Glory Days of Oil Numbered- Dealing with Climate And Health Crisis

  by Professor Dato Dr. Ahmad Ibrahim, 

The oil business is going through a troubling phase. Climate change concerns are

mounting pressure on the industry to reduce GHG emissions. A recent ruling by a court in the Hague on SHELL has raised the urgency to diversify into renewables. Unlike the oil crisis of the 70s and 80s, the current crisis is different. It is not associated with a sudden price rise accompanying a sharp supply contraction. It is to do with a sharp drop in price because of a supply glut coupled with a somber demand. The earlier crisis proved troubling for the global economy. But the current low-price crisis also spells trouble for the oil business itself. This crisis is much to blame for the recent layoffs of petroleum engineers. Will such a scenario change in the future?

Few in the oil business can forget the two major oil crises of the past. The first occurred in 1973 when Arab members of OPEC decided to quadruple the price of oil to almost $12 a barrel, a high price at that time, by cutting production and restricting exports to some countries. A steep global recession followed. The other major oil crisis occurred in 1979, a result of the Iranian Revolution (1978–79), where social unrest severely damaged the Iranian oil industry. The situation worsened following the outbreak of the Iran-Iraq War (1980–88), which further added to the level of instability throughout the region. Since then, the business moved to more efficient methods of production, and the problems of the 1970s had been transformed into a relative oversupply of oil rather than a shortage.

The oversupply coupled with a declining demand is behind the current crisis.

Demand is now a bigger concern, as pressures grow for the world economy to transition into renewables. 2020 has not been kind to the petroleum industry when oil prices fell to their lowest levels in decades. The prices increased to around $40 a barrel later, because of production cuts by OPEC Plus, and some increase in oil consumption. Nevertheless, lockdowns and restrictions on transportation and travel remained in place in most parts of the world, putting demand well below normal. Only two things can change the balance; a war in the oil-producing region or the spread of COVID-19 to oil fields, as happened during the Spanish Flu pandemic in 1918, resulting in supply disruption.

The demand side is not looking good. The bulk of oil demand depends on transportation fuels demand. Huge levels of oversupply have put pressure on storage space. This came to light recently when there was a panicked sell-off of WTI contracts by traders with nowhere to store their goods, sending prices for the benchmark falling to almost minus $40 per barrel – the first time the commodity had ever fallen into negative pricing. The cuts in production by OPEC+ and the slight increases in fuel demand are relieving pressure on storage. The industry is fortunate to have petrochemicals, now an important driver, responsible for half of all growth in demand.

Global attention is increasingly focused on accelerating clean energy transitions to

mitigate climate change. The oil and gas industry, with its big emission footprint, is at the heart of the matter. Demand growth for gasoline and diesel between 2019 and 2025 is set to weaken as countries around the world implement policies to improve efficiency and cut carbon emissions, and as electric vehicles increase in popularity. The global oil industry now faces challenges. On the demand side, experts caution it may not return to the pre-pandemic levels. The world is increasingly turning towards the electric transport sector, reducing the global demand for petroleum. Technologies such as carbon capture and utilization, which will make the emission problems disappear, are some options the oil business is experimenting with. The questions of cost and techno-economic feasibility loom large here. It is quite unlikely that the oil price will reach the high levels of the past. Only lower-cost producers may still have a chance. But for high price producers, the future looks bleak. The glory days of the oil business are numbered.