Economists, investment banks and other analysts have been debating early on in the coronavirus crisis a curious abstract phenomenon: the shape of economic recovery. Various theories propound a U, V, W, L shape, or more exotic shapes, a square root or the Nike swoosh. What does the geometry of recovery mean for the energy industry?
The concepts about the shape of a recovery date back to earlier recessions. Global economic activity has gone into its steepest and fastest plunge ever. Once the virus is largely contained, or when a cure or vaccine is found, will the economy quickly rebound to pre-viral levels – a V-shaped recovery? Will it go into a prolonged slump before reviving (a U)? Will there be a double-dip W-shaped recession – either because the outbreak rebounds as lockdown measures are eased and have to be re-imposed, or because debt and dislocation bring a subsequent financial crisis? A series of Ws, when waves of pandemic recur for years to come? Maybe no recovery, in an L-shape – a steep drop followed by prolonged stagnation? Or, a square root sign – a sharp dip, followed by some recovery before flatlining?
Most forecasters for now seem to go with the V-shape, and then show a few more pessimistic scenarios. This is indicative of a natural human tendency to assume a return to perceived normality as a base-case. Assets and infrastructure remain intact, the crisis has been short-lived so far, and governments have poured trillions of dollars into keeping businesses liquid, preserving jobs and keeping ordinary people from financial ruin.
Former US Federal Reserve chairman Ben Bernanke has said banks are stronger today than in the global financial crisis, and that this downturn will be much shorter than in the 1930s. Stock markets seem to agree: the S&P500 is back to the levels of May 2019. The severest economic crisis since the Great Depression is treated as costing us just a year.
But as my colleague at Columbia University’s global energy centre, and former ADIA Global Head of Research Christof Rühl observes, it’s concerning that everyone’s forecasts keep getting worse. The recoveries will not be the same shape and timing everywhere: as Spain and Italy seem over the worst, Russia and Brazil’s epidemics are accelerating. What shape would a Chinese V, an American W and a Russian L add up to?
China, first-stricken, has mostly contained the virus with a strict national effort, even though it flares up again in places. But although business is reviving, it now faces the impact on its main export markets: last year, North America took 20 per cent of its goods, Europe 20 per cent, and oil exporters, badly hit by the slump in prices, another 10 per cent.
The shape of the energy business’s recovery is triply uncertain. Energy use depends on economic activity, but the type of energy used varies greatly. Oil demand in aviation and commuting has suffered worst. Petrol use is now picking up again as lockdowns are eased in China, the US, the UK and the Gulf, and Chevron chief executive Mike Wirth said, “It would appear the market has found a bottom”. But the industry now faces a likely slowdown in trade which will hit diesel for lorries and fuel oil for ships.
Natural gas was in a slump even last year but has been hit less by the virus as people still need to heat their homes and power their laptops. Ultra-cheap gas has been able to keep squeezing out dirty coal.
Renewable energy has coped best of all, because of its near-zero operating costs and, often, priority access to the grid. Some projects have been delayed by practical issues, but post-viral stimulus spending is likely to focus heavily on green energy.
Secondly, ideas about recovery themselves affect the oil market. The Opec+ group is in the middle of cutting almost 10 million barrels per day to avoid swamping the market, and US and Canadian producers have also cut back sharply as their output has become unprofitable. But with a modest recovery in West Texas prices to almost $30 per barrel, some companies have already begun turning their wells back on. Higher prices will make it harder for Opec+ to agree on extending current cuts to the year’s end and will encourage some members to “cheat” on their targets.
Such behaviour, and the massive overhang of inventories, could limit oil prices for an extended period. Despite the dismal demand situation, lower-cost producers could eventually benefit if their competitors have been driven out of business. The path of recovery for oil-producing companies and even countries is not necessarily the same as that for the industry.
Thirdly, habits and work patterns are likely to be durably changed. About 86 per cent of people surveyed said they would delay air travel even after coronavirus is largely contained. Companies and employees are likely to warm to working at home, at least part-time, and eschew costly and time-consuming conferences in physical locations.
I have attended more online conferences and webinars in the past month than on-site events in a year, more cheaply and comfortably – even if they lack the elements of human interaction and serendipity. For a while, commuters will prefer private vehicles to public transport, increasing fuel use, but that will ebb as cost and congestion push people back to buses and metros.
Simple illustrations of the path of recovery are useful, if not taken too literally. In this messy world, flexibility, resilience, and an eye for opportunities are more useful than a rigid long-term strategy. U, V, W, L spell danger for many, but success for some.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis