As coronavirus pandemic is shaping a new social reality we may have already reached peak oil demand

By Costis Stambolis

What has been happening to energy markets since the start of the year is extraordinary by all counts and is certainly going to have far reaching economic and social consequences in the years ahead. When the present coronavirus epidemic is over, (with a new wave in sight) we will wake up in a different world. Less certain, less affluent, less inquisitive, less outward, less mobile and certainly a lot less energy consuming. The unthinkable, until recently, isolationist motto "stay at home" has given birth to a new state of affairs across the world which is not going to change that easily. Nor shall we see a swift return to previous living habits when the present epidemic comes to an end. Social distancing and its corollary "fear of association" will most likely emerge as the new norm but with unforeseen societal consequences and a permanent dent on the global economy. A new order of political correctness may indeed emerge where "less" and "far apart" will become the key words.

Without fully appreciating the underlying changes which now take place in global energy demand,which is undergoing a major contraction, and as the current business models and lifestyles are being seriously disrupted, consumers will find themselves wondering if Armageddon has finally arrived. For it is most likely that the changes now emanating from the severe economic downturn will ultimately change for good the world as we know it. Let us not fool ourselves that things will soon return to normal. For once the present pandemic is over,the next day may indeed rise in splendor with brilliant sunshine but in reality it will be markedly different from yesterday as we shall be facing a "brave" new world of our own undoing.

As the currently pursued social distancing will become all pervasive what is left of the social nest, sooner or later will collapse and with it interaction, mobility and the healthy extrovert behaviour that characterizes human beings. For sure a world of great uncertainty, of limited prospects and of slower growth will await us. As some economists argue the degree of insecurity in markets and households following the pandemic will be such that inevitably will result in much slower growth, which in turn translates in less profitable companies and less stellar equity market performance.

But slower economic growth also means slower energy growth. In terms of energy use the effect on transportation will be devastating as many airlines will disappear or shrink,the number of regular routes will be scaled down, road miles per person will nosedive, urban mobility will suffer - and be closely supervised from now on - and cross border tourism will come to be regarded as something of a luxury, affordable only by the privileged classes, very much it used to be before the last war. As countries will be isolating themselves as fear of another deadly virus wave spreading among their populations will take hold, and border controls will be tightened up, international trade and shipping will also suffer.

As many analysts point out In the post coronavirus era priorities will change and economies will once again become introvert as national goals will be redefined along with new targets. A strengthening, if not return, of the nation state appears inevitable as governments, companies and organizations will seek to minimize the negative impact of excessive globalization. As a counter weight the educational, and knowledge sectors will expand since by necessity people will turn to the internet for information and for horning new learning skills. A "small is beautiful" mentality may indeed come to substitute the until recently unquestioned, model of constant and unbrittled growth in a globalised environment.

As social patterns and human behavior will be greatly affected with governments and corporations discouraging social interaction, energy will become a main looser as demand destruction will lead to a huge production and grid overhung. According to IEA's latest forecast global energy demand is expected to fall by 6% in 2020, (see graph) which is seven times the decline experienced after the 2008 global economic crisis with advanced economies suffering most- USA will see its energy demand down by 9% while that of the EU will shrink by 11%. These figures must be compared to actual global energy demand increase over the last decade when it expanded by an average of +1,5% per year. It now seems highly improbable that we shall see such figures again any time soon.

Demand destruction is most visible in the oil markets where according to Paris based International Energy Agency (IEA), April oil demand is likely to sink by a massive 29,0 mb/d and with 2Q20 demand expected to be 23.1 mb/d below a year – ago level. The IEA also predicts that the annual decline will fall by a record 9.3 mb/y year – on –year in 2020. These are unimaginable figures for a global oil market of the size of 100,0 mb/d, which is the demand level reached in 2019. Any prognosis of oil demand for 2021 will be risky as this is tied up to estimates of future global economic growth which under the present recessionary climate is really hard to predict. Although it is still too early to determine the longer term impact from the current pandemic it is fair to postulate that the energy industry that emerges from it will be significantly different from the one that existed before.

Rate of change of global primary energy demand (1900 – 2020)

Source: IEA, Global Energy Review 2020

Far reaching consequences from future demand contraction

Evidence is mounting daily supporting the view that the current market anomaly is not just a mere correction in oil industry's long and upward stride but rather a major turning point, a fall off a cliff event. Since the disruption we are now witnessing in the oil markets,where one third of demand has been wiped out thorough lockdowns and travel bans, cannot be explained as yet another cyclical move. It has also landed at the worst possible moment as the oil sector finds itself in the grip of its own crisis as it is facing mounting challenges posed by Climate Change priorities which have come to dominate the political agenda as of late. (e.g EU's New Green Deal)

Until now the discussion with regard to oil demand was whether it could top out over the next 10,15 or 25 years.However, the events of the past weeks where several oil fields have been shut down,storage facilities filled up to the brim and markets have shrunk, have propelled forward the estimates for peak oil demand. With a number of experts suggesting that peak oil demand has already arrived, earlier than expected, and imposed by accident and cruel necessity rather than by a gradual change in consumption patterns.

On the other hand there is a school of thought which says that because at the same time we are witnessing a phenomenal fall in oil prices - almost 70% for Brent which is currently trading in the $20 per barrel region from $ 65 in early January- demand will pick up fast in the second half of this year and in 2021, especially with oil importing emerging economies taking advantage of real cheap oil to boost their economies. Hence,according to the above logic, the fall in demand in developed economies will somehow be compensated by a surge in demand by developing countries.

However, this explanation is wanting especially since both the IMF and the World Bank have already warned of the devastating economic consequences for most emerging economies, in the years to come, which will suffer from huge losses of their GDP's and hence any amount of really cheap oil will not be enough to resuscitate their moribund economies. To this proviso we must add some countries' determination to accelerate their switch to renewables and energy efficiency in an effort to decouple from hydrocarbon dependence. Whether their ambitious goals for carbon neutrality by 2040 or 2050 will be achieved is another matter. What matters though is that a global move to alter the global energy mix is in progress and this clearly does not encourage further oil demand growth.

Of course whether or not we have have actually reached a peak oil demand level will not be known for some years,when statisticians expect a clear pattern to emerge. But all the markings of a "fin de saison" for global economic growth are there and I would be greatly surprised if we are not already going through an inflection point. Therefore, it is not an exaggeration to observe that what we are witnessing today constitutes a major paradigm shift in oil market dynamics.

What will follow is not yet clear but one is bound to suspect that what we call "growth" and its associated goals and definitions will be redefined. No doubt a much softer ascending growth curve will result with certain economic activity sectors loosing out,some remaining stagnant while others being given a boost.Developed economies will become the main losers as lifestyles will change and with them energy consumption patterns. On the other hand emerging economies will stand to benefit as investment (FDI mostly) will try to seize growth opportunities. The question remains as to how soon and to what extent growth strategies can be worked out by governments and institutions, so as to take effect soon and avoid a massive economic depression over the coming years.