The impact of Covid-19 on energy and environment

How deep and how long?

The lockdowns adopted in response to Covid-19 led to profound changes in the international energy market and had evident (even though likely temporary) consequences on the environment. Emissions have been falling, GDP growth is plummeting and fossil fuel demand has crashed. However, the situation is still dominated by a great deal of uncertainty as the further spread of the virus is unpredictable.

The lockdown was followed by an impressive reduction in global COemissions. This came as no surprise: all major economic downturns in recent history negatively impacted on industrial production and the service sector (namely transportation), thereby reducing emissions. After the 2008 crisis global emissions decreased by about 1.3%. Currently, the Climate Action Tracker Analysts (CAT) provided two scenarios for CO2 emissions after Covid-19 - respectively showing a decrease of 4% and 11% on an annual basis. Of course, the extent of the reduction will heavily depend on the further spread of the virus, the speed at which a vaccine will be developed and distributed, and government responses to the crisis.

Howeverrejoicing for this temporary breather would be a dangerously shortsighted judgementOnce economies kick back into gear, emissions are likely to do the same. As reminded by the IEA executive director, Fatih Birol, shrinking the economy is not a viable solution to address climate change. A structural reform of national energy systems is needed in the low-carbon direction; in this sense, the current crisis could be a double-edged blade.

The global growth forecast is equally dominated by uncertainty. Future economic trends heavily depend on a series of factors which are quite difficult to predict, such as the resilience of the pandemic, the efficiency of containment measures, or social behavioural changes. The IMF expects a 3% decrease of global GDP in 2020, but at the same time the institution seems optimistic regarding the recovery which it expects to be V-shaped (+5.8% in 2021). Whether this positive comeback will actually materialise is highly doubtful, while there is a consensus about the shrinking in the world’s economy expected for this year. The economic recession has already started, and its effects are already evident in many countries. The foreseen GDP loss will force governments all around the world to promote stimulus packages in an attempt to preserve the livelihoods of their citizens.

The nature of such packages will be crucial to assess the impacts of the Covid-19 crisis on the global energy market and, indirectly, on our planet. With their choices, governments will determine whether the recovery is going to be characterized by a comeback to fossil-fuels (i.e. emissions bouncing back) or an improvement in clean energy transition. There are arguments in both directions. On one hand, pressing economic needs and funds shortages may lead countries to delay their low-carbon transition, setting aside climate priorities. On the other, this exceptional situation may be the ideal baseline to adopt structural economic reforms towards a green, sustainable pattern of development.

The most disruptive effect of the pandemic has been witnessed by the oil market. The global lockdown caused an unprecedented shock for global oil demand (more than one fourth of global oil consumption has been lost in April and May 2020) As a result, oil prices, both for crude oil and oil products, are at an all-time low. For the first time in history, the US oil price was forced into negative territory (-$37/barrel for WTI futures). Oil producers have excess supply oil on their hands, which needs to be stored. At the same time, oil storages are filling up rapidly, with such capacity unable to keep up with the production.

On the supply side, the world’s major oil exporters are trying to normalize the situation by cutting their production. In this respect, an extraordinary Ministerial meeting was held on the 9th of April between the OPEC and non-OPEC countries (including Russia and Mexico). The agreement reached provides for the greatest production cut ever experienced in this sector.  The participants decided to adjust downwards their crude oil production by 9.7 mb/d starting from the 1st of May until the 30th of June 2020. Subsequently, the agreed cut for the rest of the year, until the 31st of December 2020, will be of 8 mb/d.  Analysts seem dubious about the effectiveness of the agreement, deemed insufficient to tackle such a sharp decline in demand. Ultimately, the evolution of the pandemic in the next few months will be crucial to understand how, and at what pace, the crisis will evolve.

Photo: mean tropospheric NOdensity in China during Covid lockdown, on the 25th of February 2020. Credits NASA.

More about this topic: 

“Is Coronavirus Good for Our Sick Planet?”, Luca Franza
https://www.iai.it/en/pubblicazioni/coronavirus-good-our-sick-planet

“Il petrolio al tempo del coronavirus”, Luca Franza
https://www.affarinternazionali.it/2020/04/i-negoziati-sul-petrolio/

“Power Shifts and the Risk of a “Crisis Within the Crisis”: COVID, Oil and the MENA Region”, Luca Franza

https://www.iai.it/sites/default/files/iaicom2036.pdf

“The Impact of the Oil Crisis on the MENA Region”, Alice Favazza and Camellia Mahjoubi

https://www.iai.it/sites/default/files/iai2011.pdf