Amid COVID-19 and an oil price war, the past few months have been perhaps the most difficult period ever for the US oil and natural gas industry.
For oil, falling demand and global overproduction have plunged prices and balance sheets. In fact, oil prices hit a ridiculous $ 40 level a few weeks ago due to an extreme technical problem with the functioning of oil futures contracts. For natural gas, the market was not the only impact. Prices have generally remained very low but stable below $ 2.00 since mid-January – well before the onset of the pandemic.
Unsurprisingly, we now hear about the “end of oil and gas” and our world of renewable energy that awaits us around the corner. But, digging deeper, let’s take a look at what really happened and where we’re probably going to start from here.
Demand for oil in the United States has surely dropped since COVID-19. Especially for gasoline, which accounts for almost half of our oil consumption, home orders have reduced consumption to decades-long lows.
April gasoline demand averaged only 5.33 million barrels per day, up from 9.47 million barrels per day in April 2019. However, when the country reopens, gasoline demand for the week ending May 8 was 7.4 million barrels a day – still lower but rising rapidly.
Oil prices rose on Wednesday after the U.S. Energy Information Administration reported a DECLINED gross inventory of 700,000 barrels for the week ending May 8. A few weeks ago, he reported a weekly INCREASE of 20 million barrels.
Further on, the reality is that the outlook for petroleum-based cars may actually improve after this crisis. The internal combustion engine of petroleum represents almost all of our car sales (in 2019, plug-ins represented only 330,000 of the more than 17,000,000 cars sold, or less than 2%). Fearing human proximity and an increased risk of infection with the virus, it is quite possible that Americans (and others in the world) use less public transport to avoid such close quarters.
The Dallas Fed reports that working from home – and therefore needing less gas – is not possible for more than 60% of the full-time workforce, like those in professional services who already had the possibility before COVID-19 hits us.
Furthermore, for many Americans, having less money in the midst of higher debt is likely to delay or outright cancel the purchase of a new, more efficient car that could reduce the oil used per kilometer traveled.
Unfortunately, all energy industries are struggling with the pandemic. This includes disrupted supply chains and labor shortages for renewable energy. Sales of electric cars, widely promoted as the engine of the “end of the oil age”, are also on the brink, and are expected to drop nearly 45% this year, according to experts at WoodMac. Too unrealistic for the majority of today, “BMW: electric cars will always be more expensive than petrol cars. “
It could take a year or two, but demand for kerosene will resume as the travel bans end and business travel resumes. There is simply no alternative to flying and we Americans love to do it. Oil, after all, is therefore the basis of globalization, an integral and always emerging trend against which it would be wise not to bet.
As travel opportunities return, low oil prices themselves encourage use, as they drive down the prices of gasoline, jet fuel and diesel, which are dramatically changing our world.
As for natural gas, which is rapidly becoming our most vital source of energy, perhaps the most telling sign of its competence is that demand in the first four months of this year has actually been higher than for same period in 2019. Read it again.
Above all, this additional fact of gas comes even as a mild winter and spring should reduce demand. COVID-19 lowered industrial demand by about 8-10%, but an equal rise in the energy sector compensated.
And low prices will spur a further surge in gas consumption in electricity this summer – at 40%, gas is easily our main source of energy. Gas at $ 2.75 is difficult for other sources to compete with, let alone the $ 1.70 price it hit last week. Especially since gas represents a 45% increase in American electrical capacity, its price could double (or even triple) and it would still dominate the market.
Let’s look at the 2019 U.S. Department of Energy’s oil and gas dashboard on what actually happened to U.S. demand, for which there is no evidence that COVID-19 did anything to change structurally:
- Oil demand was 20.46 million barrels per day, the second highest since 2007 and the sixth highest level on record.
- Gasoline demand reached 9.3 million barrels / day, at record levels
- Distilled fuel oil consumption reached 4.1 million b / d, at a record level
- Jet fuel demand was 1.74 million b / d, an all-time high
- Natural gas demand easily reached a record of 85 Bcf / d
- Gas used for electricity is a record 31 Bcf / d, an increase of 7% compared to 2018
Also in 2019, U.S. exports of oil (8.5 million barrels / day) and gas (4.7 trillion cubic feet) hit record highs. Exports are a growing business that will require increase in domestic oil and gas production – which, you don’t know, also easily hit record levels in 2019.
Especially for gas, however, it is true that exports are down slightly in the middle of COVID-19 and may be struggling during the summer, as low prices and global demand make competition more difficult. But it is certainly not a long-term trend.
Ultimately, the biggest problem could be that as demand rebounds, a lack of investment in new supplies could violently collide with rebounding demand to drive up oil and gas prices. This is even a very short-term concern: “Goldman Sachs: demand for oil could exceed supply by the end of May”.
US Department of Energy projections consistently indicate that gas will remain a dominant source of electricity and heating. Its low-cost portfolio, fewer emissions, greater flexibility and increased reliability clearly demonstrate this. Just like the biggest string shooter in ESG investment:
- “We believe that natural gas plays a very important role in the energy transition”, Larry Fink, CEO, BlackRock, January 14, 2020
In fact, there are a number of environmental goals that could quietly increase our demand for gas far beyond what most Americans realize: “Deep electrification means more natural gas.” This explains why FERC data shows companies planning huge amounts of new natural gas infrastructure.
There is no doubt that renewable energies are benefiting from a growing part of our energy mix. Yet some concoction of geographic divergence, slower tax breaks and tax incentives, intermittency, generally higher costs, cost reductions and efficiency gains that don’t last forever, land intensification and unique needs for natural resources (for example, “rare earths”) will play a limiting role in their ability to move oil and gas.
It is also overlooked that wind and solar power are sources of electricity, which do not compete in most modes of energy consumption (for example, transportation). Plus, who knows, something like Michael Moore’s new documentary could have a bigger negative impact on the renewable outlook than many would imagine.
All in all, the reality is that our plight has almost certainly bottomed out. COVID-19 is a temporary disaster that is likely to have some reverberation effects. But when it comes to energy, normalization for most of our huge demand complex will come back. In other words, there is not much choice.
The facts on the ground have not changed: for something integral to disappear, there must be something to replace it properly. Oil and natural gas are still not widely replaceable (especially since coal and nuclear are statistically declining).
And I would bet against some of the drastic lifestyles and societal changes some of which now assume will limit the use of oil and gas. Don’t buy it. These claims are more wishful thinking of competing companies than factual reality (this is where I choose to focus my work).
The energy markets are cyclical and have experienced severe downturns before, only to emerge stronger at the other end. For the United States, this means: 1) stable but highly dynamic demand for oil, 2) much, much more natural gas and 3) rapidly growing renewable energy, in fact supported by natural gas which is at the times cheaper and more widely available than backup batteries their intermittence.
We see roughly the same extreme rhetoric that we saw 10 to 15 years ago. Do yourself a favor for your future: bookmarks and PDF all the ridiculous, for lack of all the evidence and citations are multiplying today. Trust me, you will still need it to show how even smart people can be like this …