‘The mother of all stress tests’: BP details Covid-19’s impact on energy

One thing to start: US oil producers are foregoing lots of money on their hedges.

Welcome back to Energy Source — we’ve sent the newsletter out a bit later than usual today so we could squeeze in news from BP’s just-released annual statistical review that is fresh off an embargo. That’s our first note.

In our second, Houston correspondent Justin Jacobs looks at how Joe Biden’s administration, which is committed to an energy transition and a rapid decarbonisation plan, is approaching Opec — an organisation set up to protect the interests of some of the world’s biggest fossil fuel producers.

Last, I was involved in a fascinating panel discussion with the International Energy Agency yesterday, talking a bit about my travels through American fossil fuel communities to ask how they feel about the energy transition. Fatih Birol, the IEA’s executive director, introduced the discussion by saying: “Labour must be central to the energy transition.” It’s an intriguing new focus for an agency often only seen as a modeller and scenario builder.

Now on to the newsletter.

The pandemic’s impact on the energy industry, quantified

We know the coronavirus crisis wreaked havoc on the energy world. But how bad was it? The latest edition of the BP Statistical Review lays bare the sheer disruption caused by the pandemic. 

“2020 was a year like no other,” said Spencer Dale, chief economist at BP, in prepared remarks due to be delivered on Thursday afternoon. “The global pandemic was the mother of all stress tests.”

Here are the highlights:

1. Primary energy consumption fell by 4.5 per cent in 2020 — the largest annual decline since 1945. This was mainly driven by oil, which accounted for three-quarters of the drop as governments imposed lockdowns and travel bans. The US, India and Russia experienced the largest declines in energy consumption.

2. Carbon emissions from energy use fell by more than 6 per cent in 2020, to levels not seen since 2011. This was the largest fall since the second world war. While this is great news for the environment, the world would need to produce similar decreases in carbon emissions, annually, for the next 30 years to meet the Paris climate goals — and this is still not enough to reach the net-zero emissions targets that many companies and governments have signed up to. 

3. As prices declined to multiyear lows, the share of natural gas in primary energy continued to rise, reaching a record high of 24.7 per cent.

4. Coal consumption fell by 4.2 per cent, led by declines in the US and India. OECD coal demand fell to its lowest level since at least 1965, when BP started collecting the data. But its use in power generation is still relatively robust, only falling to 2015 levels.

“There is still a long way to go to squeeze coal out of the power sector,” said Dale.

5. Wind, solar and hydroelectricity generation all grew despite the fall in overall energy demand. Wind and solar capacity increased by a colossal 238GW in 2020 —a jump 50 per cent larger than at any time in history.

6. Electricity consumption is estimated to have experienced the smallest fall across the main components of energy demand, declining by just 0.9 per cent last year, as demand from industrial consumers and offices was offset by those working and spending more time at home.

Over 70 years, Dale said, “the Statistical Review has borne witness to some of the most dramatic episodes in the history of the global energy system: The Suez Canal crisis in 1956; The oil embargo of 1973, soon followed by the Iranian revolution in 1979; More recently, the Fukushima disaster in 2011. All moments of great turmoil in global energy. But all pale in comparison to the events of last year.”

(Anjli Raval)

Biden balances petro-diplomacy and decarbonisation

President Joe Biden may be staking his legacy on getting the world off fossil fuels, but Opec+ discord and fears of a spike in fuel prices have pulled him back into the world of petro-diplomacy.

After Opec talks broke down, White House press secretary Jen Psaki said this week the administration was “directly communicating with Opec parties to get to a deal” that would add supply to the market.

“Ensuring Americans don’t bear a burden at the pump continues to be a top priority for the administration,” Psaki said.

American presidents have always kept a close eye on Opec given the potential fallout for the economy and consumers — and their own political fortunes.

For Biden, surging crude and petrol prices (see our data drill chart below) as Americans hit the road and skies again, along with Opec efforts to keep barrels off the market, are fuelling inflation fears and handing Republicans a political cudgel.

But don’t expect Biden’s petro-diplomacy to look much like that of his predecessor Donald Trump, who tried to micromanage oil markets and Opec decisions, often via Twitter.

When petrol prices rose to around $3 a gallon on July 4 2018, Trump tweeted that the “Opec Monopoly” was driving prices higher, adding a threatening reminder to Saudi Arabia that the US “defends many of their members for very little $’s”. (Trump’s tweets are no longer available on Twitter after being banned from the platform, but his history of Opec jawboning can be found here.)

While Biden might send Riyadh a message that makes a similar point, it certainly won’t come in the form of a bombastic, market-roiling tweet.

Even more extraordinary was Trump’s intervention in the depths of the pandemic last year to personally broker a deal for Opec to cut supplies in a bid to lift prices from historic lows and rescue a US oil industry that was in freefall.

Rather than Biden intervening in Opec talks personally, Psaki said she expects him to leave the task to other administration officials.

That is partly a return to form for US-Opec diplomacy, but for Biden it is also a reflection of the awkward politics of the energy transition for a president that has framed climate change as an existential threat.

Just a few months ago Biden gathered world leaders for a virtual summit to inject new momentum into flagging efforts to slash the world’s carbon emissions and transition away from oil and gas.

But ahead of November’s COP26 climate summit, Biden is in the position of needing to ask the world’s top oil producers to pump more carbon-spewing crude to keep his economic recovery on track. (Justin Jacobs)

Data Drill

Americans driving over the holiday weekend paid more for the privilege. Yesterday’s petrol prices averaged nearly $3.14 a gallon, up 40 per cent since January. AAA expects another increase of 10-20 cents by the end of August: bad news for summer road trips.

Petrol prices haven’t been this high in seven years, and this fresh increase will add to many Americans’ worries about post-pandemic inflation.

Power Points

• How one company’s transition away from fossil fuels is another’s opportunity to double down.

• Why Opec+ failed to get a deal amid rising oil prices.

• Cement is one of the hardest industries to decarbonise. These start-ups want to change that. 

• The EU’s carbon border tax will generate nearly €10bn. 

• Reaching its net-zero target could cost the UK less than the pandemic.

• “As long as Syria is sick, Lebanon is tired.” Facing its own energy crisis, Lebanon is tightening its grip on fuel smuggling to Syria. 

• What Biden’s infrastructure bill means for energy