Scenarios & challenges for oil markets and energy transition in a post-pandemic climate

In a recent post in the Petroleum Economist, energy policies and market consultant Andrei Belyi noted that the recent decline in the price of oil is unprecedented, and with the transport sector becoming unpredictable, the ability of experts to forecast has become seemingly impossible.

He goes on to note, "The oil price crash has triggered vivid discussions about the eventual emergence of a post-oil era. Some commentators have even suggested the crisis signals the end of oil industry." But falling oil prices make it more difficult to finance the transition to a low carbon economy.

We asked Andrei about the scenarios which exist for oil markets and energy transition in a post-pandemic climate, challenges, and the strength of systems to provide the required amount of renewable energy.

Read the Q&A below.

Q: In your opinion, what scenarios exists for oil markets and energy transition in a post-pandemic climate?

Andrei Belyi: All depends on the magnitude and extent of the crisis. Currently, we observe an unprecedented crisis with oil demand. As the oil Industry has entered into an era of high uncertainty, it therefore becomes hard to estimate risks.

Oil product demand is currently stagnating, particularly the demand for aviation fuel has dropped significantly compare to the beginning of the year. Hence, crude oil is not processed but stored, as are other oil products. Weekly floating storage has doubled in comparison with storage utilisation in 2018-19.

Many experts have pointed out that the Russia-Saudi 'price war' is one of the causes of the current price collapse. In my opinion paper produced for the Vienna institute of International Economic Studies (WIIW), I noted that even the OPEC+ agreement wouldn't solve the issue of demand uncertainty.

Indeed, once an agreement was reached in early April 2020 with the help of the US, prices didn't rebound, and therefore provoked a panic on the market. Interestingly, the US storages weren't at their maximum capacity. The storages didn't even reach their peak in 2017 of 68% utilisation, but the panic drove prices to negative. Market fundamentals also stimulated the panic, and demand is stagnating while storage capacity is getting filled.

Many now say that is the end of oil industry. I would strongly doubt it.

The current crisis creates uncertainty of demand but doesn't decrease oil intensity of the global economy. For example, oil intensity in India is about three times higher than in the EU. The fact that Indians will have access to cheaper fuel doesn't stimulate development of electric vehicles, renewable applications in residential sector, or other alternative energies.

The economy will first stagnate, and then, once demand re-emerges, oil demand will grow first on the Indian sub-continent.

Q: What are the current challenges which renewables face, and are there opportunities?

Andrei Belyi: I believe the challenges will more than likely vary from one sector to another. The main issue is the disruption of lithium production chain, and lithium is crucial for electric vehicles and for solar photovoltaic electricity.

China's demand stimulated lithium processing, and I believe the main impediment for the industry will be the uncertainty in China’s future demand. Adding to that the effect of the global pandemic and lockdown has had on the mining – including the slowing down of lithium and cobalt outputs.

Q: Renewables and green fuels would need to scale up operations, but do we have systems strong enough to provide the amount of renewable energy required?

Andrei Belyi: I think the strength of the systems may vary from region to region.

It seems the EU is strongly committed to make the post-Covid19 recovery green, by supporting first carbon neutral technologies.

Similar commitments are not observed elsewhere. For example, regardless the pandemic, Russia has been planning to increase its coal production. Oil intensity in both Russia and the US is unlikely to decrease in the near future.

A high oil price has always helped alternative energy technologies to be promoted - incentives are normally substantial and driven by the price. Additionally, oil revenues in the Gulf countries have been often been used to promote solar energy domestically and to decrease desertification.

Oil revenues have been helpful for smaller exporters, like those from North Africa or the Caspian oil and gas producers. Some of these have developed sustainable projects, like the ambitious gas flaring abatement in Azerbaijan.

In the current global climate where all the economies will require support, and with limited revenues from hydrocarbons, many of those sustainability projects risk being marginalised.

Q: What are the main arguments around decarbonisation and that direct electricity consumption will lead to higher electricity costs for users?

Andrei Belyi: Direct use of electricity is always more expensive than fuels.

In transport, heating, and industrial processes, the difference can sometimes be double. Of course, it all depends on very specific cases. Even European socio-economic structures are not ready for 'full electric' option.

This means that working with hydrocarbons is a must in addressing the climate crisis. This includes gas flaring reduction, abatement of methane emissions, and more ambitiously hydrogen-enriched natural gas in the markets.

Q: Many sectors and industries want to feel secure about their destiny, should there be a concern over the infrastructure and scarceness of resources in our efforts towards decarbonisation? Is there a way to avoid fighting over the same resources in the future?

Andrei Belyi: I think scarceness of resources have always been over-stated and is now certainly not an issue.

Hydrocarbons are everywhere. In addition, we should avoid resource-determinism by linking the resources to conflicts. Interestingly, low oil price is more associated with conflicts and instability, than high oil prices.

How would it affect decarbonisation efforts? Let's see. But in a politically unstable world it will be harder.

Q: There is merited concern that a low oil prices could lock emerging markets into an older, unsustainable energy cycle. Are there any ways to counteract this?

Andrei Belyi: It all depends on case by case situation and on the extent of the economic crisis particularly in the global south.

The current oil price collapse is a direct reflection of the global economic decline provoked by a ‘Black Swan’. While states, international financial institutions, or aid programmes provided by the most developed nations might pass on financial assistance to the green carbon neutral projects however, there is no clear indication can be done until the economic implications of the ‘Black Swan’ are clear.

Q: If we were to cast back from 2050, what are the steps we need to take today to make sure were headed in the right direction?

I guess there is no top-down approach for all as so much will depend on economic context.

I believe that it is particularly hard to back cast anything in times of economic uncertainty. Any major economic crisis leads to unpredictable effects.

If we think back to the crisis of 1929; would anyone have imagined back then that the Great Depression will indirectly lead to a new world order by 1945?

Interested in learning more about how the energy sector, and its customers, can achieve a low carbon, sustainable future? Join us at Energy Transition World Forum (ETWF) in Amsterdam. Find out more here.