Mar 18, 2020

Axios Generate

By Ben Geman
Ben GemanAmy Harder

Good morning. Today's Smart Brevity: 1,213 words, 4.5 minutes.

Situational awareness: "International climate talks scheduled for Glasgow in November have been thrown into doubt as the global clampdown on travel intensifies because of the coronavirus pandemic." (FT)

🎵 Tomorrow marks the birthday of Mason Jennings, so I thought this would make a nice intro tune for these harrowing times...

1 big thing: Coronavirus could fuel Middle East unrest

Illustration: Eniola Odetunde/Axios

The coronavirus isn’t just wreaking havoc on our health, livelihoods and economies, it’s now poised to feed Middle East unrest, Axios' Amy Harder reports.

The big picture: The oil-rich region is being ravaged by the novel coronavirus and low oil prices that have dropped even more due to the pandemic cutting off global demand and a related price war between Saudi Arabia and Russia.

How it works: Nations in the Middle East depend heavily on oil revenue for a large portion of their economies, so persistently low oil prices sap government money for a vast array of public services, including health care and education.

  • The less money they have to provide services for their populations, the greater the risk of unrest that could, some experts say, fuel extremism and violence.

What they’re saying: Experts generally agree the one-two punch of COVID-19 itself and resulting lower oil prices will significantly exacerbate problems in the region, particularly Iran and Iraq, both which are already dealing with a host of other problems.

  • “What happens with failed states, is you have young, unemployed men with nothing to do and access to extreme ideology,” Helima Croft, global head of commodity strategy at RBC Capital Markets, told Axios.
  • Referring to the unrest that ultimately helped set the stage for the 9/11 attacks, Croft added: “Problems in the Middle East often don’t remain in the boundaries of these countries.”

By the numbers: If current oil-market conditions continue — oil prices hovering at or below $30 a barrel — some oil-rich nations could see their oil and gas income fall by 50% to 85% this year, the International Energy Agency and OPEC said this week in a joint statement.

  • That would be the lowest levels in more than two decades, according to a recent analysis by IEA, an intergovernmental research group.
  • Although their joint statement doesn’t specify which countries, it presumably includes members of OPEC, the Organization of Petroleum-Exporting Countries.
  • A request for comment to IEA Tuesday evening wasn’t immediately returned.

Between the lines: “The lower the prices go, the greater chance of Middle East upheaval,” said Peter Atwater, a behavioral economist and adjunct lecturer at William & Mary.

Yes, but: Civil unrest has declined in key oil-rich Middle East nations since 2011 protests, largely because some governments have become more repressive since then, said Niamh McBurney, who leads Middle East and North Africa analysis for global risk consultancy Verisk Maplecroft.

What we’re watching: How low oil prices go and how long they stay there.

  • "If [low prices are] short-lived, most governments in the region will be able to hold off on cuts to social welfare systems and essential services,” McBurney said by email.
  • “If it persists through to the end of the year, countries like Egypt, Tunisia, Oman, Iraq, Kuwait will have difficult decisions to make.”

Go deeper: OPEC-Russia oil price war escalates as Saudi Aramco announces supply increase

2. Oil plunges and industry pain spreads

This morning is bringing fresh and stark signs of how economic contraction from COVID-19 is crushing the oil market and forcing companies to cut back.

The big picture: West Texas Intermediate is trading in the $25-per-barrel range, which Bloomberg points out is the lowest level since 2003.

  • The global benchmark Brent crude is also dropping a lot, trading in the $27 range compared to nearly $70 in early January.
  • The price collapse stems from COVID-19 freezing a significant amount of travel and economic activity, and the collapse of the Saudi-Russia agreement to limit production.

Threat level: "An OPEC+ supply surge and crumbling oil demand are leading to concerns about a surplus that could overwhelm global storage," BofA Global Research said in a note this morning (emphasis added).

Driving the news: The number of companies announcing spending and workforce cutbacks keeps growing.

