Of COVID-19, Oil Price Crash, and Climate Change
The arrival of the new decade has presented itself in a daunting way and 2020 has been nothing but tragedies. The coronavirus pandemic has swept across the globe and infected millions with hundreds of thousands of mortalities. Oil price crashed and WTI crude has reached a negative price for the first time in forever. Climate change agenda is still on the table and struggling as countries around the world roll back climate-friendly policies amidst the public health concern. Even the Conference of the Parties (COP) has been postponed for a year due to the concerning pandemic.
Let us look at what has happened thus far. The outbreak of COVID-19 started late 2019 and spreading violently early this year. One by one, the countries closed their border and lockdown orders were issued. People were advised to stay at home and were enforced to social distancing in an attempt to flatten the curve. The economic activities started to slow down as people are no longer travelling and working from home. Factories are shut, international air travel declined, and non-essential businesses are closed, which reduced the global demand for oil, the energy source that mostly powers the economy.
Now, comes the OPEC+ coalition led by Saudi Arabia, entering in a discussion with Russia to cut the oil production. The negotiation essentially fall apart when Russia refused to slow down their production, further driving the oil price down as both Saudi Arabia and Russia ramping up their production in a bid to gain the market share. The price war and the low global demand for oil has caused a worldwide oversupply and deficit in storage. The oil price kept dropping and anybody with oil futures contracts are scrambling to get the contracts off their hands. They are paying to release the contracts as there is no more storage available to reserve the supply. Then, it happened, the free fall of oil price. The WTI crude dipped to a negative price and traded as such. It has since rebounded but still hovering at a low price of around $30.
Needless to say, the oil price has always been volatile and this is one of the many cycles that we have observed. However, the COVID-19 situation did trigger the major collapse of oil prices. The supply and demand shock that the oil and gas industry experienced today may be the first in history. The oil price is expected to be low for a significant period as countries reopen and the global economy recovers. The major enigma now, what does this mean for climate change? Does it help the climate change agenda and accelerate climate action or will it delay the supposed transition from fossil fuels?
Historically, low oil price is a major issue with significant impacts for climate advocates. The low price tag of oil supply reduces the incentives to change to a more sustainable energy and raw materials. People will be driving more often, logistics costs will be more economical, and it will be more affordable to use natural gas as a source of energy. This will drive consumption and ultimately increase carbon emission. It will be difficult to convince some policymakers and business leaders to switch to renewable sources of energy. In short, the low oil price affects the economic decision and that decision is not necessarily in favour of the climate change agenda.
In the transportation sector, the low oil price delays the transformation to electric vehicles as there will be a sustained demand for internal combustion engine vehicles. The fuels are cheap enough for people to ignore the fuel economy of the car and have more mileage at the same cost. The sales of conventional vehicles will be booming and electric vehicles will be only appealing to those who are less cost-conscious in making economic decisions. Even in the logistics sector, the affordable fuels for the trucks, ships, and airplanes accelerate business growth as more goods transported around the world.
The low oil price creates a business case for the energy sector to use natural gas as an available option for the source of energy. It diminishes the immediate needs to deploy renewable energy and entice the policymakers to continue to rely on fossil fuels rather than sourcing to alternative energy. Even in the manufacturing sector, petroleum remains the major raw material for many products, from crayons to lubricants. Low oil price abates any effort to substitute this material with a more sustainable source. Plastics will remain as the go-to material for packaging with lesser incentive to find alternatives. Yet, there is still a glimmer of hope for the climate change agenda. The low oil price only delays the energy transition but did not change the trend.
The recent cycle of oil price crash is another proof that the market is volatile and demonstrates that it is an unreliable investment. The latest market crash should be the catharsis for the oil and gas industry to change their investment strategy. In a world with a low oil price, small producer companies will be forced out of business and they will need government intervention to recover or else bankruptcy is imminent. However, big producer companies are resilient and chose to wait it out as they have enough cash reserve to persevere of yet another cycle. Nowadays, they are pressured to diversify their portfolio in an extravagant attempt to future-proof their company. The golden preferred investment? Renewable energy.
In a bigger scheme of things, this approach makes sense. Renewable energy is dubbed as the cheapest source of electricity. The cost of developing and building the infrastructure for renewable energy is lower than the fixed cost of fossil fuel and it is decreasing as the innovation progressed. The renewable energy sector is less volatile than the fossil fuel market hence it should be an attractive investment. Reading the room, the oil and gas companies should invest strategically in the renewable energy sector and start the energy transition. An unconventional move has to be made to stop investing in new fossil fuel infrastructure. The oil and gas industry has the capacity to change the tide and the industry is never short of great engineering talents so expanding to the renewable energy sector is not a far-fetched idea. It is just a matter of will. The industry can take this opportunity as an advantage, right here right now, to reduce the dependency of fossil fuels and build more infrastructure to accommodate the new energy. It is a long-term exit strategy for a sustainable prospect and future-proofing of the company.
PETRONAS recently recorded a 68% fall of profit after tax in the first quarter of 2020. To brace the impacts of the coronavirus pandemic and oil price crash, PETRONAS has decided to cut capital expenditure and operating expenses of the year. Still upholding the three-pronged strategy; maximize cash generators, expand core business, and stepping out, PETRONAS plan to future-proof the organization and ensure the company’s long-term sustainability. With the establishment of the new business unit, Gas & New Energy, PETRONAS should react to the current situation by investing heavily in wind and solar energy infrastructure and accelerating technological innovation as outlined in the strategy of stepping out. The acquisition of Amplus Solar and a joint collaboration with Universiti Teknologi MARA are good starts but PETRONAS is capable to do more than that. Building solar farms and conducting feasibility studies of offshore wind farms are among many proactive measures that PETRONAS can undertake in this situation. It is imperative for PETRONAS to grow renewable energy as one of the core businesses and cash generators since it is an incentive to dampen the effect of oil price volatility. The shift, sooner or later, will help to sustain the company. Hopefully, the cost-cutting exercise soon to be conducted by PETRONAS would not involve the little amount of 5% of capital expenditure, announced earlier this year, reserved for the renewable energy. After all, PETRONAS aspires to be a significant contributor to the Malaysian government’s renewable energy target of 6GW by 2025.
No doubt that the coronavirus pandemic has triggered the oil price crash and in a way, it has helped reduce the carbon emission as people stay at home and non-essential long-haul journeys are banned. It is nothing short of tragic. What matters the most is the next steps. We must take advantage of the low oil price and volatility of the market as a sign to invest in clean energy, hence recognizing the long-term economic trends and urgent threat of climate change. The business case of fossil fuel investment has weakened leading to accelerated energy transition. However, it must be acknowledged that low oil prices could reduce the economic incentives to reduce emissions. Nevertheless, we should come out of this pandemic and market crash with a new outlook and fresh perspectives. The oil and gas industry may not recover to its former glory but we can make the energy industry to be future-proof. Business, as usual, should not persist and the challenge of climate change should no longer be ignored.
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