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How COVID brought down Big Oil

Prices dropped again this week as Americans hunker down for another round of shutdowns to curb the coronavirus. 

Oil rig on land

It’s been a tough year for the oil industry.

In April, there was a mind-bending moment when crude futures dipped into negative figures. Then, after several months of a slow increase in demand, oil prices dropped again this week as Americans hunker down for another round of shutdowns to curb the coronavirus. 

The drop is relatively minor — there is still demand for oil in places where the government response to COVID has been competent enough to reopen parts of the economy — yet is another data point in the volatility and uncertain future of fossil fuels. 

Experts say this is the beginning of the end.

How COVID accelerated the fall of oil prices

Before COVID, most energy forecasters saw the end of the age of oil in the offing — usually in the range of 10 to 30 years. 

Danny Kennedy, the charismatic Aussie behind some early efforts to popularize cleantech and CEO of New Energy Nexus, an organization that supports clean-energy entrepreneurs around the world, was more bullish. Last year, he predicted that the collapse of oil would happen sometime during the 2020s. Now Kennedy marvels that even that timeline seems conservative.

"Remember the wrap you did last year on the decade?" Kennedy wrote to me in an email earlier this year. "I suggested oil would fall — didn't realize how fast!"

Here’s how the Great Pause of 2020 accelerated forces already in motion: 

First, oil demand plummeted as the world stood still in the spring. While travel has rebounded some and is sure to rebound more as the economy recovers over the next decade, we’ve learned that it is possible, and convenient, to live remote lives. Many teams are working effectively virtually, and workers may not be anxious to get back to the rush-hour grind. Flying for an in-person meeting — in the past, a reflexive move for many road warriors — may be replaced by Zoom and its ilk. Virtual conferences will make companies second-guess travel plans. 

I think it's all just crashing down faster than we anticipated.

Meanwhile, clean energy and technologies continued to get bigger and better. Clean energy was declared "immune to COVID" as renewable electricity consumption grew by 7 percent (despite overall slumps in energy demand this year). Electric vehicle market share held steady and the cost of batteries reached the Holy Grail price of $100 per kilowatt-hour, the point at which EVs should reach price parity with internal combustion engine (ICE) vehicles. California’s ban on ICE vehicle sales by 2035 and Europe’s Green New Deal stimulus both send clear signals that the ICE is going into a deep freeze. 

Kennedy believes that the combination of these forces suggests that Peak ICE likely happened late last decade.

"Once there is no more growth in the market, that is the end of the story," Kennedy told me in a phone conversation. "I think it's all just crashing down faster than we anticipated."

Energy analysts broadly agree. BP’s recent energy outlook report said oil demand may never fully return, which would mean we passed peak oil in 2019. French oil supermajor Total predicts peak oil by 2030, consultants McKinsey say 2033, while Bloomberg New Energy Finance and Wood Mackenzie peg the peak at 2035.

Oil and gas isn’t what it used to be

Oil companies are most famous for two things: profits and pollution. Today, one of those is no longer true.

In the first half of 2020, the oil industry wrote down $170 billion, signaling it sees oil assets worth far less than previously believed. That’s the monetary equivalent of 18 percent of proven reserves, according to Bloomberg.

Things weren’t going great before 2020. Many supermajors and small players worked to get a piece of the Permian Basin natural gas boom, leading to overproduction in 2019 that crashed the price of the fuel. The price of natural gas dropped so low it was unprofitable, leading to companies such as Chevron to take an $11 billion write-down. 

The downturn has cost oil producers and investors dearly. Haynes and Boone, a Texas law firm that tracks oil patch bankruptcies, tracked 250 bankruptcies among oil producers in the last six years, wiping out $175 billion in secured and unsecured debt. “The total amount of investor equity in such producers that has been wiped out is many multiples of that amount,” Haynes and Boone wrote.

The stock market has caught on and has been unkind to oil companies that are selling a story of a rosy future of oil and gas. 

"The fact is, the market has peaked," Kennedy said. "That's why Exxon is out of favor and NextEra is in favor, why Ørsted is up and BP and Shell are down, why Tesla is booming while all those OEM [auto] companies, which are basically of oil companies' carriage, are being punished by the stock market."

Fossil fuel’s vicious cycle is clean energy’s virtuous cycle

The massive uncertainty in oil markets threatens to take down economies that rely too heavily on fossil fuels. 

"There's a vicious cycle, the death spiral, as [oil companies] lose their economies of scale, they have low revenues, low margins, attract less investment, pay a higher cost of capital, get less government support, lose social license," Kennedy said. 

That unspooling is motivation for companies and economies to unhitch their financial security from the future of oil — which opens opportunities to support emerging renewable technologies. And the more support clean energy receives, the cheaper it will get, the more capital it will attract, the more jobs it will create, the more communities it will serve and the more solutions it will reach. 

This approach is more or less the philosophy of the European and Chinese COVID recovery plans, which emphasize the growth of clean technologies to create jobs and generate wealth. It is also the opportunity before the United States within a Green New Deal-like effort. 

"The spiral goes both ways," Kennedy said. 

This essay first appeared in GreenBiz's newsletter Energy Weekly, running Thursdays. Subscribe here.

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