  • This morning, the huge U.S. producer ConocoPhillips said it would cut $700 million from its planned capital spending this year and scale back its share buy-back program.
  • Oilfield services giant Halliburton is furloughing about 3,500 employees in Houston as oil producers slow operations, per Reuters.
  • "The sudden crash in global oil prices has prompted Australian oil and gas producer Oil Search to cancel sale talks and slash spending by up to $675 million by shelving projects around the world," the Sydney Morning Herald reports.
  • Argus Media's Ben Winkley, via Twitter, tallies several more announcements as they come "thick and fast."

What's next: Analysts are racing to update their estimates of how much global oil demand is cratering. Rystad Energy this morning sharply revised their projections from a week ago.

  • They now see year-over-year demand dropping 2.8 million barrels per day, which would be a 2.8% decline. A week ago they were projecting only a 600,000 barrel per day full-year drop.
  • "At the moment we expect the month of April to take the biggest hit, with demand for oil falling by as much as 11 million bpd year on year," the consultancy notes.
3. The stakes of China's response to coronavirus
Reproduced from Rhodium Group; Chart: Axios Visuals

One complicated dimension of the unfolding coronavirus tragedy is what it ultimately means for carbon emissions in China, by far the world's largest greenhouse gas emitter.

Driving the news: A Rhodium Group analysis shows China's emissions grew by another 2.6% last year.

  • But now the curtailment of travel and industrial activity due to COVID-19 has led to steep declines this year. How much they will bounce back is unclear, Rhodium finds.

What's next: Analysts are keeping their eyes peeled for signs of what the Chinese government's economic stimulus measures will look like.

  • A "property and construction-heavy" package could increase cement and steel production, Rhodium finds. That scenario increases the economy's carbon intensity — that is, emissions per unit of economic output — as coal's market share rises for a time.
  • "If stimulus resources are directed towards non-fossil sources of energy production, the opposite could occur. What does this all mean? Essentially, it’s just too soon to tell," they conclude.

A separate new analysis of China's energy sector and economy by the Oxford Institute for Energy Studies similarly finds: "[T]he focus on COVID-19 has slowed progress on other policy priorities including environmental policies and liberalisation, and a strong fossil-fuel heavy stimulus would further delay them."

By the numbers: "Coal consumption by the six largest power plants in China has fallen over 40% since the last quarter of 2019," Rhodium notes.

  • Their analysis also cites a recent estimate by the climate news and analysis site Carbon Brief, which found that in the four weeks after the Chinese New Year, China's CO2 emissions likely fell by 25%.
4. The big picture: Coronavirus and emissions

Glen Peters of the Center for International Climate and Environment Research says the economic upheaval means "it is becoming increasingly likely that global carbon dioxide emissions will drop in 2020."

Where it stands: The decline could be significant, he notes. But Peters, writing in The Conversation, notes that emissions declines that followed past economic crises "suggest a rapid recovery of emissions when the pandemic is over."

  • "But prudent spending of economic stimulus measures, and a permanent adoption of new work behaviours, could influence how emissions evolve in future," he adds.

Read the whole thing.

5. Catch up fast: Exxon, solar, electric vehicles

Climate: "Exxon Mobil Corp. suffered a setback in a climate change case when a federal judge ruled that a consumer protection lawsuit filed by Massachusetts should go back to state court." (Bloomberg)

Renewables: "The spreading coronavirus is threatening project schedules in the booming U.S. solar industry following a year in which the sector topped natural gas as the nation’s top new power source, according to a report published on Tuesday." (Reuters)

EVs: "State lawmakers took significant steps last week to bolster adoption of emissions-free transportation, in moves that could result in millions of dollars in charging infrastructure investment and more electric vehicles on the road." (Utility Dive)

  • Their piece explores steps by lawmakers in Florida, Washington state and Utah.
Ben GemanAmy Harder