As the Covid-19 pandemic enters its sixth month, we are starting to get more data on the impacts that efforts to contain the disease have had on the global economy.
Much has already been stated about the fall in energy demand globally caused by the lockdown of world economies. The fall in oil prices – which despite a recent recovery remain 50% below than their January peak – is a testament to that.
More longer-term impacts are also coming into view, with this week’s announcement by the International Energy Agency (IEA) regarding falling energy investments a particularly pertinent one.
In a statement highlighting the release of it’s World Energy Investment 2020 report, the IEA warned of an “unparalleled decline” in investment across the energy chain this year due to the Covid-19 pandemic.
The agency warns that the anticipated 20% plummet will be the “biggest fall in global energy investment in history.” Oil and gas projects will be hardest hit, with investment falling by almost one third through this year.
For the first time, investment in electricity projects is expected to surpass that invested into hydrocarbons. However, all is not good on the power side either, with the IEA also warning of a 10% decrease in electricity sector spending. These cuts are “worrying signals for the development of more secure and sustainable power systems,” the agency adds.
Clean Break
The IEA is just the latest to warn of a present economic outlook threatening recent progress in terms of renewable energy development. Globally, industry commentators point to the present economic crisis as an excuse for companies to cut back on riskier investments, and instead concentrate on surer bets.
However, while the global economy is without doubt entering a period of difficulty, it seems premature to write off continued progress towards cleaner energy grids.
Economic crises don’t end progress; in fact if you look at history you could argue that they accelerate change rather than slow it down.
If analysis of the current situation proves correct, the last economic crisis similar to that we now face occurred in the 1930’s, a period which saw inventions such as the Jet Engine, Radar and Nylon to name just a few. That same decade saw significant leaps towards the development of the first computers, as well in chemistry and nuclear physics which revolutionised the petrochemical and energy sectors.
Innovation doesn’t stop; indeed it has been a constant in human development. Companies will face pressure to rationalize and justify their investments, however, in an uncertain environment such as this all bets are equally risky.
The longer oil demand is subdued and prices depressed, the less attractive the return on investment on hydrocarbons. Meanwhile, the cost of renewables continues to fall, and research into energy storage will continue in some way, shape or form. The more reliable these sources become, the more attractive a longer-term investment they seem vs oil where the margins are becoming increasingly tight.
In March, British oil major BP announced a 25% cut in its budget for 2020, while a Reuters article last week suggested the company was contemplating halving senior management positions in a bid to cut costs.
However, according to that same article, the one budget the company refuses to cut was that focused on renewable and clean energy sources. While that investment is small in comparison to the company’s total capex, new CEO Bernard Looney has made it clear where he sees the company’s future.
Investment in oil and gas will not end any time soon; however the market fundamentals emerging in the post Covid-19 world should favour more investment in cleaner energy sources rather than less.