The world is learning to live with less oil. It may never look back.
The coronavirus pandemic has destroyed demand for gasoline and jet fuel as billions of people stay home, and there's no guarantee it will ever fully recover despite rock-bottom prices.
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The oil industry is bracing for the effects of the crisis to linger. Employees keep working from home. International travel stays scarce. And citizens in once polluted cities, having become accustomed to blue skies, demand tougher emissions controls, encouraging governments to redouble efforts to tackle the climate crisis.
Such changes would come on top of a push for investors to dump oil assets that had been gaining momentum before the recent price crash. Sustainable energy investments, by comparison, appear to have held up relatively well despite stock market volatility.
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.
The threat of a second wave of infections in the fall also looms for producers. Prices have already plunged to their lowest levels in decades as producers grapple with excess supply and the worst demand shock in history.
"There remains an exceptional level of uncertainty regarding the near-term outlook for prices and product demand," BP Chief Financial Officer Brian Gilvary told analysts this week.
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.
As governments around the world put their economies into a deep freeze to prevent the spread of the disease, demand for energy collapsed. The International Energy Agency expects global oil demand to fall by a record 9.3 million barrels per day in 2020, the result of efforts to contain the contagion in 187 countries and territories.
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.
Such dynamics — combined with the supply glut that resulted from a brief but brutal price war between Saudi Arabia and Russia — have dealt a gut punch to oil markets. Last week, US oil prices turned negative for the first time ever as traders paid people to take crude off their hands, with storage tanks filling up fast.
To restore calm to markets and start pushing prices higher again, supply needs to come down significantly, and by much more than the record cut envisaged by OPEC and its allies from Friday. That means wells will be shut down, and many companies will fail.
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."
New behaviors
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.
Lewis of BNP Paribas thinks it's inevitable that the coronavirus will have lasting effects on activity in developed countries. He predicts that the number of people working from home will stay elevated even after the crisis ends, cutting down commutes. Road fuels such as gasoline account for roughly half of the world's oil demand.
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.
Carriers such as Lufthansa and British Airways have already warned that their businesses will have to shrink because the sector won't recover for 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.
That could be especially true in Europe, which has pledged to cut emissions at least 40% below 1990 levels by 2030. German Chancellor Angela Merkel said Tuesday that tackling climate change must be woven into the solution to the coronavirus pandemic.
"'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.
There are already signs that European cities will use the pandemic as an opportunity to keep pollution down. Milan said last week that as the city opens back up, it will reserve more street space for bikes and pedestrians.
"Of course, we want to reopen the economy, but we think we should do it on a different basis from before," Marco Granelli, deputy mayor of Milan, told the Guardian newspaper.
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.
In the United States, much rests on the outcome of the 2020 election. President Donald Trump has been a vocal supporter of America's oil and gas sector, recently promising a bailout package. Joe Biden, the Democrat almost certain to challenge him in November, is much more likely to adopt a Green New Deal-type approach to rebuilding the economy.
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.
The remainder of 2020 will prove crucial in setting the trajectory. Some countries could prioritize their economic recoveries over efforts to cut emissions, Tonhaugen said. That will be tempting given that crude is so cheap.
"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.