimated that global demand would hit 109.3 million b/d in 2040 before declining to 109.1 million b/d in 2045 and plateauing “over a relatively long period.”
S&P Global Platts Analytics sees global oil demand peaking in 2040 at around 114 million b/d before slipping to 109 million b/d in 2050 under a “most likely” scenario, some 5 million b/d lower than pre-crisis forecasts.
Use of fossil fuels is being whittled away by the rising adoption of renewable energy, energy efficiency and electrification, according to IRENA.
“Over 90% of the [decarbonization] solutions in 2050 involve renewable energy through direct supply, electrification, energy efficiency, green hydrogen and BECCS,” or biomass with carbon capture and storage, IRENA said. “Fossil-based CCS has a limited role to play, and the contribution of nuclear remains at the same levels as today.”
Under the 1.5 C scenario, electricity would become the main energy carrier with 50% of direct share of total energy use, up from the current level of 21%, IRENA said. Nearly 90% of electricity needs will be provided by renewables, up from 7% in 2018, with the remainder coming from gas and nuclear.
Wind and solar photovoltaic will constitute the biggest part of the power generation mix, supplying 63% of total electricity needs by 2050, with installed renewable generation capacity growing to 27,700 GW from 2,500 GW currently.
Electricity demand is forecast to grow over two-fold between 2018 and 2050 with the use of electricity in industry and buildings doubling and in transport jumping from zero to over 12,700 TWh, according to IRENA.
Hydrogen and its derivatives will make up 12% of final energy use by 2050 and 30% of electricity use will be dedicated to green hydrogen production and its derivatives, it said. The world will need almost 5,000 GW of hydrogen electrolyzer capacity by 2050 from just 0.3 GW now to achieve this level of hydrogen.
To achieve the 1.5 C scenario, the world will need to spend $33 trillion on top of the $98 trillion currently earmarked for energy systems investments. Some $24 trillion invested in fossil fuels need to be rerouted to energy transition technologies over the period to 2050, IRENA said.
In the face of new global energy changes, going through these traumatic times, and after 60 years, what future for OPEC, can we expect of this organisation.
OPEC was established on September 14, 1960 and celebrated its 60th anniversary with a declining share in both energy decision-making and global marketing. With the coronavirus outbreak despite a substantial drop in production, prices are struggling to recover to 2019 levels. With a crisis like no other, since the 1928/1929 crisis, at a time when the interdependence of economies was low, no expert, able only to develop scenarios, can predict whether consumer and investment activities will be able to rebound, depending on the control of the epidemic. However, a high growth rate in 2021 compared to a negative growth rate in 2020 would mean it recovers, and in any case, the level of 2018/2019 will not be reached until 2022. However, the growth of the world economy and the future energy consumption model for 2020/2025/2030 are the fundamental determinants of the price of oil/gas, as the market has experienced ups and downs have not yet reacted favourably to the various OPEC decisions.
OPEC was created on September 14, 1960, at a Baghdad conference mainly on the initiative of the Shah of Iran, the Saudi Abdullah Tariki and the Venezuelan Juan Pablo Pérez, with initially only five member countries: Saudi Arabia, Iran, Iraq, Kuwait and Venezuela. Other producers joined such as in Africa, Algeria joining in 1969 was the first country to nationalise its hydrocarbon production; Angola: member since 2007. One of the largest areas of exploration, mainly conducted as production by the major oil companies of the OECD; Congo: the last member country to join the organisation (in the summer of 2018); Gabon: a member who left the organisation in 1995 and rejoined it back in July 2016; Equatorial Guinea, a country that joined OPEC in May 2017; Libya: member since 1962. Immense potential for untapped exploration due to the conflict in that country; Nigeria: OPEC’s least nationalised oil industry. In South America: Venezuela a country with the world’s largest oil reserves thanks to its oil sands resources but currently experiencing a severe political and economic crisis; Ecuador, which was a member of OPEC between 1973 and 1992 and then again in 2007 In the Middle East: Saudi Arabia as a founding member. The traditional leader of OPEC and the second-largest producer in the world with the largest conventional reserves; the United Arab Emirates, a member since 1967, a significant producer; Iran, founding member, OPEC’s second-largest producer and fourth-largest exporter of crude oil in the world before sanctions; Iraq: a founding member with the world’s largest open-air reserves; Kuwait:a founding member, a unique deposit whose peak production is declining. Qatar, a country that announced that it would leave the organisation in January 2019, officially to focus on its gas production.
