On the open plains of Wyoming, in the shadow of the Rocky Mountains, something strange began happening last month. Coronavirus itself had barely touched this sparsely populated American state. But the impact of Covid-19 could already be seen.
As thousands of aircraft were grounded and billions of citizens ordered to stay home, global demand for oil, the key lubricant of world commerce, had crashed so far and so fast that producers in Wyoming were willing to pay someone 19 cents a barrel to take it off their hands. It was worse than worthless, it had become a burden.
A thousand miles northwest, in Alberta, Canada, home to perhaps the world’s single largest deposit of hydrocarbons, a similar story was playing out.
By Mid-March, if you so desired, you could have purchased one of Canada’s estimated 1.7 trillion barrels of oil, for just $5. In other words, 159 litres of the world’s most vital commodity would set you back less than a pint of beer.
A month later, what may have seemed like mere trivia from obscure corners of the global oil market has rippled across the US, as the price of America's key benchmark, West Texas Intermediate, plunged as low as minus $40 on Monday - the first time ever it had been below zero.
As supply outstripped demand and storage space filled up at the fastest pace on record, no one wanted to be on the hook for taking delivery of any oil in May. There would be nowhere to put it and no one to buy it off you.
Negative prices were to some extent a technical blip caused by the way oil is traded on futures contracts, but experts think the phenomenon is likely to recur next month as the world economy continues to shrink.
How the situation develops over the coming months could have lasting impacts on what will soon return to being the most important battle facing humanity – the climate crisis.
US and Canadian oil production, which is relatively high-cost compared to other nations', such as Saudi Arabia, looks set to be decimated by the catastrophic slump in oil prices and some experts think it will have a hard time bouncing back. Thousands of jobs will go and many oil wells will cease production. This in turn, the argument goes, will aid the shift towards a lower carbon world.
There are other aspects to the crisis that could be good for the climate; potential changes in our behaviour could stick with us, meaning people work from home more often, travel less and shop locally, for example. Companies that currently fly supplies from all around the world or rely on migrant labour may conclude that building things closer to home is less risky.
While these may sound like the rosy predictions of green campaigners seeking a silver lining, they are in fact those of Jeff Currie, global head of commodities research at Goldman Sachs. The Wall Street investment bank is not known for environmental utopianism, its analysis is hewn from mountains of data and cold, hard facts.
Currie and his team believe that plummeting demand caused by the current crisis could, paradoxically, lead to a massive spike in oil prices next year when the economy comes out of hibernation. They predict that the oil industry won’t be able to keep up, leaving a gap for renewables such as wind and solar to fill.
In an eye-catching report, Currie said coronavirus would “permanently alter the energy industry and its geopolitics, restrict demand as economic activity normalises and shift the debate around climate change”.
A key reason for this is that the energy source to which the industrialised world has been addicted for more than a century has some major physical constraints. It can’t simply be turned off and on like a tap, Currie tells The Independent.
“Oil wells are very different from other industrial processes. They’re organic deposits that require pressure to extract them. When you shut them down you typically do damage to the well,” says Currie.
No one has ever attempted to turn off the oil supply so quickly as in the last few weeks. Global demand has cratered by as much as 30 per cent, or 30 million barrels a day, far in excess of anything seen in any previous downturn. Meanwhile, Russia and Saudi Arabia have kept production levels high as they engage in a battle for market share.
“Because oil, and energy more broadly, must be contained within infrastructure like pipelines tankers and refineries, you can’t run a surplus indefinitely,“ says Currie. “You can’t just pour the oil outside of the well, it has to go into the system.”
Key parts of that system are already full, which means that many producers, particularly those based inland that are reliant on pipelines rather than ships to transport their oil, will have no choice but to shut down, or “shut in”, in industry parlance.
Shutting in and then opening up again can be prohibitively expensive, which is why producers in Alberta, Wyoming and beyond are willing to sell oil at a loss rather than halt production altogether.
Oil is often described as being found in “reservoirs” or “pools”, giving the misleading impression that it sits in cavernous holes underground which simply have to be located and tapped. It’s easy to imagine sticking something akin to a huge straw in the ground and sucking out the oil.
In truth oil deposits are often found saturated in tiny holes of porous rocks. Pressure must be applied constantly to force the oil out of the well. This is easy at the start when pressure can be naturally high, resulting in the kind of gusher often depicted by Hollywood.
But, as a well matures, it becomes increasingly tricky – and therefore expensive – to apply the required pressure and extract oil. Starting up the process again, or drilling new wells, adds further cost.
“It’s going to require a lot of money to be spent to fix the industry,” says Currie.
That money is no longer forthcoming in the quantities that many oil companies have grown used to, meaning only the largest and most efficient companies are likely to survive.
