Oil markets are in turmoil, energy demand has been hammered by Covid-19, and economic crises loom all over the world; so why is energy economist Michael Liebreich optimistic? He talked about the current state of the world with Alex Braae.
In the world of energy economics, there are no simple answers. Decisions made in one part of the world will inevitably have ripple effects that sweep across every country, affecting all sorts of once-normal aspects of everyday life.
Right now, the field is one of many facing unprecedented conditions to study. Covid-19 and the associated restrictions on all sorts of travel and transport have hammered demand for energy, in a way that is entirely without parallel this century. At the same time, Saudi Arabia has launched a price war, massively ramping up production in order to crash the benchmark price and drive competitors out of business.
This is all set against a backdrop of a global health emergency and the urgent need to save lives, along with a long looming period of economic uncertainty that could shake many societies to their cores. And in the biggest picture view, climate change still looms as a terrifying threat to everyone, everywhere.
It might sound like all of this is unmitigated bad news. But in fact, we might be getting a glimpse right now of a much better world to come. To unpack these contradictions and connections, The Spinoff spoke to Michael Liebreich, an internationally renowned energy economist who specialises in the financing of clean energy. The Briton recently spent time in New Zealand speaking with a wide range of people with interests in the sector, as a guest of Z Energy.
His comments have been condensed slightly here.
The Spinoff: The oil price war – how long can it last and what comes after it?
Michael Liebreich: There’s so many moving parts, so it’s quite difficult to say. But we know that the oil price is going to be very weak so long as there’s massively more supply than demand. Right now demand is enormously down, we’re hearing huge figures – France during the lockdown was over 75% down, most airlines have got something like 95% of flights cancelled. Right now we must be producing tens of millions of barrels more a day than is being absorbed.
US oil companies are lobbying to fill the US strategic reserve, as oil can be stored. It will help prices that countries with strategic reserves are trying to absorb some of the excess supply, but it’s so over scale compared to that. We’re clearly in for very low oil prices as long as the shutdowns continue.
What sort of timeline are we looking at for that?
What you really need is for demand to be higher than supply for a pretty extended period. There are tankers sitting around, all the oil storage in the world is going to be full, and you’ve got to absorb all of that, which takes quite a bit of time and economic recovery. I’m simply not a believer in a quick bounceback – what we saw in China was a quick return to about 85% percent of economic activity once you’ve got this thing under control. Well, first of all, we’re still weeks or months from doing that, even in Europe. The US is still rocketing up.
And then you get into the developing world – India, where people have been trying to get back to their villages, and milling around in their tens of thousands. They’re not going to get through this thing in a hurry, and I’m so pessimistic about our ability to really put a lid on it quickly. We’re going to live like this until a vaccine comes along, and I’m not an immunologist, but it could be a year, it could be two years. So that oil price is going to be low.
Did the countries who got into this know what they’d be setting off?
Saudi Arabia I think has made an absolutely classic error – they thought that with the virus and weak demand, they could piggyback on that and unleash a little price war, and it would smack a bunch of US producers out of business, and then they’d be able to do a deal with OPEC and Russia and push the oil price back up. The price was around $60 – $65 a barrel when they started releasing the taps – they’d have calculated it would maybe go down to $50 or $40, and then go back.
But this dip is much more substantial, much more serious, and Saudi Arabia doesn’t have huge resilience. It only has so much foreign currency, and with a $30 oil price they can only last a couple of years before they’re out. Russia’s got a more diverse economy and can last a lot longer, but at these prices ultimately the Saudis will have to sue for peace.
But Saudi Arabia can produce very cheap oil – surely that helps them?
Well, people say that – they can get oil out of the ground for as little as $4 a barrel, so surely they’ll be the last one standing. I don’t think that’s the way it works, because they need an $80 fiscal breakeven. In other words, the government needs $80 a barrel in order to set aside money. So I look at Saudi Arabia as a big, inefficient producer. Saudi Aramco can produce very efficiently, but Saudi Arabia is essentially just an oil economy. And if you’re an inefficient producer, you don’t unleash a price war – it’s a really stupid thing to do.
We may be seeing the sowing of the seeds of the next oil price spike, because all the oil producing countries are putting exploration and development on ice. Demand is down now, but it will come back up, it may not be to exactly the same level, but it will come back. And if we’ve not invested in the supply side, the prices could spike again in four, five, six years. I’d like to think that might even be the last oil price spike, because what’s going to happen then is that there’ll be so many alternatives across transportation, maybe even the chemicals space, and with another big spike people will be saying ‘to hell with this. We’re now really going to move to other fuels for as much as possible’.
Those alternatives would include renewable sources of energy – but wouldn’t they also include dirtier fuels like coal?
The coal industry is currently being seen off. As much as there was no real alternative, you could hate it as much as you want, but if that was the only way to generate cost effective electricity, you’re stuck. But as soon as there’s cheap gas, cheap renewable energy, we’re just not really held over a barrel by coal, and see it being driven out of the mix in Europe and the US, the uptake is not there any more in Asia. And as soon as there are meaningful alternatives to oil – nobody loves this sector, nobody loves these producers, they’re not going to stay with them for nostalgic reasons, they’re going to want to switch.
Speaking of that switch, is there a risk that very low demand for oil will make renewable energy much less feasible? Is the price point for renewables still too high, and should governments get involved with more subsidies?