Since 1982, OPEC has had a system for regulating production and selling prices using a total amount of production (slightly more than 30 million barrels of crude per day). This volume of production, defined according to member countries’ reserves, is adjusted according to the needs of the consumer countries. The system of production quotas by member country was agreed in 2011 and negotiations have been expanded since the end of 2016 with other non-OPEC producers, Russia, produces as much as Iran, Nigeria, Venezuela, Algeria and Ecuador combined. However, the functioning of this regulatory system is affected by fluctuations in the price of the dollar, the transaction currency of oil: the purchasing power of producing countries decreases when the dollar falls and vice versa.
OPEC manages a quantification instrument: the OPEC basket (ORB) which sets a benchmark price based on the costs of fifteen crude oils type (one per member country). The different qualities type reflect the major crude exports of member countries (e.g., the “Arab Light“ of Saudi Arabia). This basket is competing with the WIT and the Brent, whose prices are usually only a few cents different. Production and price management is extended by periodic assessment of available reserves. For all these countries, oil and gas revenues contribute significantly to their development through taxation. Still, these being very fluctuating over time and depending on the number of inhabitants of a country. For example, according to the EIA (2019), oil revenues in 2018 amounted to $14,683 per capita in Kuwait (nearly 4.2 million inhabitants), compared to only $212/hab for Nigeria (-200 million inhabitants). When the dollar falls against other currencies, OPEC states see their revenues decline for purchases in different currencies, which reduces their purchasing power as they continue to sell their oil in dollars. Local constraints (political instability, wars) or international crisis (embargo, sanctions) also affect the availability of the oil resource and thus its price. Always according to the IEA, in 2018, OPEC states as a whole benefited from a total of about $711 billion in oil revenues compared to $538 billion in 2017, due to higher average crude oil prices and higher exports, where Saudi Arabia benefited of $237 billion in 2018, ahead of Iraq with $91 billion.
OPEC decisions have, for some time, had some influence on the world’s oil price. Beyond the economic context, OPEC’s action on oil price developments is closely linked to the geopolitical environment. The organisation’s influence, however, has diminished since the 1990s, as has its share in world oil production. 55% in 1970, 42.6% in 2017 and about 38/40% in 2019 and indeed an even lesser rate is expected in 2020. One example is the oil crisis of 1973 during the Yom Kippur War: OPEC’s embargo on Western countries that support Israel caused a fourfold increase in the price in five months from October 17, 1973, to March 18, 1974. However, this historical version of the first oil shock is highly questionable.
On the other hand, from 1983, the price of a barrel collapsed, and from then on, would no longer be controlled by OPEC for several years. The London futures markets (ICE) and New York (NYMEX) playing an increasing role in determining prices, took over the pricing process away from OPEC. Recall that on September 28, 2016, OPEC met in Algiers with a historic decision to limit crude oil production to a level of 32.5 to 33 million barrels per day. On November 30, 2016, in Vienna, its output from 1.2 million barrels per day to 32.5 million with an effective agreement as of January 01, 2017, and Russia’s commitment to reduce its production by 300,000 barrels per day. In May 2018, the Vienna meeting, the members signed the integration of another country: Equatorial Guinea, which then officially became the 14the member of OPEC (the sixth African country). It was in a particular context that on April 09 2020, the group of oil-exporting countries, comprised of the 13 of the OPEC and ten-member partner countries, negotiated a new agreement on a joint reduction in production: a 22% reduction in output from the ten non-quota-exempt OPEC countries (i.e. OPEP without Iran, Venezuela and Libya) and their 10 OPEC partners, the final agreement covered 10 million barrels per day less on the market during May and June, with reductions up to 8 Million Barrel per Day (MBD) between July and December 2020, and then to 6 MBD up to January 2021. The effort will be supported mainly by Saudi Arabia and Russia, the second and third largest producers in the world behind the U.S., which would each cut nearly 2.5 Mbj from a reference production smoothed to 11 MBD. The remaining 5 million barrels to be cut would be distributed among the other 18 countries in the agreement, depending on their production level over a typical reference month, which is October 2018. According to experts, discussions focused on this reference period, with each measuring its actual production capacity, having to decide whether or not to take into account condensates (hydrocarbons associated with natural gas deposits) in the reference period can also play on final quotas. The organisation hopes that the United States, the world’s largest producer, and other countries such as Canada, Norway and Brazil, will reduce their production to a total of 5 MBD. This is only a wish since the United States has indicated that it will not participate in this reduction,(the majority being private companies, U.S. laws prohibiting executive directives in the management of the private sphere) as the U.S. Department of Energy has declared that the country’s production is already declining, because the majority of marginal deposits, which are the most numerous, although costs have fallen by more than 50% in recent years, shale oil is no longer profitable below $40 per barrel
During the 1990s, OPEC’s influence with the importance of Saudi Arabia on oil price resulted in prices declining for three reasons: a) internal divergences and the violation of production quotas by some of its members, b) the failure to extend its zone of influence to new producers (Russia, Mexico, Norway, United Kingdom, Colombia) and c) the impact of the London and New York markets that significantly drive prices.
