Washington — Plunging oil demand caused by the coronavirus outbreak is giving the fossil fuel sector a preview of the shrinking market share it would face in an energy transition, and collapsing oil prices may scuttle the industry's efforts to prepare.
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The outbreak is expected to destroy more than 2 million b/d of oil demand in the first quarter of 2020 and possibly put the full year on track for the first oil demand contraction since 2009.
The double-barreled crisis of a Saudi Arabian-Russian price war on top of this demand slash comes just as the oil sector had started engaging the idea of an energy transition toward cleaner fuels and lower emissions.
Fossil fuels are expected to represent half of total energy supplied in 2050, down from 80% currently, under a model of the energy transition by S&P Global Platts Analytics' Scenario Planning Service. The model assumes the world meets the minimum Paris Agreement target of no more than a 2 C warming this century.
The scenario is designed to "take into account existing infrastructure constraints and capital costs, but there are multiple pathways to achieving global decarbonization targets depending on policy drivers, consumer behavior, and assumptions regarding adoption of new technologies," said Mark Mozur, lead analyst for world energy demand at Platts Analytics.
SHUFFLING THE DECK
This week's market turmoil could reshuffle an entire deck of oil-related climate issues in the years ahead: Will major oil companies like BP and Repsol abandon their recent pledges to become carbon neutral by 2050? Will research and development be set back substantially? Could energy demand take a permanent hit as consumers learn to live with less? Will adoption of alternative vehicles stall out amid cheap gasoline?
Also complicating matters will be an anomalous year for global carbon emissions in 2020 because of the coronavirus outbreak's impact on energy demand — factories shutting, airplanes flying fewer routes and employees working from home rather than driving, among other factors.
"It puts the companies in a tough bind — if environmentalists expect the oil industry to emit at pandemic-year levels and invest at boom-year levels, that's going to an unrealistic expectation," said Kevin Book, managing director of ClearView Energy Partners.
International Energy Agency Executive Director Fatih Birol said the current market conditions will be a "test" for IOCs that set ambitious climate goals in recent months.
LOW GASOLINE PRICES
Roman Kramarchuk, Platts head of energy scenarios, policy and technology analytics, said low oil prices can hit electric vehicle adoption, among other alternative technologies that compete on price. Policy makers would have to be willing to raise subsidies to spur adoption instead.
"With gasoline prices at $5/gal, many people may consider an electric car from a total-cost-of-ownership perspective — since they can save money on operating the vehicle," Kramarchuk said. "With gasoline prices at $2/gal, for example, it's harder for an electric vehicle to compete."
Alex Gilbert, non-resident fellow with the Payne Institute at the Colorado School of Mines, pushed back on some early predictions that the oil price plunge could signal peak demand, sustained lower emissions or the collapse of oil companies.
"Low oil prices will make clean energy less economically attractive," he said.
Gilbert said the current market rout could lead mid-sized oil and gas producers to forgo promised "environmental, social, governance" initiatives set in recent months.
"The major producers will have pressure on their ESG initiatives," he said. "That said, Shell, BP and the like face political pressure from the EU, which may only strengthen with lower prices. Some companies may actually step up ESG initiatives and efforts to diversify, but I imagine it will not be a priority for many."
LONG-TERM DEMAND IMPLICATIONS
On the demand side, Kramarchuk said there is a possibility that consumers will get used to consuming less energy. He pointed to Japan after the 2011 Fukushima nuclear disaster, when the country was forced to use drastically less electricity, and its economy adjusted to it.
"In this case, we are looking at the possibility for potential long-term implications," Kramarchuk said. "Part of that is behavioral driven, in terms of how people work, commute and travel and have fun — and what energy do they need to do that."
Book said the US saw a "low-energy recovery" from the Great Recession because of a change in the industrial mix and the loss of jobs that required commuting.
"For a period of time, Americans really did more with less," he said, adding that that changed when energy supply eventually rose and prices fell. "Then they did more with more."