London — As the world emerges from the economic wastelands of the coronavirus pandemic, hopes are growing that climate-friendly policies and behavior changes will speed the transition away from fossil fuels. But there may be speed bumps along the way.
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Political parties, business leaders and environmental groups are calling for a 'green recovery' to transform the global economy in the wake of the pandemic. Many believe the push will accelerate the demise of the era of oil.
The International Energy Agency and IMF have called for $1 trillion in spending to revitalize economies and boost employment while making energy systems cleaner and more resilient under a pandemic recovery plan.
Even BP last week cut its long term oil price assumption by 27% to $55/b, citing a growing belief that the pandemic will have a lasting impact on global demand for oil and gas. BP, which had promised to "reimagine energy" before the outbreak, said the move will slash up to $17.5 billion from its book value, re-igniting investor concerns over potentially stranded assets from high-cost oil and gas resources.
But energy forecasters are far from agreed on how long-lasting and significant the changes to oil demand will be.
Climate think-tank Carbon Tracker believes that the pandemic has just hastened the inevitable as fossil fuels are already approaching terminal decline as the world's top energy source.
"We are witnessing the decline and fall of the fossil fuel system," Carbon Tracker Energy Strategist Kingsmill Bond said. "Technological innovation and policy support is driving peak fossil fuel demand in sector after sector and country after country, and the COVID-19 pandemic has accelerated this. We may now have seen peak fossil fuel demand as a whole."
Peak oil demand
Others acknowledge the prospect of long term oil demand destruction but are more sanguine over the potential for a green revolution emerging from the pandemic.
Rystad Energy, which last week slashed its estimates for the world's recoverable oil by 282 billion barrels due to COVID-related spending cuts, sees a faster adoption of electric vehicles and more recycling as the main threats to long term oil demand.
While it previously saw oil demand peaking at 107.5 million b/d in 2030, the Norwegian consultants now expect demand to top out up to three-years earlier at around 106.5-107 million b/d.
It notes, however, that road freight expansion as well as growing plastics consumption will likely scupper any chance of a faster swing to alternative energy.
"We haven't put the global economic motor to a permanent sleep," Rystad's senior oil markets analyst Artyom Tchen said. "It starts roaring again and will drag more people out of poverty, with associated energy consumption growth."
S&P Global Platts Analytics now sees oil demand about 3 million b/d lower than its previous forecasts out to 2040, with jet fuel and marine fuels suffering the biggest losses. Like Rystad, Platts Analytics sees lower jet fuel demand from less personal and business international air travel as a key threat to demand.
Rather than accelerate peak oil demand, however, Platts believes it could be extended by about a year to 2041 due mostly to the expected resilience of long term petrochemicals demand.
"The strength in demand for the petrochemical sector will become the most important factor in overall growth and many who are calling for peak oil demand in the short term seem to overlook this fact," Platts Analytics' head of scenario planning Dan Klein told clients this month.
The economic variables used model future oil demand are complex while the appetite, funding and outcomes of green policies are tough to predict. As a result, the list of push and pull factors over demand is long and contradictory.
More working from home in the future should mean lower transport fuels demand but some remaining commuters may opt to avoid public transport over health fears and jump in their cars. Less office space saves power but private homes are less less-energy efficient.
A policy push to incentivize electric vehicles should lower road fuel demand but lower oil prices will dent their competitive advantage.
Booming e-commerce and online shopping means fewer car trips to the mall but more truck deliveries and greater demand for plastic packaging. Fear of potential outbreaks would also lift demand for personal protective equipment, derailing hopes of clamping down on single-use plastics.
The competing factors mean it may be too early to call whether the crisis has dramatically changed the pace of the energy transition.
"I do think there is an element that some people are overplaying, this idea that this is a seismic change. Changing consumer behavior is very, very difficult," said Chris Midgley, head of analytics at S&P Global Platts.
"I think there's a real danger that we think everything has been solved, and I think this it's quite the opposite....The real challenge is, will governments to be able to afford to continue to invest in infrastructure to support the energy transition."
BP's chief economist Spencer Dale is also wary of predicting a major nosedive in the world's dependence on oil, saying last month that it will likely be constrained more by the pace of economic recovery than changes in consumer behavior. More countries could potentially turn inward in terms of their policies and spending priorities, resulting in a hit on the pace of future globalization and expansion of international trade.
Speaking in April, the global head of commodities research at Goldman Sachs Jeff Currie told Platts he sees the potential for the crisis to accelerate the transition away from fossil fuels to low carbon energy may be limited more by the availability of cheap alternatives to oil.
Technological progress is still needed to lower the costs and boost the availability of electric cars, solar and wind power, and other alternative energies, Currie believes.
"It's not this catastrophic gloom and doom backdrop that people are concerned about," he said. "But will (oil demand) rebound to 100 million b/d immediately? The answer is no. Will it rebound above 85 or 90 million b/d? Extremely likely.