="http://www.w3.org/2000/svg" viewBox="0 0 512 512">

35 Will Coronavirus Save the Climate?

Sarah Rowan

The spread of coronavirus has caused our hyper globalised world to slow down resulting in a dramatic fall in oil prices and leaving the industry to face its greatest challenge in 100 years. Will this crash lead the way to a green energy revolution or will oil bounce back?

As global cases of the novel coronavirus continue to increase exponentially around the world, countries are shutting down. People are told to work from home, only essential industries can continue operating as usual, and borders are closed. This halting of industry and travel worldwide is having major impacts on the demand and price of crude oil. The oil industry is infamously volatile, historically operating in boom and bust cycles. However, the effects of the COVID-19 quarantine in China, the world’s largest importer of crude oil, and India, the third largest importer, have sent oil prices tumbling. The price of a barrel of oil has fallen from $65 at the beginning of 2020 to $22.58 (Brent crude) on March 30th– a low not seen for almost two decades [1]. Additionally, failed agreements by companies to cut oil outputs has led to continually high rates of oil extraction as the crisis has unfolded. This continually high production has meant that global oil storage facilities are currently at 75% capacity, and are predicted to fill up by mid May [2]. Future speculation has suggested that the price of oil could reach the teens in the coming weeks if the crisis continues on track. Furthermore, the increasing strain of high oil production on global storage space has led some to suggest that negative oil prices could be seen in the near future whereby oil producers pay customers to take their oil and alleviate storage space. In some specific crude grades in America, negative oil prices are already a reality, however the widely traded Brent and WTI oils have yet to be affected to this extent.

The price trend of Brent crude oil throughout the coronavirus pandemic. Source: [1]

 

What is also exacerbating the situation is an ongoing price war, whereby producers cut prices deliberately below their competitors forcing prices to continually decrease. Beginning on the 8thof March 2020, there has been an ongoing price war between Saudi Arabia and Russia, the second and third largest oil producers respectively. Due to the destabilisation of the oil industry by increased shale oil production in the U.S. in 2014, an alliance was formed consisting of the Organization of the Petroleum Exporting Countries (OPEC), Saudi Arabia and Russia. This alliance was known as OPEC+, and was focused on the management and stabilisation of oil prices. According to the International Energy Agency, by mid February the demand for oil decreased by 435,000 barrels per day from the start of 2020 due to the effects of the coronavirus spread. This demand slump lead OPEC countries to agree to decrease oil production by 1.5 million bpd over the second quarter of 2020. However, this agreement to reduce production was rejected by Russia leading to a fall of oil prices by 10%. Following this price slump, Saudi Arabia unexpectedly cut barrel prices on the 8thof March which resulted in a 30% decrease in Brent crude and a 20% drop in WTI oil prices, the largest fall in oil prices since the Gulf War. Saudi Arabia then announced that it would increase its oil production from 9.7 million bpd to 12.3 million bpd. Russia also announced that it would increase its oil production by 300,000 bpd. As a result of the increased oil production and low global demand due to the coronavirus, prices dropped to an 18 year low by mid March. It has been described that the oil industry now faces its biggest crisis in 100 years [3].

The effects of this oil crash and price war can be seen in economies and companies around the globe. The stock markets have been severely affected by recent events as one of the largest stock market declines since the 2008 financial crisis was seen from the 24thto the 28thof February. Further, in the first week of March the global markets became increasingly volatile. On the 9thof March, now known as “Black Monday I” the combined effects of the coronavirus and the ongoing oil price war lead to huge drops in the global markets. This was followed by a further drop on “Black Tuesday” whereby stocks fell by more than 9% in the U.S. and Europe followed by a further decline for the rest of the week. On the 16thof March, the markets experienced “Black Monday II” whereby Asia-Pacific and European stock markets had record 24 hour declines. On this day the Cboe Volatility Index, a measure of stock market volatility, closed at 82.69 becoming the highest ever value recorded for the index and marking record market volatility. The stock markets are yet to recover as of the beginning of April, with oil prices showing their largest monthly and quarterly declines in history. The effects of the oil crash have also been observed in the Saudi Arabian and Russian economies with Saudi Arabia cutting its spending and increasing its debt ceiling by 20% of the GDP, and the Russian ruble falling by over 30% by mid March from the beginning of 2020. Other players in the oil industry have also had to adapt to the ongoing volatility in the industry. Sinking oil prices has meant that shale oil production in the U.S. has stopped growing as oil prices have to be above $40 per barrel in order for production to be profitable [4]. Furthermore, it has been estimated that 10% of oil production worldwide could become uneconomic if the price of oil continues to stay low, with heavy crude oil producers such as Canada, Mexico, and Venezuela being particularly effected [5]. Norway, the 15thlargest oil producing country in the world, saw a historic low as the krone declined 7% against the euro.

