Oil Demand Has Collapsed, And It Won't Come Back Any Time Soon

Sep 15, 2020
Originally published on September 15, 2020 3:27 pm

2020 is shaping up to be an extraordinarily bad year for oil.

In the spring, pandemic lockdowns sent oil demand plummeting and markets into a tailspin. At one point, U.S. oil prices even turned negative for the first time in history.

But summer brought new optimism to the industry, with hopes rising for a controlled pandemic, a recovering economy and resurgent oil demand.

Those hopes are now fading. In a report Tuesday, the influential advisory body called the International Energy Agency revised its forecasts for global oil consumption downward, warning that the market outlook is "even more fragile" than expected and that "the path ahead is treacherous."

It's the latest in a flurry of diminished forecasts from major energy players. On Monday, oil cartel OPEC slashed its expectations of oil demand, just as Trafigura, a large oil trading company, warned that another large oil glut is building.

And energy giant BP, which has grabbed headlines with its new carbon-neutral commitments, raised the possibility that the world might never again use as much oil as it did before the pandemic.

A pair of recent OPEC reports reflect the rapid shift in mood.

Its August oil forecast assumed that by 2021, "COVID-19 will largely be contained globally with no major disruptions to the global economy." OPEC also predicted that economic activity would be rebounding steadily and oil demand would be recovering.

But on Monday, OPEC released a much grimmer forecast.

"[S]tructural changes to the global economy are forecast to persist," the oil cartel wrote. Travel and tourism "are not expected to achieve pre-COVID-19 levels of activity before the end of 2021."

The IEA, a well-regarded source of global energy data, agreed with the oil cartel's latest assessment, writing that "it is becoming increasingly apparent that COVID-19 will stay with us for some time."

"There's some negative vibes out there," said Neil Atkinson, the head of Oil Industry and Markets Division at the IEA. "It just doesn't appear to be a simple case of this horrible thing comes along in the first six months of the year and then mercifully goes away again and we can all go back to normal. It's just not happening like that."

The world still relies heavily on oil and natural gas. For 2020, OPEC predicts total oil demand will be slashed by nearly 10% — nowhere near the large-scale pivot away from fossil fuels that scientists say is necessary to fight climate change.

But from the industry's perspective, this year's decline is tremendous and destabilizing. Producers around the world are already radically rethinking their production plans, shutting down drilling rigs and hitting pause on major projects.

Many U.S. producers have gone bankrupt. Saudi Arabia, which has been trying to diversify its economy to be less reliant on oil as the sole source of prosperity, pushed the wider group of countries called OPEC+ to slash output and drag prices up out of the doldrums.

These disruptions come as a growing number of investors, regulators and even energy giants are projecting bigger shifts in oil demand in the years to come as much of the world takes action to try to limit the most damaging consequences of climate change.

BP and Shell are among the European oil and gas giants that have pledged to reshape their businesses to focus more on zero-carbon energy sources. Total, the French energy company, recently acknowledged that the shift away from fossil fuels will cause some of its current oil investments to become "stranded assets," meaning they will not be as valuable as expected in a world that has reduced its reliance on oil.

BP published its annual energy outlook this week and laid out three possible trajectories for the future of oil demand. In two of those pathways, the world would take meaningful action on climate change, and the current drop in demand — instead of being a pandemic-induced blip — would become the pivot point leading toward a lower-emissions future.

In the third path, where the world continues with "business as usual" instead of acting more swiftly to stop global warming, BP predicts oil demand would increase slightly over the next few years — but still peak within the decade.

BP says its scenarios are not forecasts, but "a range of possible outcomes."

Carolyn Kissane, an energy expert and an academic director at New York University's Center for Global Affairs, says BP's experts aren't the only ones who see a possibility that energy demand may have already peaked.

She notes many factors will affect demand — including economic developments, government policy decisions and, of course, the pandemic. And big questions remain about just how profoundly our behavior might shift as a result of pandemic disruptions.

"Maybe we are making this more dramatic, radical transition that's going to have much deeper impacts," she says. "There is that uncertainty."

Transitioning away from fossil fuels will not be quick, easy or simple, Kissane says. But it's possible the pandemic is pushing companies and oil-producing countries to think now about how to adapt to a world with reduced oil demand — one they once expected would arrive further into the future.

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MARY LOUISE KELLY, HOST:

The global economy is powered by petroleum in cars and planes, power plants, plastics. The pandemic sent demand for fuel plummeting, and now some major energy groups say the decline will stick around into next year. In fact, NPR's Camila Domonoske reports the change might be permanent.

CAMILA DOMONOSKE, BYLINE: The International Energy Agency issues a monthly report on the state of the oil market. Every decimal point is closely watched. Neil Atkinson is the head of the Oil Industry and Markets Division at the IEA.

NEIL ATKINSON: We'd be agonizing about changing the growth up or down by 0.1 million barrels per day.

DOMONOSKE: That was before the pandemic. In the report that came out this morning, the numbers are a lot bigger than that, and they're going down.

ATKINSON: So there's some negative vibes out there.

DOMONOSKE: It's not just the IEA. OPEC, the global oil cartel, just revised its expectations down. Also this week, Trafigura, the world's second-largest oil trading company, said there's a huge glut of oil on the way. Things were bad for the oil market this spring when the coronavirus caused a collapse in oil as lockdowns put a halt to travel.

ATKINSON: Doesn't matter if the price is zero. If you can't drive anywhere, there's no demand response.

DOMONOSKE: A price of zero sounds hypothetical, but at one point, prices actually went negative. Still, this summer, many in the industry were feeling optimistic. China's economy seemed to bounce back. There was hope the global economy would recover and demand for fuel would come surging back. Now...

ATKINSON: It just doesn't - to be a simple case of this horrible thing comes along in the first six months of the year and then mercifully goes away again, and we can all go back to normal. It's just not happening like that.

DOMONOSKE: And this immediate pandemic-driven drop in demand - it comes in the middle of huge uncertainty about the future of oil and gas because of climate change. In fact, there was another big report on the future of energy this week from BP, the British energy giant that's planning for a future with less petroleum. BP says it's possible this drop in demand is the start of an even bigger shift, and the world will never again use as much oil as it did in 2019. That's if the planet moves to take action on climate change.

CAROLYN KISSANE: Let's say BP is correct, right? And, you know, BP's not the only one that sort of sees the peak demand is in the past, right?

DOMONOSKE: Carolyn Kissane is an energy expert at New York University's Center for Global Affairs.

KISSANE: You have a - you know, an industry that is - we could say it's in decline, right? It's changing very rapidly.

DOMONOSKE: For a while now, the oil industry has considered what a future of declining demand would look like. That might have seemed like a distant future, but the pandemic is raising questions right now.

KISSANE: I think the idea that - you know, that we've passed peak demand - and I think once that gets into people's heads and especially into, like, the corporate heads, then they're like, wow, if that's the case, then maybe everything I was thinking six months ago has to be revised because now we're looking at a very different future.

DOMONOSKE: It's hard to predict exactly what happens next, especially these days. A lot depends on government policies and, of course, the pandemic. But Kissane says one thing is clear. Whether demand comes back eventually or declines from here on out, the months and years ahead will be tough for oil producers.

Camila Domonoske, NPR News.

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