The simple answer is yes, it slows down the uptake of clean energy. But it’s more complicated than that. For example, oil doesn’t really compete with electricity in the energy market. It does if you’re using a diesel generator in Nigeria, or if you’re on an island that only has fuel generators for power. But in most major systems, oil is no longer an electricity source. That would be gas, coal, nuclear, renewables and so on. And there are even paradoxes – like in the US, a lot of natural gas is produced as a byproduct of oil. At the moment, a lot of that is flared because it’s not valued highly enough, but a lot of that which goes into the system is produced alongside oil. If your oil generates less revenue, then you become more dependent on revenue from selling your gas. So there are some paradoxes here, which actually mean as the oil price collapses, we just don’t know the dynamics.
Where we will see a slowdown is the shift to electric vehicles, because there you have oil competing with electricity. It’ll be different in different countries though. In the US for instance, yes, this has been a bad period for the competitiveness of electric vehicles – not only is there very cheap oil, but you’ve also got an administration rolling back energy efficiency standards. Why are they doing it, when their own analysis shows that it’ll cost consumers more over the life of the car? It benefits the oil producers, so that’s why they’re doing it. When you look at Europe, the driver for electrification of vehicles is around air quality a lot more. And the consumer oil prices there have a much weaker relationship to the benchmark oil price, because of the much higher taxation on oil.
It’s a similar situation in New Zealand, with tax being a relatively large share of the petrol price.
Exactly. And in China, it’s driven by policy requirements that the country doesn’t want to rack up a huge balance of payments problem from importing oil, so they’re much more comfortable using electricity from that perspective. They’re worried about air quality, because the Chinese Communist Party doesn’t like it when people take to the streets to complain about that. They want to leapfrog the Western car industry, and they won’t be able to do that using internal combustion engines, but they can do it with battery manufacturing. So there are just different drivers in different places, but in the US where it is just a cost question – EVs vs ICEs (internal combustion engines) – yes, this is very bad news for the rapid uptake of electrification.
What about stimulus programmes, and other sorts of government intervention?
In the non-US world, a lot of policymakers will say if we’re going to have to stimulate something, we might as well do something that is in line with the transition to clean energy. In the US it could go one of two ways, depending on whether President Trump wins the next election – if it’s not him it will be much more in line with the developments around the rest of the world, around cleaning up the carbon emissions structure.
What do you think it will mean for the wider goal of reducing emissions that the most significant drop in the 21st century that we’ve seen is directly correlated with negative phenomena like mass unemployment?
The first thing I’d say – and this should be front and centre – the first priority is not the economics, and it’s not the climate, and it’s not the job losses. The first priority is that this is a health crisis – people are dying – so whatever is done we need to sort that out.
The second thing is, you’ve got really urgent humanitarian scale economic problems, and the second priority is to address those. And frankly if someone comes along and says that they don’t want to help someone hungry who has lost their job because they used to be a coal miner, I say to hell with that. We have to help people, whatever shape that takes. That is particularly stark given our collective failure to help the right people with the right urgency after the Great Financial Crisis of 2008.
Where it bleeds over into the emissions and climate issue – look at the Yellow Vest protests in France. If people are not economically remediated and comfortable in the aftermath of this, if you go to this and say we want to give car companies a big subsidy, or that we want to pay people who can afford Tesla cars money to buy one of them, because it’s really important to do something about the climate, they’ll say wait a minute, I’ve lost my job and I’m still living on benefits – or no benefits in the developing world even. I think that’s a very dangerous place to go.
So how do we go about those goals then?
It would be nice to think we’re not going to do that in a stupid way, of subsidising a whole bunch of high carbon models, a whole bunch of assets that were already looking stranded before Covid came along. Thinking about Australia, if the cleverest way to deal with that economic rescue is to fund the Adani coal mine, that’s a really stupid way to do that.
But we are able to innovate massively, and this is where it gets really interesting. There are a whole bunch of learning and innovation in periods like wartime, and periods of great stress like this. But already, look at Zoom and Skype and what they mean for home working. I tell you, the home working solution my kids’ schools put in place before the crisis did not work. Within a few weeks, they found better solutions. And they’re still clunky as hell, but you know what? Half a billion kids are out of schools right now, and we’re going to have to have new solutions. Or home medicine – the idea you’d go to a GP clinic when you’re unwell, and pass that on to everybody, and then you’d go to a pharmacy to pick up the medicine and make a whole lot more people unwell? We’re going to come out of this and think wow, did we really used to do this in 2019?
A lot of those new things that we learn will tend to reduce carbon, and governments can either choose to support them or not support them. Or they could say to hell with it, we just want to give everyone the impression that everything is back to normal, like getting everyone to start flying around again as before. But I think a lot of this stuff is going to be quite sticky.
Emissions are still likely to be lower this year than 2019 – which in and of itself wasn’t considered likely by anyone at the start of the year. Can we expect them to keep falling, or is this a blip?
Just to put a number on it, before Covid I was already saying that we’re much closer to peak emissions than we thought. Some of the pessimism in the zeitgeist masked a lot of what was happening over the period of 2013-19. Global GDP grew 23%, global energy related CO2 emissions grew 3%. That’s decoupling. It’s not enough to get to the peak and start going down, but it’s pretty darn close. This year they’re going to drop perhaps 5-10%, but even before this I was thinking 2030 would be when we would have peaked. It’s not enough to keep to 1.5C, not even enough to keep to 2C, but take the win. With the stickiness of these new behaviours and technologies, if we really lean into these changes, save lives, get people feeling comfortable about the economy, then we can really push to say look, we’re just not going to keep doing the stupid things we used to do. I think we absolutely could see that.
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