The oil industry now faces its largest challenge since its conception, and how this crisis is handled has the potential to alter the world’s energy future forever. Some suggest that the current collapse of the oil industry could bring forward the time of peak oil, whereby petroleum extraction reaches its maximum level and thereafter sees a decline tending towards no more production. Previous to the events of coronavirus in early 2020, peak oil production was estimated to occur between 2030 and 2035 according to Barclays and the International Energy Agency [6]. However, the combined damaging effects of COVID-19 and the oil price war on the industry threaten to pull forward the time of peak oil as investors grow wary of natural resource markets during a global financial crisis. This will heavily impact private and public companies, though state owned industries in Saudi Arabia and Russia may continue to produce and sell cheap oil after flooding the market. Additionally, increasing public awareness of the effects of climate change and changes in consumer behaviour has put pressure on the natural resource industry to begin investing in a sustainable future. For example, this year BP set the target of becoming carbon neutral and to decrease the carbon intensity of its sales by 50% by 2050, though details of how this will be achieved have yet to surface [7]. Additionally, many fossil fuel companies are investing in research and development of renewables. For example, at the beginning of 2020 Shell pledged to spent $2 to $3 billion per year on the energy transition [8]. This could signal the beginning of a green energy transition in the face of an oil industry in crisis.

However, the effects of the coronavirus and oil price war may also postpone the shift to a green energy system. In the previous financial crisis of 2008 and the oil shocks of 1970, fossil fuel use and emissions also reduced and then bounced back upon economic recovery. The financial crisis that will follow the coronavirus epidemic may also see a decline in green energy investment of oil companies due to the strain on the industry. Additionally, renewable energy companies and projects will begin to see the effects of the global supply chain lock down as the majority of lithium ion batteries, solar panels and wind turbines are sourced from China [9]. The oil flooded market could also harm consumer based preference for green alternatives as cheap fuel may discourage the transition to electric vehicles. Climate based research around the world has also been stalled, with universities and laboratories closing and fieldwork cancelled. Additionally, the COP26 Climate summit in Glasgow that was scheduled to take place in November 2020 has been postponed to 2021 which could result in slow or non-existent climate policy generation for the near future. It is also possible that countries may relax their environmental policies in order to encourage economic growth post lockdown. China has already stated that its environmental standards will be adjusted to assist in the recovery of its economy which halved in growth in the first quarter of 2020 [10]. The economic stimulus packages that have been created in the past weeks have also failed to support renewable industry sectors. For example, the U.S. package of $2 trillion includes $60 billion to bail out airlines and offers low interest loans to fossil fuel companies, but offers nothing to assist the climate and renewables sector [1].

In the mist of the coronavirus pandemic the future of the global energy system stands at a crossroads. The oil industry may recover from its biggest hit in history aided by government bail outs and an oncoming demand for cheap oil in a time of global recession. Alternatively, the volatile nature of the oil industry in a global pandemic in a time of ever increasing climate related crisis events may scare off investors and governments. This could result in pulling forward peak oil and an increase in investment towards a sustainable energy system. While what will occur is uncertain, the effects will determine what kind of climate future we will experience.

 

References

[1] Carrington, D., Ambrose, J. and Taylor, M., 2020. Will The Coronavirus Kill The Oil Industry And Help Save The Climate?. [online] the Guardian. Available at: <https://www.theguardian.com/environment/2020/apr/01/the-fossil-fuel-industry-is-broken-will-a-cleaner-climate-be-the-result> [Accessed 6 April 2020].

[2] Nytimes.com. 2020. The World Is Running Out Of Places To Store Its Oil. [online] Available at: <https://www.nytimes.com/2020/03/26/business/energy-environment/oil-storage.html> [Accessed 6 April 2020].

[3] En.wikipedia.org. 2020. 2020 Russia–Saudi Arabia Oil Price War. [online] Available at: <https://en.wikipedia.org/wiki/2020_Russia–Saudi_Arabia_oil_price_war> [Accessed 6 April 2020].

[4] En.wikipedia.org. 2020. 2020 Stock Market Crash. [online] Available at: <https://en.wikipedia.org/wiki/2020_stock_market_crash> [Accessed 6 April 2020].

[5] Ft.com. 2020. A Tenth Of Oil Production May Become Uneconomic. [online] Available at: <https://www.ft.com/content/dba82fa2-69c7-11ea-800d-da70cff6e4d3> [Accessed 6 April 2020].

[6] IEA. 2020. World Energy Outlook 2019 – Analysis – IEA. [online] Available at: <https://www.iea.org/reports/world-energy-outlook-2019> [Accessed 6 April 2020].

[7] Storrow, B., 2020. BP Pledges To Go Carbon-Neutral&Mdash;How Remains An Open Question. [online] Scientific American. Available at: <https://www.scientificamerican.com/article/bp-pledges-to-go-carbon-neutral-how-remains-an-open-question/> [Accessed 6 April 2020].

[8] Bloomberg.com. 2020. Shell Leads Big Oil In The Race To Invest In Clean Energy Tech. [online] Available at: <https://www.bloomberg.com/news/articles/2019-09-04/shell-leads-big-oil-in-the-race-to-invest-in-clean-energy-tech> [Accessed 6 April 2020].

[9] Nytimes.com. 2020. Opinion | What The Coronavirus Means For Climate Change. [online] Available at: <https://www.nytimes.com/2020/03/27/opinion/sunday/coronavirus-climate-change.html> [Accessed 6 April 2020].

[10] U.S. 2020. China To Modify Environmental Supervision Of Firms To Boost Post-Coronavirus Recovery. [online] Available at: <https://www.reuters.com/article/us-health-coronavirus-china-environment/china-to-modify-environmental-supervision-of-firms-to-boost-post-coronavirus-recovery-idUSKBN20X0AG> [Accessed 6 April 2020].

License

The UN Sustainable Development Goals in Context, 2020, 701-0900: SDG blog Copyright © by ETH Students. All Rights Reserved.

}