If the world is addicted to oil, the oil industry itself is addicted to cash, requiring huge injections of capital to fund exploration and production. But appetite for investing in fossil fuels, particularly in uncertain times, is drying up. With tens of billions of dollars likely to be wiped out as the majority of small, heavily indebted, US oil producers go to the wall, that appetite is likely to reduce even further.
Capital markets are more cagey about handing money to oil producers after years of below-par returns. Meanwhile, banks are beginning to cut back financing for oil and gas, and large funds, including Norway’s $1 trillion sovereign wealth fund, have reduced their investment in the sector. The Bank of England is also looking into climate stress testing that could force lenders to get rid of assets at risk as the world shifts to net zero carbon.
At the same time, renewables are rapidly becoming a more attractive investment. A wind farm requires a lot less capital than an oil field, and while the returns are less spectacular they are more solid and reliable.
Paul Flood, portfolio manager at Newton Investment Management, says companies that produce renewable energy are unique in that they remain stable even through turbulent economic times. That makes them an ideal place for governments to focus what will likely be huge stimulus programmes in the wake of the Covid-19 crisis. “It fits very nicely. You’re killing two birds with one stone by providing new sources of renewable energy to decarbonise power, and also providing pension funds with stable revenues.
“I think if governments are going to do fiscal spending they’re going to have more credibility directing it towards renewables and climate change initiatives than towards oil and gas.”
Despite this apparently gloomy outlook for fossil fuels, not everyone is convinced Covid-19 will be a good thing for the climate. Legal & General Investment Management invests more than £1 trillion of other people’s money, mostly for the very long term.
Nick Stansbury, LGIM’s head of commodity research, believes the current slump in oil prices must be seen on balance as bad for the environment. “From a climate perspective, this is really disappointing,“ he says, “it’s not what we wanted to happen. We did not want oil prices to crash, just as we were beginning to see real momentum behind clean technology and its competitiveness. This has set that back in a very disappointing way.”
As consumers, we react pretty quickly to cheaper oil. LGIM’s research shows that after the last significant oil price fall back in 2014-15, Americans started buying less efficient cars within a month. Those decisions have implications for emissions for many years until people trade in their SUVs again.
However, Stansbury says American drivers have already gone pretty much “all-in” on gas guzzlers, so the current low prices may not cause them to trade up and get even more inefficient vehicles.
There is a broader and more important point to all this: if oil stays around $20 a barrel – the current cost of Brent Crude – that clearly underestimates the actual environmental cost of combusting fossil fuels, says Stansbury. He doesn’t see the kind of drastic shortfall in oil supplies that Jeff Currie at Goldman is predicting and believes American producers can shut down and then ramp up supply again when needed.
“There is a higher probability of oil shortages in the next decade as a consequence of this but I think it’s far from certain that that’s what we will get.” US onshore producers already know about huge reserves of oil, it’s just a case of having access to capital so they can go and drill it.
What about those much-heralded changes to our behaviour after the pandemic? Martijn Rats, oil strategist at giant US bank Morgan Stanley, also foresees a long-term shift away from fossil fuels.
He highlights three driving forces of this change. First, the current low oil price gives governments a chance to unwind $300bn of subsidies handed out to the fossil fuel industry each year. Second, economic stimulus programmes required to resuscitate activity after the crisis will likely be used to boost investment in clean energy. And, third, we may work from home more and take less flights.
“This does not bode well for oil demand in the long term, especially relative to previous long-term expectations,” Rats wrote in a recent note to clients.
A report by the AA predicts Covid-19 will cause a permanent reduction in travel in the UK because we’ve quickly adapted to use remote working technology and realised it’s quite effective. The AA even said that a planned £27bn investment in Britain’s roads might not be needed, and perhaps some of the money might be better aimed at improving our broadband internet speeds.
Reports of the death of commuting may be greatly exaggerated however, at least for the time being. Nick Stansbury at LGIM thinks it’s too early to tell whether there will be a behavioural shift significant enough to have a real impact on emissions.
“Anecdotally, and from my own experience, I know that [working from home] works a lot better than anybody expected it was going to. It’s more viable in the long term to do my job 100 per cent from home. Before this I would never have imagined I could do that.
“Will a lot of us end up working from home a bit more often, gaining a few more hours in our days? We probably will.”
But that’s about as much as we can say. Any emissions prevented by fewer journeys to work are likely to be swamped by surging demand for air travel in emerging markets, he says.
Jeff Currie at Goldman Sachs believes that higher oil prices after the crisis will hold back demand for flights and make people commute less often.
However, given that the world has experienced only a few weeks of coronavirus lockdown conditions, he is sceptical about predictions that the experience will drive long-term changes to our behaviour.
“Wait and see,” he says. “We have no idea.”
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