But U. Other countries have also cut production. Yet analysts argue that rebounding global growth will soon push demand back to — and even beyond — prepandemic levels. That surge, compounded with a recent lack of investment in the oil sector, might set the stage for a demand crunch and a significant price rise. Elevated demand might last a while. The International Energy Agency recently issued a pathway for the world to follow to reach net-zero carbon emissions by That path is unlikely to be followed.
What it demands from governments and consumers belies all historical experience about what they can or will do. In most realistic scenarios, oil demand will likely peak in the next two decades before declining. The world will likely need more oil as we emerge out of the pandemic. Countries that produce that oil will reap the high economic returns. This includes Canada, the fifth-largest producer of oil and gas in the world. How should Canada respond if the anticipated boom happens?
For starters, oil producers should learn well the lessons taught over the past decade. They need to continue improving their environmental, social and governance performance. Such efforts differentiate Canadian producers, enhance their social licence to operate, buy investor credibility and keep Canadian businesses meeting societal demands that will not go away.
But if prices started to rise, they could throw their newfound caution to the wind and boost production to cash in on a rising market. This is a tricky operation. But if the group raised production ahead of, or well behind, a recovery in oil demand, it could increase volatility and cause extremes at both ends of the price spectrum. Uncertainty around how these different forces play out makes it tough to predict when the boom will start or how high prices will go.
We will not speculate on potential future price levels. But in terms of timing, an oil price boom based on a fundamental supply-demand imbalance could start as early as the third quarter of or be delayed until And there are good reasons to believe that it will not last for decades.
Indeed, in our view, it could be over in 12 to 18 months. Because the oil industry and commodity markets have changed significantly during the past decade. The supercycle prior to had its origins in the s, when lower prices caused a reduction in investment. Since that time, the industry has become far more responsive to changing external conditions. Increased oil consumption will inevitably lead to higher emissions. More expensive oil will increase the pace of transition away from fossil fuels, especially in countries that need to import oil to meet their energy needs.
The IEA said that the pathway, while narrow, is achievable if countries act with urgency to embrace clean technologies.
We expect these countries, rather than pay costly bills to external oil suppliers, to accelerate investment in renewable energy and electric-vehicle charging networks—in some regions, using postpandemic stimulus programs to rebuild in a more environmentally friendly way.
Investing in domestic technologies would also strengthen the security of the energy supply. And in developing countries, greater exposure to real oil prices could hold back consumer demand. The COVID crisis has also normalized patterns of consumption and ways of working that are less dependent on mobility and oil. Conducting a meeting via a provider such as Zoom, for example, has become second nature for business professionals.
We expect that most companies will continue to use video conferencing after the pandemic, causing business travel to lag the recovery in leisure travel as fewer in-person meetings are needed.
These new, more socially distant and stationary approaches to work and shopping could curb postpandemic oil demand and, as they become more established, help mitigate future price booms. Savvy producers and oil-dependent energy users will invest the increased revenue they receive from higher oil prices in a range of measures to strengthen their businesses in preparation for a lower-carbon world.
It is essential, however, that oil and gas companies maintain their fiscal discipline and avoid reverting to the inefficiencies and wasteful spending of the past, especially since the period of strong prices will be a short one. These companies need to consider taking three actions:. For industries that rely heavily on oil for their energy needs, such as airlines and shipping, higher prices can pose huge challenges.
A wave of consolidations and bankruptcies swept across the sector. The stock prices of premier energy firms like Chesapeake Energy Corporation crashed it declared bankruptcy in Some, like Anadarko Petroleum Corporation, liquidated their shale gas holdings. The petroleum industry has also taken a major reputational hit for its role in warming the planet while peddling climate-change denialism. Shareholders are revolting ; wealth managers are divesting. Yet four years later, running for reelection, Donald Trump used the same script to try to best Democratic nominee Joe Biden in Pennsylvania.
At a rally in Latrobe, Trump claimed that fracking had created , jobs in the state. The Pennsylvania Department of Labor and Industry counted only about 18, The region saw only 1. These numbers show that gas drilling has not lifted the financial outlook of shale communities. In fact, it may have even made things worse.
Nonetheless, politicians and pundits spend immense time and resources catering to energy sector workers—often at the expense of endangered jobs for people like mail carriers or computer programmers, who make up more of the employment picture.
Our perceptions about the future change dramatically in bear markets. Sometimes these negative views change how we think about economic and market cycles. In other words, a certain commodity or industry will never come back. Today, agricultural commodities, industrial metals and energy are all trading at year lows and the outlook is bleak. Oil is a depleting resource. A huge amount of capital is required to keep it flowing. Without investment, production declines.
For some companies, like the U. Indeed, the degree to which an industry has too much or too little investment is at the core of every cycle, be it oil, real estate, semiconductors or other resources.
In good times, money is poured into the ground, which creates excess supply and ultimately lower prices. When prices are at year lows like they are today, capital spending dries up, shortages emerge, and prices eventually rise.
As the expression goes, the solution to low prices is low prices. When we get through the coronavirus, the world will still need in the neighbourhood of million barrels of oil each day to keep the lights on.
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