How COVID brought down Big Oil

Heather Clancy runs the rule over a tough year for the oil sector that may well become an historic turning point

It’s been a tough year for the oil industry.

In April, there was a mind-bending second when crude stocks dipped to adverse figures. Then, after a few months of a slow growth in demand, oil prices dropped again as Americans hunker down for another round of shutdowns to curb the coronavirus. 

The drop is comparatively modest – there is still demand for oil in places where the government response to COVID was competent enough to reopen sections of the market – yet is yet another data point in the volatility and uncertain future of fossil fuels. 

Experts say this is the beginning of the conclusion.

How COVID hastened the fall of oil Rates

Before COVID, many energy forecasters saw the end of the age of oil in the offing – typically in the assortment of 10 to 30 years. 

Danny Kennedy, the celestial Aussie behind several early efforts to popularize cleantech and CEO of both New Energy Nexus, a company that supports clean-energy entrepreneurs across the globe, was bullish. This past year, he predicted the collapse of oil could occur sometime during the 2020s. Today Kennedy marvels that that timeline looks conservative.

“Remember the wrap you did last year on the decade?” Kennedy wrote to me in an email before this year. “I suggested oil would fall – didn’t realise how fast!”

Here is the way the Great Pause of 2020 hastened forces in motion: 

To begin with, oil demand plummeted since the world stood in the spring. While travel has rebounded some and is guaranteed to muster more as the market recovers over the next decade, we have learned it is possible, and suitable, to live remote lives. Many teams are still working efficiently practically, and workers might not be concerned to get back to this rush-hour grind. Flying for an in-person meeting – in the past, a reflexive movement for all road warriors – could be replaced by Zoom and its ilk. Virtual conventions will make employers second-guess travel programs.

Meanwhile, the clean energy and technologies continued to get bigger and better. Clean energy has been announced”immune to COVID” as renewable electricity consumption rose by seven percent (despite general slumps in energy demand this season ). Electric vehicle market share held stable and the cost of batteries reached that the Holy Grail cost of $100 each kilowatt-hour, the stage at which EVs should reach cost parity with internal combustion engine (ICE) vehicles.  California‘s ban on ICE car sales by 2035 and Europe’s Green New Deal stimulation both deliver clear signals that the ICE is moving to a deep freeze. 

Kennedy believes that the combination of these forces indicates that Peak ICE probably happened late last couple of years.

“Once there is no more growth in the market, that is the end of the story,” Kennedy told me in a phone conversation. “I think it’s all just crashing down faster than we anticipated.”

Energy analysts broadly agree. BP’s current energy outlook report said oil demand might never completely come back, which would imply we passed peak oil in 2019. French oil supermajor Total predicts peak oil by 2030, consultants McKinsey state 2033, while Bloomberg New Energy Finance and Wood Mackenzie counter the summit at 2035.

Oil and gasoline isn’t what it used to be

Oil companies are most famous (or notorious ) for two things: gains and pollution. Today, one of those is no longer true.

At the first half 2020, the oil sector composed $ $170bn, suggesting it sees oil assets worth far less than previously considered. That’s the fiscal equivalent of 18 percent of proven reserves, according to Bloomberg.

Things weren’t going great before 2020. Lots of supermajors and smaller players worked to get a piece of the Permian Basin natural gas boom, leading to overproduction in 2019 that crashed the cost of the fuel. The cost of natural gas dropped so low it was unprofitable, leading to companies like Chevron to take a $11bn write-down. 

The downturn has cost oil manufacturers and investors .  Haynes and Boone, a Texas law firm that tracks oil patch bankruptcies, tracked 250 bankruptcies among oil producers in the previous six years, wiping out $175bn in secured and unsecured debt. “The total amount of investor equity in such producers that has been wiped out is many multiples of that amount,” Haynes and Boone wrote.

The stock exchange has been around and has been cruel to oil companies that are promoting a narrative of a rosy future of oil and gas. 

“The fact is, the market has peaked,” Kennedy explained. “That’s why Exxon is out of favor and NextEra is in favor, why Ørsted is up and BP and Shell are down, why Tesla is booming while all those OEM [auto] companies, which are basically of oil companies’ carriage, are being punished by the stock exchange.”

Fossil fuel’s vicious cycle is clean energy’s virtuous cycle

The massive uncertainty in oil markets threatens to take down economies that rely too heavily on fossil fuels. 

“There’s a vicious cycle, as the death spiral, even as [oil companies] shed their economies of scale, and they still have reduced revenues, low margins, and bring less investment, pay a higher cost of funds, get fewer government assistance, lose social license,” Kennedy said. 

That unspooling is motivation for companies and economies to unhitch their financial security from the future of oil – which opens opportunities to support emerging renewable technologies. And the more support clean energy receives, the cheaper it will get, the more capital it will attract, the more jobs it will create, the more communities it will serve and the more solutions it will reach. 

This approach is more or less the philosophy of the European and Chinese COVID recovery plans, which emphasize the growth of clean technologies to create jobs and generate wealth. It is also the opportunity before the United States within a Green New Deal-like effort.  

“The spiral goes either way,” Kennedy explained. 

This article appeared in GreenBiz’s publication Energy Weekly, conducting Thursdays. Register here.

This essay appeared in GreenBiz.com.

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