Shaken or stirred? The energy market after the dramas of 2020

Blog post by guest writer: Nick Butler, Visiting Professor at King’s College London

Anyone looking at the global energy market at the end of 2020 can easily identify the losers from the upheaval of the last year.

The Covid pandemic has cut energy demand, revenues and margins especially for oil and gas. Dividends and investment have been sharply reduced. As a result, thousands of jobs have been lost across the world from Norway to North Dakota. The losers are not limited to the private sector. OPEC revenue is estimated to have halved and many national oil companies are therefore also starved of capital for new projects. Travel and events which normally attract large numbers of people have been hit and the only winners beyond the makers of vaccines would seem to be Zoom and similar communications companies.

At the same time 2020 has seen a surge of political activity around the green agenda. Europe, the UK and even Asian economies such as Korea, China and Japan have embraced emissions reduction targets while the US has elected a new President who believes that action on climate change is a priority.   

As a result, for some the events of 2020 seem to mark the passing of the age of hydrocarbons, an inflection point which signals the beginning of the end for the oil industry, the internal combustion engine, and fossil fuel driven power stations.  

For others 2020 has been a year of recession which has shaken the industry but not changed the underlying reality. From their perspective the growth in the use of wind and solar will continue but will merely contribute to meeting the ever-increasing global demand. The inexorable forces of population growth and the spread of prosperity especially in Asia are the crucial factors.

We cannot yet know which of these views is correct. We are still too close to the continuing reality of the pandemic and its economic consequences to assess the lasting impact. The political pledges have been made but have not yet been matched by detailed delivery plans. In five years’ time, will we look back and see Covid and the commitments on climate change as dramatic events which broke up the market structures to which we had become accustomed over the last century? Or will life by then have clicked back into a pattern closely resembling what went before? 

If it is too early to make firm judgments in December 2020, another year should give us much greater clarity. On the assumption that the vaccines work and that the pandemic can be controlled 2021 should see a return to normal levels of economic life. Many economic forecasters are predicting a strong revival in the second half of next year.

In twelve months´ time we should have some some strong clues as to which of the alternative views of the future will turn out to be true. Facts are worth more than vague opinions driven by hopes and fears and so here are five points to watch, each of which will be measurable with hard data by December 2021.

  • Will the number of SUVs sold across the world during 2021 exceed the number of electric vehicle sales? Light vehicles provide the easiest way of electrifying and therefore decarbonising the transport sector but will consumers choose (or be required by regulation) to make the lower carbon choice?

  • Will the number of airline passenger miles flown at the end of next year exceed the level reached in 2019? Has the pandemic reversed the desire for mobility which for the last half century has been driven by rising living standards and increased global business activity?

  • Will oil and coal demand by the fourth quarter of 2021 be higher or lower than it was in the same quarter of 2019? Will the economic recovery which should follow the Covid recession be powered by hydrocarbons or not? 

  • Will the five leading European energy companies (BP, Shell, Equinor, Total and ENI ) will by the end of 2021 be spending more than 20 per cent of their capex on non-hydrocarbon activity? The keenest observers of the underlying trends are the companies – many having come through successive wars and recessions over the last hundred years.  If they shift their investment something is really happening. 

  • Finally, and probably most important of all. Next year the Chinese should publish their 14th five-year economic plan. The point to watch is whether that plan contains a firm commitment to reduce the use of coal in the next five years as a step towards their long-term objective of transforming China to a net zero economy by 2060 which was announced by President Xi earlier this year. What happens in Europe matters, but for the global climate agenda developments in Asia are much more important.  

There are numerous other possible indicators but these five represent key steps where data will be readily available and where practical changes could be made. All sit within the range of what is possible. The answers to these questions will show whether the events of 2020 have changed behaviour and whether the commitments to long term targets are really going to backed by substantive action. Of course, these are all partial steps – there can be no instant transformation. But individually and collectively they will offer a clear signal.

Taken together they will show whether the energy market, shaken as it has been, has been stirred to the point of making a dramatic change. In a year’s time I hope to be able to present the answers. In the meantime, thank you for reading these posts and very best wishes to everyone in Norway and across the world for the holiday season and for 2021.