As the world is likely to be moving towards a new geopolitical stage led by health security concerns and more advanced technology, we may well be witnessing a shift away from globalisation towards regionalisation. The prospects of such a shift may mean a greater regional focus on oil trade in the post-corona world, writes Slawomir Raszewski, Research Associate at the European Centre for Energy and Resource Security (EUCERS) in the Department of War Studies, King’s College London.
The COVID-19 crisis has raised a number of questions concerning the prospects of the international energy markets affected by the dramatic fluctuation of oil prices. The purpose of this short op-ed piece is to attempt to consider the above question in relation to short- and long-term prospects for the markets and, equally importantly, the industry. The article points to three main takeaways from the crisis.
Firstly, the unprecedented collapse of energy demand in the short term, experienced as a result of widespread lockdown measures, has had a strong inclination to affect the long-term prospects of demand recovery. New forms of social organisation are likely to stay permanent, removing some demand. The availability of more big data has not only enhanced efforts to digitise but also provides for greater energy efficiency and planning, moving forward as the real-time data analysis of supply and demand, will become widely available.
Secondly, the vulnerabilities of globalisation exposed by the COVID-19 crisis are likely to exacerbate the condition of the international energy sector and new investments. With low demand and low oil prices in the short term, the appetite for energy investments in the long-term has been curtailed. The “short termism” in consuming regions is likely to affect the long-term outlook, should the industry continue to ‘wait and see’ for market signals.
Having said this, (and thirdly), the re-evaluation of existing business models is underway and International Oil Companies (IOCs) are making bold steps to innovate, moving away from the existing oil-based paradigm. The move away from oil (and possibly even natural gas) has been a characteristic mainly of European IOCs and entails adopting an integrated energy company business model to address socio-economic change as well as a greater appreciation of environmental sustainability.
Widespread lockdown measures following the COVID-19 outbreak have had an instant impact on demand in the short-term. Over 100 countries – and roughly half of the world’s population – were exposed to lockdown measures of varying degrees of severity as of April. Lockdown restrictions have had a multitude of effects on economic development, particularly in those countries experiencing full lockdowns, which, in turn,have witnessed a 25% decline in energy demand amid a 6% global energy demand decline. The spectacular collapse in the price of crude oil, additionally exacerbated by a brief “oil price war” between the key producers benefiting consumers filling up storage – has led to a rather grim short-term picture for the key commodity. In an attempt to stimulate the price, Saudi Arabia-led OPEC and non-OPEC producers, most notably Russia, have returned to negotiations, agreeing in April to oil output cuts to prop up the price of oil. By agreeing to curtail production by 9.7 million barrels of oil per day during the May-June period – by far the largest output cuts on record, amounting to about 23% of OPEC’s and Russia’s output combined or 10% of global production, the group of producers, also known as “OPEC Plus”, reacted to the even greater loss of demand, resulting from the unprecedented COVID-19 crisis. Since then, the price of crude oil has increased in key markets, driven by the easing of lockdown restrictions, the post-lockdown demand for crude and the tighter crude supply. Saudi Arabia’s response has been calibrated, focused on stimulating the price recovery, particularly now that China’s demand is rising. The easing of lockdown restrictions elsewhere has started, which is likely to lead to a recovery in demand and, ultimately, an increase in the price of oil in the short-term. However, it is likely that a fraction of pre-corona demand will be permanently lost. As noted elsewhere new forms of social organisation are likely to stay permanent as more people work remotely than ever before, a trend that has broad ramification for energy demand. While a lot will depend on developments in the key energy demand centres, i.e. China, US, and the EU, energy efficiency – understood as the percentage of energy not consumed or, indeed consumed in a useful manner with minimal loss – is likely to grow in importance as an energy policy objective.
International trade has been on the agenda since before the pandemic crisis. The US-China trade war opened up discussions about globalisation of trade which, in the aftermath of the COVID-19 crisis, will no doubt continue. The world’s most traded commodity, crude oil, is at the centre of international trade. As the world is likely to be moving towards a new geopolitical stage led by health security concerns and more advanced technology, we may well be witnessing a shift away from globalisation towards regionalisation. The prospects of such a shift may mean a greater regional focus on oil trade in the post-corona world. Most importantly, it could lead to a differentiation between investments, trade and the supply of energy and raw materials, in what might be greater regional cooperation based on, respectively, the“US-centric, dollar-denominated world and the China-centric, yuan-dominated world”. The above is already exacerbating the condition of international energy and new investments. According to the International Energy Agency, the first quarter of 2020 saw a disruption in investment activity due to lockdowns as well as sharp fall in revenues, particularly from oil. 2020 compared to 2019 has witnessed significant negative changes in estimated investment in a range of sectors, including: oil (- 244.1 billion USD), the power sector (- 79.4 billion USD), and coal (14 billion USD). From an industry perspective, vulnerability to such developments is significant; some key players are now addressing this matter so that they may turn the crisis into a business opportunity, which ultimately takes me to my final point.
We are on a fast-paced track towards a new business model for oil companies. The unparalleled pandemic crisis has accelerated the re-evaluation of existing business models, a process led by IOCs. International oil companies are taking steps to innovate, transitioning from the existing, oil-based business model to an integrated energy company model. Remote working patterns mainly eliminate demand for oil, while at the same time providing for greater electricity demand. This shift away from the “oil company” model towards the “energy company” model had already been underway prior to COVID-19 and is now being vigorously pursued by some of the leading IOCs. Advances in data availability and the digitisation of the energy sector are likely to provide for greater energy efficiency and more planning, as the real-time data analysis of supply and demand is likely to become more widely available in the long run. Some of the leading IOCs had implemented such plans before, but the COVID-19 crisis has accelerated this change. Companies are making choices concerning their human resource management, investments and business strategy to address pressure from climate and sustainability objectives. This process is likely to continue in the long term.
