Vision for US Energy Critical After Worst Shock Since WWII

Global CO² emissions drop 'nothing to celebrate'

Pump jacks and wells are seen in an oil field on the Monterey Shale formation where hydraulic fracturing, or fracking, is used to extract gas and oil near McKittrick, Calif., on March 23, 2014. David McNew/Getty Images

Global energy systems are experiencing their biggest shock in seventy years as the equivalent of “the entire energy demand of India, the world’s third-largest energy consumer” has been lost due to the CCP virus crisis, according to the International Energy Agency’s (IEA’s) Global Energy Review for 2020.

The IEA report forecasts that global energy demand will fall by an unprecedented 6 percent in 2020—seven times the decline measured in the wake of the 2008 global financial crisis.

Furthermore, where our energy comes from in future has become a more strongly political matter, as an energy market in flux provides an opportunity for policymakers to place “renewables, efficiency, batteries, hydrogen and carbon capture—at the heart of their plans for economic recovery,” according to IEA Executive Director, Fatih Birol.

“This is a historic shock to the entire energy world. Amid today’s unparalleled health and economic crises, the plunge in demand for nearly all major fuels is staggering, especially for coal, oil, and gas,” said Birol. “It is still too early to determine the longer-term impacts, but the energy industry that emerges from this crisis will be significantly different from the one that came before.”

Energy Drop Indicates Death Toll, Economic Loss

The IEA report suggests that advanced economies will bear the brunt of the CCP virus pandemic, with energy demand forecast to fall by 9 percent in the United States and by up to 11 percent in the European Union.

Industrial, household, and business electricity use patterns have changed dramatically, with overall demand declining by 20 percent or more and weekday consumption resembling pre-crisis Sunday patterns for nations with full lockdowns in place. Global electricity demand is expected to fall by around 5 percent this year—the largest decline since the Great Depression of the 1930s.

Such forecasts are heavily dependent on assumptions that the lockdowns imposed by governments around the world to combat the spread of the virus are progressively relaxed over the next few months, and that this reopening is accompanied by a corresponding, if gradual, economic recovery. The IEA reports that each month of continued worldwide lockdown will further reduce demand by 1.5 percent.

Decline in CO² Emissions Nothing to Celebrate

Global declines in the use of coal and oil mean that energy-related CO² emissions are forecast to decline by almost 8 percent in 2020, to approximately 2010 levels.

“Resulting from premature deaths and economic trauma around the world, the historic decline in global emissions is absolutely nothing to cheer,” said Birol. “And if the aftermath of the 2008 financial crisis is anything to go by, we are likely to soon see a sharp rebound in emissions as economic conditions improve.”

Winners, but Short Term: Wind, Solar, Nuclear

According to the IEA, energy sources such as wind, solar photovoltaics, and nuclear have increased their share of energy mixes, as they cannot easily be switched off and government policies mandating the use of renewables in many countries lock in their priority-supplier status.

In order to reduce electricity flows to the grid, operators are electing to reduce coal-fired generation and cover peaks and troughs in demand with fewer gas-fired turbines.

The report projects that coal-fired electricity generation will decline by 10 percent globally in 2020, while natural gas-fired generation will likely decline by 5 percent. However, the report states elsewhere that the global thermal coal industry will be affected less severely than the oil or gas industries, as coal is less susceptible to supply-chain and logistical disruptions, and coal storage capacity is not a limiting factor—unlike for its fossil-based cousins.

With the world awash with cheap energy, many wind and solar projects previously planned for this year and next are now at higher risk of cancellation. According to a report by Bloomberg NEF (BNEF), numerous wind projects in both the United States and China were to be installed within the framework of subsidy arrangements that run out this year. It remains unclear whether either state will wish to continue with such projects, will postpone them into 2021, or will cancel them entirely. BNEF also said that 2020 may see policymakers “divert attention away from clean energy to more pressing concerns.”

“This crisis has underlined the deep reliance of modern societies on reliable electricity supplies for supporting healthcare systems, businesses, and the basic amenities of daily life,” said Birol. “But nobody should take any of this for granted—greater investments and smarter policies are needed to keep electricity supplies secure.”

Implications

According to the IEA, “This unprecedented situation and the stimulus packages that governments are putting in place will shape the energy sector for years to come,” with what it called “significant consequences” for the energy industry as a whole, future energy security, and Green New Deal-style energy transition programs.

“Low prices and low demand in all subsectors will leave energy companies with weakened financial positions and often strained balance sheets,” states the IEA report. Energy sources and industries that enjoy a degree of insulation from market variations—such as renewable electricity projects—are likely to emerge in the strongest financial position, while private firms most directly exposed to market prices and demand collapses will experience “the most severe financial impacts,” leading to increased market concentration and a slew of consolidations.

The IEA’s view of the oil and gas industries is particularly gloomy. Even with attempts at coordinated management of the oil industry, “a disorderly production shutdown is likely in some places,” says the report. For natural gas and LNG, the report suggests that “US LNG has played a major role in improving energy security and market efficiency in several regions, but the ongoing challenging market conditions risk significant shut-in of US LNG facilities.”

Where the energy industry goes from here depends primarily on policy decisions that must often decide between budgetary concerns and hugely expensive energy transition plans. “Governments will play a major role in shaping the energy sector’s recovery from the Covid‑19 crisis, just as they have long been in the driving seat in orienting energy investment.”

Strong US Position Going Forward

In an opinion piece in the Washington Examiner last week, U.S. Energy Secretary Dan Brouillette wrote that the energy independence policies pursued by the current administration have placed the United States in a relative position of power as both the world’s largest producer and consumer of energy.

“This new reality is a direct consequence of Trump’s prioritizing American energy independence and enacting smart policies to make it a reality—right-sizing regulations, cutting bureaucratic red tape, cutting taxes, advocating for American energy exports, and focusing the U.S. Department of Energy on next-generation energy innovation,” said Brouillette. “As long as we are producing, we can continue to look after our interests. And as long as we are consuming, cartels will look for access to our economy, and for mutually beneficial energy engagements.”

According to Brouillette, “Stability has been brought to the markets, we have new confidence in their resiliency, and together, we have the hope for better days, for an end to the crisis, and a return to prosperity. It’s going to happen, and America will lead the way.”