So sixty years after its founding, OPEC faces also three significant challenges that have persisted since the 1990s.
First, the resolution of new internal conflicts: the rift between pro and anti-American members exacerbates these conflicts. Saudi Arabia, a traditional U.S. ally, is facing Iran and Venezuela, two of the most overtly anti-American countries in the world, challenging its influence on the organisation. Beyond ideological differences, there are therefore two trends between countries for which OPEC must above all be the facilitator of a commodity market and those wishing to make it a more political weapon.
Secondly, the rise of Russia, wherewith more than 11.3 million barrels per day, produces as much as Iran, Nigeria, Venezuela, Algeria and Ecuador combined, having pledged since late 2016, alongside OPEC to cap its production to raise oil prices.
Third, the growing production of unconventional hydrocarbons in the United States, which makes it the world’s largest producer in 2019 with more than 12 million barrels per day, has reduced OPEC’s influence. However, its hydrocarbon reserves are announced as the world’s first. Still, it will all depend on the price vector and costs that may have large reserves but are not economically profitable. New deposits discovered, particularly in Canada or off the coast of Brazil, could disrupt the global distribution of these reserves and thus significantly reduce OPEC’s share. But the critical medium and long-term decline in its influence is the new model of global energy consumption that is emerging.
Years 2020 through 2040 could be impacted by the Coronavirus, as already shown by the reorientation of public investment in Europe. As per B.P.’s recent statement of September 11, 2020, companies should redirect their investments towards other alternative energies with the combination between 2025/2035 of renewable energy and hydrogen, the cost of which will be widely competitive compared to conventional fossils.
By 2030, lower dependence on oil is expected by industrialised countries. In contrast, conversely, OPEC countries remain highly dependent on oil, mainly due to the absence of a sustainable economic model that can replace the oil industry. Oil revenues account on average more than half of their Pia developed a “Vison 2030” to diversify its economy. The combination of these factors weakens the geopolitical influence of the OPEC institution and acts on the price level.
The price of oil in 2020/2021 is as always fundamentally dependent on the growth of the world economy.
