A 60-to-0 Round Trip: Nine Oily Lessons from the Pandemic
“How fast can it go from 60 to 0, and back to 60?” is something you’d expect a car buff to ask about braking and acceleration. But what if we’re talking about oil?
Remarkably, the price of a barrel clocked that in just over one year: US$60 per barrel in January 2020, $0 by April, back to $60 in February 2021.
For the energy industry, the events of the past 12 months have been a thought experiment turned real. Before the pandemic, pundits could only speculate what might happen when people stop using petroleum and prices collapse.
Now we know.
Here are nine lessons we’ve learned about the implications of transforming our energy systems
- The scale of our oil use is daunting.
By April 2020, in some places air travel was curtailed to 5% of normal, and freeways were emptied. Yet, at the lockdown’s most constrained point, oil consumption dropped by only about 20%, to 80 million barrels a day. This was essentially a simulation of what would happen if one-third of the world’s cars and up to 95% of its airplanes were suddenly converted to electric propulsion.
This is a stark and daunting reality.
We just caught a glimpse of how painful it is to reduce significant volumes of oil consumption through forced behavioral change. Based on International Energy Agency estimates, working on the expected timeline of the Paris Agreement, we are on track to achieve the same 20% reduction by 2033. That isn’t a lot of time for the kind of large-scale technology adoption required to displace our incumbent oil systems. So, what does that say about the need for behavioral change?
- Our behavior has to change, by choice.
Being locked down has forced us to accelerate the adoption of lifestyle-altering technologies and activities. And tech companies rallied to fill the need incredibly fast. Some changes will be permanent. For instance, the vaccine won’t inoculate society against video meetings nor online shopping.
It’s hard to say what the permanent impact of pandemic-induced technology will be on our energy use, but what we’ve learned is that tech products can alter the way we live, work and play, almost overnight. So, sure, offering direct substitutes for oil-based systems, like electric vehicles, is important. But perhaps just as powerful are the yet-to-come technologies that address real needs, inspire behavioral change and alter our social paradigm.
- Tech got its own shot in the arm.
Tech companies like Amazon, Zoom and Netflix proved they could change the world quickly. Investors in the stock market rewarded them and countless others handsomely. And as oil was braking to 0, investors asked what other tech companies could change the world.
Just as the pandemic has demonstrated that the incumbent oil is hard to shake, it has strengthened its cleantech challengers. With Tesla at the top, a rapid cascading effect is now in play. Investors are financing cleantech companies far faster than any government stimulus program is right now. Real innovation happens when competition is fueled with investor capital.
- Not all oil is the same.
We tend to think of oil in broad strokes, yet its many grades are used to create diverse petroleum products, from jet fuel to asphalt. The pandemic was a blunt instrument on the industry. As such, the impacts varied. Personal transportation fuels were affected far more than those in other segments of the economy. So, when it comes to transition policies, oil shouldn’t be thought of as a singular commodity serving a uniform market. More nuanced policy instruments will be required.
- Darwin was right.
The strong get stronger and the weak die off. Falling prices and bankruptcies culled the herd of oil and gas producers, starting with the high-cost laggards and the frail. Survivors consolidated, lowered their costs and became leaner and more efficient. The ones left standing are far more resilient to outside competition and displacement.
- Alberta’s oilsands aren’t going anywhere.
The popular narrative has been that Alberta’s oilsands would be the first to go out of business when oil consumption dropped precipitously. In fact, not only did they survive, but their producers fared far better than their American peers. Whatever you think of the oilsands region, events of the past year should dispel any notion it’s the world’s most vulnerable, high-cost producer.
- Price signals work, when they’re loud enough.
When the price of oil started sliding from US$60 per barrel, drilling rigs started going home. When $30 was breached, wells began to be shut in. Oil output contracted to adapt to the lower consumption. In the United States alone, at the height of the shut-ins, production dropped by almost 25%, or 3 million barrels a day
The current $60+ prices are a siren call to bring on more production. At a time when investors are demanding greater profits in lieu of higher output, is this hardened industry responding to that call? No, current indicators suggest the price signal isn’t loud enough yet.
- OPEC still pulls the strings.
A year ago, Saudi Arabia flooded the market and started a price war. A few months later, the kingdom and the OPEC cartel reined in production to prop up price. These geopolitical power plays demonstrated (yet again) that oil is not a free-market commodity.
Clean energy challengers should know that their competitors will continue to control price to suit their interests. Defending market share, maximizing revenue and locking out new entrants has always been a global blood sport in this multi-trillion-dollar industry.
- We like clean air and water.
When the world paused, a lot of people experienced what it was like to have blue skies and clear water. A heightened sense of the environment and community preservation emerged. Fossil fuels will be with us for decades yet, but this taste of sustainability will galvanize the resolve to clean up our energy systems, whatever the source.
The pandemic turned a thought experiment about the oil industry into an actual 60-to-0 test drive — its lessons should inform us about how to better navigate our energy future.
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