We are living through a global health and economic crisis, which will, at some point, end, but in the meantime, the impact on the global world of energy has been enormous. The headline talk is about the most significant falls in oil demand in history, the OPEC + agreement to reduce global oil production by 10m barrels per day, and negative oil prices. However, the impacts are being felt well beyond oil, be that on other commodity prices, power prices, and renewables.
How has Coronavirus impacted energy markets?
Oil is the easiest place to start. What Covid-19 has done is stop a large part of the world from travelling, which is having a massive impact on oil demand. In April, the decline was around 20m barrels a day (circa 20% of total demand). At the same time, we have the shenanigans of Saudi Arabia and Russia, both of whom are scheming to take back control of the oil market from the US. Against this backdrop, and despite cuts in production announced by OPEC+, I believe oil prices will remain weak for many quarters to come, and it will also be many years, if ever before demand reaches 2019 levels.
Energy prices, in general, have fallen significantly due to weaker demand. Oil prices have fallen from nearly $60 a barrel at the start of the year to minus $37.63 on 20 April. Global coal and gas prices are 50% lower than this time last year, and power prices at times in minus almost daily across much of continental Europe. The consumer does benefit from this, particularly if you are filling up your car tank; still, it does make the business environment very stressful for producers and large customers across the world as there is no certainty in the market.
Environmental emissions have collapsed across the world. In Northern India, people can see the Himalayas for the first time in years, and anyone who is living in a city will tell you that air quality has improved. The facts back this up. In London, ultrafine particulate matter is currently around half what they would typically be at this time of the year as people stay indoors and do not drive. It is the same with carbon emissions, which could fall as much as 8% this year across the world, making it the most significant fall so far. Of course, these emissions are all likely to bounce back as economic activity improves. But what it does show is that humanity, when united in a common cause, can change quickly. Who would have thought that it would be possible to stop all civil aviation flights across the world! This gives me hope that we will be able to deal with cross border environmental issues such as pollution as well as climate change.
Renewables are very interesting. Some renewable projects may be delayed or not completed this year, and supply chains have their problems too, but overall, nothing too major. What is interesting is that intermittent renewables are supplying large amounts of power in countries as far apart as India and Germany. In the case of Germany, renewables supplied over half of its power needs in Q1, and in April, a record was reached on Easter Sunday when renewables met 77 % of all the country’s power needs. The BUT in all of this is that, as we move beyond subsidies, who is going to build solar or wind facilities when they face the risk that they may have to pay people to take their power at a certain time of the day? Even worse, PPAs (Power Purchase Agreements), which are seen by many as the next big step forward for renewables will become more difficult to come by; and even if successful, terms are going to make it challenging to roll out at scale.
Finally, we will see closures and a restructuring of global energy. Prices for all energy commodities have fallen over the last decade. This declining market, despite increases in demand from countries like China and India, has made it a difficult place to invest and operate. The Coronavirus has only worsened the situation. In 2008, the oil price reached $147. They averaged $50 last year. Today, they are around $20. Power prices in Europe were $70 in 2008. Last year, they averaged $50, and today they are $25. Coal prices hit $180 per tonne. In 2019, they averaged around $100, while today they are $50. Natural gas is even more dramatic. In 2008, US natural gas prices averaged $8.80. Last year they were $2.56, and now they are $1.80. At these price levels, we will see massive disruptions, bankruptcies, and closures in the coming quarters and years. Higher cost oil facilities will be closed. Coal mines and plants will become unprofitable, and there will be consolidation across the whole industry. The bigger question is whether capital will come into this market to push a cleaner energy world.
My view is that capital will come into the energy market to restructure and consolidate it. Still, capital will not go into new opportunities such as hydrogen or even large-scale renewables without government support, or something radical like an impactful carbon tax…