For China, which is heavily demanding hydrocarbons and dependent on external markets at half-mast, industrial production is recovering very modestly. Such a decline is unprecedented in China since the country turned to the market economy in the late 1970s. According to the Asia-Pacific report released on April 8, 2020, the world’s second-largest economy could see its GDP growth limited to 2.3% over the whole of 2020, or, as per a darker scenario, be almost nil, at 0.1%. It is not to be compared to its 2019 estimated 6.1% for a population exceeding 1.3 billion requiring a minimum growth rate of 7 to 8%. As far as India is concerned, the demand for hydrocarbons will also be low because its economy is geared towards globalisation. The impact on its growth rate is evident and is still in a declining trend in 2019. After falling to 4.5% from 7.5% in 2018, it is accompanied by an increasing rate in unemployment. In addition to all potential health and social crises, its economy paralysis could lead to the breakdown of the supply chain of many global companies. India, with more than 4 million low-cost employees (Indian I.T. engineers are paid up to 5 times less than their Western counterparts) is the leading player in ICT outsourcing. Almost all of the major international groups delegate part of the management and maintenance of their digital tools to Indian companies. For the Euro area, dependent on more than 70% on hydrocarbons, the PMI (survey of business purchasing managers) saw the most significant drop on record, after reaching 51.6 in February 2020. This index is a figure that if it is below 50, it indicates a contraction, but if above, represents an expansion of activity. For instance, the President of the European Central Bank stated “In the economies of the Euro area, for each week of Lockdown, GDP‘s are shrinking by 2 to 3%. The longer it goes on, the bigger the shrinking of the economy.” Growth in the euro area and the E.U. generally will fall below zero by 2020. This necessitated a $1 trillion bailout from the ECB, plus $500 billion for all ancillary institutions. For the two leading European economies, according to officials, in France, the notices give less 9%. In Germany, the leading economic institutes have forecast that Germany, which plunged by 9.8% in the second quarter of 2020, double the co. Recorded in the first quarter of 2009 following the financial crisis. For the United States of America, the job market is deteriorating at an unprecedented rate, despite the government’s injection of more than $2 trillion. With data contradictions showing the extent of uncertainty, Morgan Stanley sees GDP fall by 30%, Goldman Sachs by 24% and JP Morgan Chase by 12%. The bailout package, which is more than 9% of U.S. GDP, is a mix of non-refundable aid and hospital loans, a massive increase in unemployment insurance for individuals. But this raises the whole problem of the health care system in the United States. According to the Kaiser Family Foundation, which specialises in health issues, the average cost of family insurance in 2018 was $19,600 (about 18,000 euros), 71% funded by the employer. To keep it, a sacked employee will have to support it in full. To avoid a significant increase in the number of uninsured (about 28 million in the United States), a dozen states, mostly Democrats, have relaxed the rules for subsidised insurance underwriting. For the global economy as a whole, and according to several international institutes, including the Institute of International Finance (IIF), Global Financial Sector Association, a note dated April 7, 2020, highlights the global economy is expected to contract by 1.5% in 2020 in the context of the COVID-19 pandemic, lowering its forecast from 2.6% to 0.4%. According to the report, I quote “our global growth forecast is now -1.5%, with a contraction of 3.3% in mature markets and growth of just 1.1%” in emerging markets, adding that there would be “enormous uncertainty” about the economic impact of COVID-19.” Over the full year, the IIF expects growth rates in the United States and the euro area to contract by 2.8% and 4.7% respectively. For its part, the IMF anticipates a “partial recovery” in 2021 provided the pandemic subsides in the second half of this year. That containment measures can be lifted to allow for the reopening of shops, restaurants, a resumption of tourism and consumption. According to the IMF, low-income or emerging countries in Africa, Latin America and Asia “are at high risk” where we have seen capital outflows from emerging economies more than triple that for the equivalent period of the 2008 financial crisis.
What are the prospects for the price of oil?
Global oil consumption in 2019 was around 99.7 million BDD globally, according to IEA data, and OPEC countries accounted for only 40 per cent of global crude oil production. China on a global consumption for the same period imported 11 million barrels or about 11/12% of world consumption. According to energy experts, a drop or rise of a dollar in the price of oil would mean an impact between 500 and 600 million dollars. If you take a median average of 550, the shortfall from this decision is $5.5 billion per day per year. It will therefore be a matter of establishing a currency balance of the net gain of this decision, assuming that, if the price falls to $30 or less, before this reduction, allowing the market price to be between $40/45 per barrel. If the barrel were less than $30/35, this decision would have had a very mixed impact. In September 2020, it seems that the market is reacting timidly after this reduction, knowing that the price increase will depend mainly on the return or not to ‘growth’ in the world economy. The primary determinant of demand, because the reduction of 10 million barrels per day is based on the assumption that global demand market declines by only 10/11% while the coronavirus epidemic has caused a drastic fall in global demand, up to 33% or about 30 million BPDs.
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.
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.
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.
The United Nations (UN) celebrated on May 10th, 2021, the first edition of the International Day of the Argan Tree, an endemic tree in Morocco.
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