Oil sector poised to bounce back from the coronavirus

The big picture:

• Yes, the coronavirus is throwing the industry into its worst crisis ever, and thousands of workers and possibly hundreds of companies could go bankrupt in the coming months and years.
• But no, our society’s structural foundations that run on oil have not changed — and that will become clear in the long term, after the crisis is over.

Where it stands: A lot of potential factors could make this moment in history the beginning of the end for the oil industry, but both history and experts suggest that absent explicit actions by governments, the long-term outlook for the oil industry is at least neutral, and even possibly positive.

Let’s look first at the three factors suggesting the outlook will be positive for the industry, and then three that could change things.

The three positives:

1) Recessions put environmental concerns on back burner

“What I worry about most is history suggests when the economy is suffering, the pace of environmental policy ambition wanes,” said Jason Bordoff, a former Obama administration energy official who now leads Columbia University’s Center on Global Energy Policy. “It means that policies that would slow oil demand growth may get pulled back.”

2) Economic growth = oil demand growth

Oil demand tracks closely with economic growth. It may not feel this way now, but history suggests the economy will eventually get better.

• “Most of the evidence indicates that the economic effects of the 1918 influenza pandemic were short-term,” per a 2007 paper by the St. Louis Federal Reserve.
• The oil industry also recovered and undertook the fracking boom following the 2008 and 2009 recession.

This crisis moment could actually force better financial decisions overall and weed out producers less financially secure, Bordoff says. And as the economy improves and demand recovers, "strong companies might do quite well over the next decade,” Bordoff said.

3) Unchanged government policies

Why don’t you just stop eating if you want to lose weight?

• The ridiculousness of that question explains why the extreme dropoff in oil demand is not a successful strategy to get off oil.
• Much like a successful diet is achieved through time and gradual change to healthier foods and fewer calories, so too, is getting off oil and transitioning to cleaner sources.

“It’s important to change oil demand over a period of years and decades if you want to create a sustainable reduction in emissions,” said Ed Crooks, vice chairman of the Americas for consultancy Wood Mackenzie.

The three variables:

1) Coronavirus-fueled changes in society

This pandemic could change our society for the long haul. Maybe…

• We’ll vacation closer to home for a long time after this.
• We’ll keep Zooming into conferences.
• Flying will become prohibitively expensive after accounting for empty middle seats.
• We’ll buy gasoline-powered cars because fuel is cheap and we’re wary of crowded buses and subways.
• We’ll buy things even more online, filling our trash bins with even more oil-derived plastic.
• Our pent-up desire to be out in the world will lead to a surge of flying and driving.

The first three would reduce oil demand, while the last three would increase it. Regardless, they’re tinkering around the edges.

By the numbers: Lower oil demand from aviation, road transport and cruise ships could result in a loss of just over three million barrels a day by 2040, compared to an overall oil market of 115 million barrels of oil a day or more by then, an S&P Global Platts Analytics analysis found.

2) Economic stimulus plans

If — this is a big if — countries around the world seek to infuse their economic stimulus plans with clean-energy policies, that could go a long way in keeping the oil industry on its knees where it is now.

• Europe seems to be the most likely part of the world to double down on its already ambitious climate-change goals. But that’s not where oil demand was poised to grow a lot anyway.
• China appears to be wavering on its climate-change goals, which would have the upshot of increasing fossil-fuel use of all kinds.
• Poorer and rapidly developing economies, like India and other Southeast Asian nations, are where oil demand is poised to really grow. Yet these are also countries most likely to push economic recovery any way they can get it, rather than reducing fossil fuels.

3) The presidential election

The most immediate and obvious impact of Joe Biden winning would be that he would likely infuse clean energy into any additional stimulus measures still needed by then.

• There’s also a ripple effect. A Biden administration would put pressure on other nations — much like Barack Obama did — to inject climate concerns into diplomacy and economic recoveries.
• If President Trump wins reelection, we can expect little explicit focus on clean energy other than as a bargaining chip to get concessions to help the oil industry, which is often how Washington works anyway.

The bottom line: We might not be going anywhere right now, but neither is the oil industry.