This month saw oil prices dip to their lowest levels in over two decades, with West Texas Intermediate (WTI) oil reaching negative values for the first time in history. This month, I mark this historic decline in price with a look at how Coronavirus has affected our energy consumption, and what the post-pandemic future might look like for the energy industry.
Changing energy Demand
The move to lockdown conditions in many countries around the world, and the closure of non-essential workplaces has led to a shift in how we consume energy. Each year in the UK, the national electricity grid sees a predictable drop in demand in the first few months as the weather warms and the evenings get lighter. However, when you compare 2019 data with 2020, there is a steep decline correlating to the start of lockdown, and a reduction of the daily average consumption from 35 to 27 gigawatts (GW) on weekdays, and from 30 to 24 GW on weekends. This shows that there is not only an overall reduction in demand (by over a fifth), but also a blurring of the line between the working week and weekdays during lockdown.
However, the graph above shows that oil is currently not contributing to our electricity generation in the UK, and elsewhere it is not a major source of domestic energy (for example, in America, oil-fired power stations provide just 1% of national electricity). Gas is the main source of electricity generation, with wind and nuclear energy also significantly contributing. Interestingly, gas prices have increased during the catastrophic decline of oil, probably due to the fear of supply being more limited as oil production falls.
Oil (Brent) and Natural Gas prices from http://oil-price.net/
Reduced Transportation
The Financial Times states that global oil consumption has reduced by a third. But if we were not previously consuming oil for electricity, then what were we using it for? The pie chart shows the UK oil usage during 2019, from the UK government National Statistics page.
It shows that historically, the vast majority of oil consumption in the UK is used for transportation. But the onset of lockdown in the UK saw an almost instant decrease in the levels of transportation across the country: Nine out of 10 flights have been grounded, the number of train journeys being taken is down 95%, and use of public transport in London is down to <10% compared to pre-lockdown levels (https://citymapper.com/). The number of flights, train journeys, ferries, and road transportation have all fallen as people #StayHome and reduce the number of trips they make. The decline of Brent oil price closely tracks the reduction of travel in major European cities corresponding to the arrival of Coronavirus in Europe (see graph below).
There have been a number of news stories in recent weeks documenting the reduction of pollution, with examples across China, Europe and America supporting the fact that lockdowns have led to a fall in transportation and heavy industry that releases nitrogen dioxide. Although pollution levels fluctuate due to weather conditions and other controls, satellite imagery from the European Space Agency shows up to a 50% reduction in nitrogen dioxide across London, and may other European cities. This is broadly linked to a decline in road transportation. Impressive satellite images of nitrogen dioxide distribution in China are also linked to the reduction of coal burning. This all points towards reduced energy consumption across industry and domestic uses.
Storage Capacity
The reason for such historic decline in oil price, particularly in the USA (where WTI oil prices reached negative values this March) is being driven by the perfect storm of reduced demand, insufficient reduction in production, and rapidly filling storage facilities.
On April 12th, OPEC (the organization of petroleum exporting countries) reached a historical agreement to cut global production by 10% in an effort to slow the rate that storage facilities are reaching capacity. But the 10% cut has not been enough. The move to negative values for WTI oil in March was driven by companies trying to offload product to avoid having the cost of renting tankers to store it, as the main storage facilities in the US (Crushing, Olklahoma) reached capacity. Crushing is currently filled to around 70% of its 76 million barrels of working capacity, with the remaining capacity already leased and awaiting delivery. The UK and Europe are also struggling with insufficient storage capacity, with tankers being left to float out at sea with nowhere to sell their load. Without increasing demand, cut production, or alternative storage being found, next months trading is likely to be as volatile as this months!
Looking towards a post-pandemic world
In the short term, oil prices are likely to remain fairly low, but we hope that they stabilize to some degree. WTI was valued negatively only briefly during the final day of trading for May delivery, with June markets looking stronger. However, until we see further cuts to global production through companies shutting in wells, an increase in demand as countries start to ease lockdowns, or alternative storage can be found, for example in the subsurface, then prices will remain low.
In the mid term, things will recover. We are still hugely reliant on oil and other petroleum products for heating, energy and transportation. It may take some months to use up the amassed stocks from storage facilities, and some time for companies to start up pre-lockdown production, but I believe that once this crazy situation gets back to normal, the population, and industry will be keen to get moving again, driving up demand.
I am looking forward to reviewing the energy consumption stats next year, to review the full effects of the Coronavirus on energy demand, and to see if there will be any lasting effects on our behaviour. In the meantime, stay home, stay safe, and stay positive all!
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