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The devastating impact of the great lockdown
Demand for energy is plunging in the worst economic slump since the Great Depression, and governments have only a limited ability to cushion the blow
Ed examines the forces shaping the energy industry globally
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As the number of newly confirmed coronavirus cases starts to level off in many countries, governments have been starting to think in more detail about how they can reopen their economies. President Donald Trump on Thursday launched what were described as “guidelines for opening up America again”, and suggested that some states would start to loosen restrictions before May 1, “one careful step at a time”. The German government this week set out a plan to start allowing smaller shops to reopen, while maintaining strict hygiene measures, from April 20.
As these ideas have begun to take shape, however, it has become increasingly clear that the reopening is going to be a slow and tentative process, with setbacks along the way. The point was made vividly by Jean-François Delfraissy, who leads the French government’s scientific council on the coronavirus. “We are not going to go from black to white, but from black to dark grey,” he told a senate hearing this week. “And to go from grey to shaded grey will need time. We see it as taking two months.”
The UK and New York State both announced on Thursday that their lockdowns would not be lifted until mid-May at the earliest, and India said on Tuesday its restrictions would remain in place until at least May 3. When leading Wall Street executives joined a call with President Trump on Wednesday, they were not demanding a quick end to restrictions on business, but urging the government to help provide more testing, Politico reported. The White House is exploring ways of meeting that demand.
The IMF this week gave a stark depiction of the devastating impact of what it is calling “the Great Lockdown”, in its latest World Economic Outlook. The world is heading into a much worse decline than in the financial crisis of 2008-09, with global GDP shrinking by 3% this year, the IMF believes. It is forecasting a sharp bounceback in 2021, with growth of 5.8%, but acknowledges that “the risks for even more severe outcomes, however, are substantial”. Its outlook shows a more pessimistic scenario, in which shutdowns last longer this year, and there is a second outbreak in 2021. In that scenario, the IMF expects world GDP to be almost 8% lower next year than in its base case.
The IMF described the drop-off in oil demand as “unprecedented”, and highlighted the impact on oil-exporting countries, warning that it would be a particularly severe blow for those with high production costs and undiversified revenues. In its base case, it is forecasting that GDP will shrink this year by 2.3% for Saudi Arabia and 5.5% for Russia.
The OPEC+ countries try to rebalance the oil market
Their slumping economies created a strong incentive for Russia and Saudi Arabia to do what they failed to do a month ago, and agree concerted cuts in oil production to cushion the blow. After four days of wrangling, the OPEC+ group finally reached an agreement on Sunday April 12: its members have pledged to cut their production by 9.7 million barrels per day in May and June, 7.7 million b/d for another six months, and then 5.8 million b/d for a further 16 months. It is the largest output cut since OPEC was founded 60 years ago.
President Trump played a central role in the negotiations, talking to the leaders of Russia, Saudi Arabia and Mexico — who had been refusing to make the cuts that other countries demanded — to cajole them into making a deal. At one point he hosted a four-way teleconference with King Salman of Saudi Arabia, President Vladimir Putin of Russia and President Andrés Manuel López Obrador of Mexico, to help bridge the gap between them.
After the deal was announced I spoke to Dan Brouillette, the US energy secretary. He said that while the US wanted good relations with Saudi Arabia, and welcomed Saudi investment, it also wanted a strong domestic energy industry and a “fair and balanced trade relationship”, and that point had been made clear in the talks.
Brouillette acknowledged that the cuts implemented by the OPEC+ countries might not be enough to rebalance the market, but asked: “What if we had done nothing? That is the obvious alternative and I think, relative to that, this is going to help a lot.”
The US is hoping that the total drop in world oil supply, including shut-ins and declines from other producers as well as the OPEC+ cuts, will head towards 20 million b/d. The administration has no plans to compel American companies to cut production, but is pointing to forecasts showing that output is on a declining trend in the US and elsewhere in the world.
Wood Mackenzie expects onshore crude production from the US Lower 48 states to drop by about 900,000 b/d between now and the end of the year. Genscape, a Wood Mackenzie business, calculated earlier in the week that shut-ins already announced in the US Lower 48 will add up to about 241,000 b/d of production lost in May, and the announcements are still coming. The pressure on storage capacity in North America is becoming intense, with the tanks at Cushing, Oklahoma, set to reach effective limits by the end of next month; companies are running out of places to put the unwanted oil that they are producing. In the physical crude markets many US blends are selling at deep discounts to WTI futures.
The Texas Railroad Commission (RRC) has been looking at reviving the use of its powers to impose production limits, which have been left dormant for decades. A video meeting on Tuesday heard vigorously presented arguments on both sides. The American Petroleum Institute argued against the state exercising its authority to set quotas, warning that such a move would “mainly affect the most efficient and economic oil production”. Scott Sheffield, chief executive of Pioneer Natural Resources, however, argued that the RRC’s concession of oil market management to OPEC since the 1970s had been an “economic disaster”, with the result that “our industry has created so much economic waste that nobody will buy our stocks”. The commission will consider the question again at another online meeting on April 21.
The oil markets, meanwhile, have been generally unimpressed by both the OPEC+ announcement and the RRC’s deliberations. Brent crude has dropped from a high above $35 a barrel last week to below $28 on Friday morning, while WTI has dropped from over $27 to less than $20.
The governments of oil-producing countries have shown signs of growing unease that their efforts so far have been ineffective. The energy ministers of Saudi Arabia and Russia spoke on the phone and issued a joint statement on Thursday, emphasising that they were “strongly committed” to implementing the OPEC+ agreement, and were “prepared to take further measures jointly with OPEC+ and other producers if these are deemed necessary”.
The Trump administration for its part has been floating suggestions of additional help for US oil producers. One idea being circulated would mean the US government buying crude still in the ground to add to the nation’s Strategic Petroleum Reserve.
Ultimately, though, any measures taken by governments can only mitigate some of the worst effects of the downturn. The crisis facing the industry will end only “when you turn the demand cycle back on”, as Dan Brouillette put it. Until then, companies will be face a gruelling battle for survival.
More coronavirus updates
For a weekly look in detail at how the pandemic is affecting the energy industry, take a look at Wood Mackenzie’s new coronavirus impact tracker, published every Wednesday.
For a great discussion on the consequences for the transition to lower carbon energy, this hour-long webcast is well worth a watch.
Royal Dutch Shell has become the latest large European oil and gas company to set an ambition of becoming a net zero emissions business by 2050, following similar aspirations announced by Repsol and BP. Shell said a crucial part of the strategy for achieving its goal would be working with its customers to cut their emissions, using technologies such as carbon capture. “We must help our customers decarbonise,” the company said. “It means working with our customers to address the emissions which are produced when they use the fuels they buy from Shell.”
Equinor has been given Norwegian government approval to build a floating offshore wind farm that will power two of its oil and gas platforms, a world first.
Demand for flexible packaging is surging as consumption of food for home consumption and medical supplies rises.
President Trump has been talking about a $2 trillion infrastructure investment package as a way to get the US economy going again after the shutdowns. There are at least seven potential power transmission projects that could form part of such an infrastructure programme, Greentech Media reported.
And finally: renewable natural gas produced from waste is seen by some as a fuel with exciting prospects in a carbon-constrained world, but it has opponents as well as supporters. The LA Times carried a good piece on the debate over “cow poop as the next ‘clean’ fuel”.
Simon Flowers — The coronavirus pushes oil towards the abyss
Gavin Thompson — ‘Life also, world also’: India extends its lockdown
Alan Gelder — Refining and the energy transition: Is the coronavirus a sign of things to come?
Tom Mitchell — Why China’s state oil company merger looks like an unusual step
Izabella Kaminska — Why the real economy needs a prudential authority too
William Nordhaus — The climate club: How to fix a failing global effort
Inês Azevedo and others — The paths to net zero: How technology can save the planet
James Temple — The unholy alliance of covid-19, nationalism, and climate change
Morgan Bazilian and Kipp Coddington — Carbon capture, utilization, and storage under the Paris Agreement
Quote of the week
“I saw a couple of folks on the news who are in the business, and they said: ‘I think they need to do more.’ My immediate response to that is well, you can close your company today and help that situation. Stop your production altogether if you want to.” — Dan Brouillette, US energy secretary, suggested he had little time for calls for the administration to intervene to compel cuts in the country’s oil production.
Chart of the week
Most of the focus in the coronavirus-related downturn has been on the oil industry, but renewable energy and electric vehicles are taking a hit, too. Demand for electric cars has been holding up relatively well in Europe, but Wood Mackenzie analysts expect a steep fall in worldwide sales for the year as a whole. There has also been some disruption to production of cobalt, a key raw material for lithium-ion batteries. One possible consequence of the pandemic could be “a reassessment of globalised EV supply chains”, say Wood Mackenzie’s Ram Chandrasekaran and Gavin Montgomery.
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