The Coronavirus Crisis
The fossil fuel industry has been one of the hardest-hit economic sectors of the coronavirus crisis. The energy industry as a whole relies on consistent economic growth. As the demand for goods, services, and travel increases, so does the demand for energy. Therefore, when the global economy lingered through an extended period of inactivity, the energy industry collapsed. While the renewable energy industry continued to experience some level of growth during the coronavirus pandemic, the fossil fuel industry flopped. As the global economy was put on a virtual lockdown as a result of the spread of the coronavirus, a remarkable decline in industrial operations, airline travel, and driving lessened the need for fossil fuels in both developed and developing countries all around the world. As a matter of fact, the drop in travel, economic activity, and numerous other aspects of typical daily life kicked off the greatest decline in the demand for energy that has ever been recorded throughout human history (Rathi, 2020). As less oil, coal, and gas were consumed, fossil fuel companies suffered through one of the most challenging periods of the fossil fuel era. When the economy started to bounce back at the end of May and through the beginning of June, the price of oil climbed significantly. However, energy experts say that the challenges faced by the fossil fuel industry are far from over.
A Comeback for Oil Prices?
Between April 21st and June 5th of 2020, the price for West Texas Intermediate crude oil climbed from $11.26 a barrel to $39.55 a barrel, which is representative of a 251 percent increase. Between April and June, oil prices rose faster than any previous time in history (Tomlinson, 2020). The dramatic comeback in oil prices has made some economists optimistic about the future of the fossil fuel industry. As people around the world are beginning to go back to work, travel, and buy goods and services, the demand for oil and gas has started to increase. However, even with oil prices hovering around $40 per barrel, most American oil companies need crude oil prices to be around $50 per barrel to make a profit. Therefore, optimism alone cannot save the oil and gas industry. Moreover, some energy analysts say that the price of oil make never recover, as the world has started to shift into a new model for global energy consumption and production. In the worst-case scenario, one energy report says that the fossil fuel industry has already entered into the beginning of a $25 trillion collapse (Ambrose, 2020).
Mounting Oil Reserves
Even though the world has started to return back to work, data from S&P Global Platts indicates that the global community still has a combined one billion barrels of oil in storage facilities (Gupte, 2020). There are also over 200 million barrels of oil and other petroleum products that are being stored on temporary floating barges and freight ships, which is representative of the biggest level of crude oil being stored within floating vessels that has ever been experienced. While global traffic from vehicles and airlines has started to pick up, the imbalance of the supply of oil versus that demand for oil continues to remain extraordinarily skewed. As a result of the global slowdown in the demand for oil, energy data from the Fitch Group has estimated that the oil industry will lose around $1.8 trillion in annual revenue by the end of 2020 (Tomlinson, 2020). In addition to the drop in demand, overflowing oil and gas storage facilities continue to be a costly side effect of the decline in global economic activity.
Increasingly large reserves of oil and gas have started to create immense problems for fossil fuel companies, global policy makers, and even the overall health of the global economy. The oversupply of oil and gas felt throughout countries around the world has created a dire collapse in oil prices that has hovered near historic lows for an extended period of time. This situation has started to create tremendous levels of uncertainty and tension in countries that depend on oil and gas revenue. These nations are turning to the Organization of the Petroleum Exporting Countries (OPEC) for assistance. However, while OPEC has moved forward with initiatives to cut oil production to get a handle on the oversupply problem, the organization’s actions have had a very minimal impact on remedying the situation for fossil fuel producers.
According to the International Energy Agency’s executive director Fatih Birol, “Demand will not jump from one day back to levels we had before the crisis and we still have a huge amount of surplus and plus a lot of floating oil around the world, so therefore one needs to be very careful if one doesn’t want to change” (Gupte, 2020.) These comments were primarily directed at oil and gas companies that have not followed guidance to cut levels of fossil fuel production. While it’s clear that many companies want to retain their workforces, if they cut production, they are often unable to generate enough revenue to pay their workers. On the other hand, if oil and gas companies continue to pump out record levels of fossil fuels, the entire industry may collapse. The situation has become transformed into a double-edged sword where there are consequences coupled with somewhat favorable outcomes irrespective of the chosen path.
