All this could mean that global demand never returns to its 2019 record high, a scary prospect for oil companies and their employees from Texas to Western Europe, and countries such as Russia, Nigeria or Iraq that depend heavily on selling crude.
“I think the pressure to accelerate the forces driving the energy transition will only increase as a result of this crisis,” said Mark Lewis, global head of sustainability research at BNP Paribas Asset Management in Paris.
Before the pandemic, analysts predicted that the peak in oil demand would occur around 2040 due to the rise of electric cars, increased energy efficiency and a switch to alternative sources.
But the coronavirus has forced many assumptions about the future of oil to be tossed out.
Everything has changed
At minimum, the shock of the coronavirus crisis will take the oil industry years to process.
The Paris-based agency estimated earlier this month that demand will fall in April to a level last seen in 1995, when the global economy looked radically different.
But industry players also need demand to start the recovery process in the second half of 2020.
“The key question is how quickly the Covid-19 pandemic is contained and comes to an end, since that dictates the degree of movement around the world,” said Jim Burkhard, head of crude oil research at IHS Markit, a research firm. “No one knows that yet.”
Current Wall Street forecasts for demand to recover fully in one or two years rely on two main assumptions: that governments will quickly ease rules keeping people indoors, and that economic activity will bounce back very rapidly once restrictions lift.
In this case, demand could return to 2019 levels as soon as 2022, according to IHS Markit.
There’s some evidence to support this upbeat view. Goldman Sachs notes that weekly refinery data indicate that oil demand in China — the world’s biggest consumer — is only about 5% down compared to pre-crisis levels, suggesting a robust recovery.
But IHS Markit has also modeled an alternative scenario in which governments are slower to lift quarantine rules, or a second wave of the virus hits. Should that happen, demand may never fully recover.
“If we do have a second wave — even if it’s a quarter of the intensity of this one — it’s still going to keep oil demand down and further entrench changes in behavior,” Burkhard said.
He also says the psychological impact of the virus will weigh on travel for a long time, encouraging businesses to limit the number of conferences they attend and reducing the frequency at which people fly generally.
“I just fail to see how aviation can ever go back to the rates of growth we were seeing before this crisis emerged,” he said. Aviation accounts for a smaller portion of oil demand than ground transportation, but it has been a key driver of growth in recent years.
Last week, Rystad Energy, a consultancy based in Oslo, moderated its predictions for a rise in oil demand in the second half of the year, factoring in a weaker outlook for gasoline and jet fuel consumption.
The big role for governments
Such behavioral shifts, the thinking goes, could clear the way for governments to take more aggressive action to promote renewable energy and pivot away from the use of fossil fuels, allowing countries to meet their commitments under the Paris Accord sooner.
“‘If we look at the severe harm that has been caused by the corona crisis to our economies all over the world, we also have to encourage each other not to forget climate protection,” she said.
It’s also a major opportunity for China, Lewis said. The country recently extended its subsidies on electric vehicles to 2022, but later said it will cut them by 10% this year.
Bjornar Tonhaugen, head of oil markets at Rystad Energy, still expects demand to hit a new record in 2022, powered by a surge in activity as daily life gets back to normal. But government action in the wake of coronavirus could “fast forward” the timeline for peak consumption.
“Lower prices are slowing down this move to renewable energy sources,” said Giovanni Staunovo, an oil analyst at UBS, who does not believe the peak in demand has been reached.
But Lewis noted that renewable energy has gotten much less expensive in the past decade, with prices falling 70% to 90% depending on the technology. That has the potential to speed up a transition that was already underway — in contrast to the aftermath of the 2008 financial crisis.
“You’re bringing forward what was already starting to look inevitable,” Lewis said.