As the fossil fuel industry continues to seek out a new direction to save itself, President Donald Trump is one thing that the industry cannot afford to lose. President Trump has been a staunch advocate of fossil fuels and the notion of American energy independence fueled by a revival of oil, gas, and coal production. In addition to supporting the fossil fuel industry, some economists and energy experts say that President Trump has been actively working to stifle the growth of the renewable energy industry. By appointing former fossil fuel executives to head numerous government agencies, these executives have been moving forward with actions that bolster fossil fuel production. If President Trump is not reelected to a second term in office, the oil and gas industry may face new and unexpected challenges during the already unprecedented decline. Energy analysts say that a Democratic White House will undoubtedly pull back support from the fossil fuel industry and provide incentives for green energy development. Moreover, Democrats may try to move forward with initiatives to put a price on carbon, which would further incentivize alternative energy while simultaneously making it more expensive to burn fossil fuels.
A study conducted by researchers from the University of California at Berkeley found that the U.S. could achieve 90 percent of electricity generation from renewable energy sources by 2035 if certain policies are implemented to incentivize wind, solar, and hydro power (Tomlinson, 2020). As some fossil fuel energy generation operations have been shuttered during the coronavirus pandemic, a surprising number of renewable energy projects have continued to break ground, like Spain’s 500-megawatt Núñez de Balboa solar power plant. This single solar power generating facility will be able to supply enough electricity for upwards of 250,000 people (Givetash, 2020). This is just a singular example of one of the many renewable energy initiatives that have been coming online despite the significant drop in fossil fuel consumption.
Leaders from the International Energy Agency say that the global energy industry that emerges after the conclusion of the coronavirus pandemic may be significantly different that the energy industry that existed prior to the pandemic (Rathi, 2020). A drop in overall operating costs, coupled with easy access to electrical grids has produced some of the most ideal conditions ever experienced for the renewable energy industry. When the renewable energy industry is compared to fossil fuel industry’s need for convoluted supply chains, a large workforce, and a continuous flow of raw materials, renewable energy generation typically doesn’t require the same level of supply chains or a consistent flow of raw materials to keep the energy operations running. Moreover, renewable energy generation sites typically only need abundant levels of wind, sunshine, or flowing water to produce electricity. As fossil fuel power plants have continued to be taken offline, the overall proportion of renewable energy within the global electric power grid has grown precipitously.
The impending collapse of the fossil fuel industry has compelled many industry executives to ramp up their lobbying efforts with the Trump administration. As the International Energy Agency has released reports that highlight how the coronavirus fallout could end up triggering the biggest drop in energy needs since World War II, fossil fuel lobbyists have been vigorously working to save their industry. Since the start of the coronavirus pandemic, the overall demand for oil, coal, and natural gas has dropped by over ten percent (Ambrose, 2020).
Researchers from the Wood Mackenzie energy consulting firm have published scenario figures that emphasize how growth in green energy could initiate an extended period of no growth for the global fossil fuel industry. Under certain scenarios, their models indicate that the demand for oil will remain flat throughout the rest of 2020, which will then be followed by a consistent decline through the 2030s (Tomlinson, 2020). While these models are shocking for many oil and gas companies, it’s important to note that these models contradict future energy forecasts from both the International Energy Agency and the U.S. Energy Information Administration.
What kind of an impact would a perpetually declining oil and gas industry have on the American economy? Dean Foreman, who is the Chief Economist for the American Petroleum Institute, says that U.S. oil and gas industry workers earned on average almost double the salary of workers across the spectrum of other American industries. If these jobs were to disappear, Foreman stresses that the overall economic impact would be severe. With this in mind, the job cuts are already starting to mount for the industry. On June 8th, 10,000 workers were cut from the oil giant BP (Finley, 2020). In response to the massive cut in jobs, the CEO of BP said the cuts were necessary to make up for the loss in revenue that was initiated by persistently low oil prices. This may be just the beginning of the job losses, according to forecasts from numerous energy analysts around the world.
When looking at the big picture, the coronavirus pandemic has exposed some of the inherent weaknesses of the global fossil fuel industry. Declining oil prices, increasing stockpiles of oil and gas, and industry wide job losses threaten to undermine the fossil fuel industry for the foreseeable future. As the renewable energy industry continues to gain traction, some energy analysts question whether the fossil fuel industry will ever truly make a sustained comeback.
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