With COVID-19 decimating global demand, the benchmark price of US oil dropped below zero this week for the first time in history. That means oil producers were offering people money to take the stuff off their hands.
Although the price soon returned to positive territory, this is not just a temporary blip. It’s caused by factors the oil industry may never fully recover from — an outcome with huge implications for economic growth and critical sectors such as food and manufacturing.
Yet policymakers and investors have not fully absorbed the ramifications. The COVID-19 pandemic will probably keep demand very low for at least 18 months — the time needed to develop and roll out a vaccine — and most likely several years. That’s too long for the global oil industry as we know it to survive.
Prior to the pandemic, the oil industry was already on the brink. Although there is plenty of oil left, it is “increasingly expensive to access,” as the Geological Survey of Finland — a Finnish government agency overseeing the EU’s mineral resource modelling — noted in February. Since 2005, when production of conventional crude oil began to plateau, 71 percent of the growth in the global oil supply has come from US shale deposits, which are accessed by hydrofracturing, or fracking. Ramping up that production became so costly that most shale oil companies had negative cash flow. They compensated for it by drawing down debt that was rapidly becoming impossible to repay.
That’s why, even while most of the world was sleepwalking into the COVID-19 pandemic, the Finnish government report concluded that the supposedly “healthy” expansion of the global oil industry was in reality a debt-driven “bubble.”
The pandemic, and the resulting plunge in oil prices, was a pin that burst this bubble.
Even this only scratches the surface. Because we have depleted fossil fuel resources that are easier to reach, it now takes more energy to extract oil from any given spot. This is reflected in a metric called Energy Return on Investment, which measures how much energy can be harvested from a given resource, relative to the amount of energy required to access it.
During oil’s heyday in the 20th century, its EROI was sometimes as high as 100 to 1. In other words, the energy derived from oil wells and used throughout the economy was 100 times greater than the amount of energy required to produce that oil. But this ratio has dramatically decreased. Between 1960 and 1980, for instance, the worldwide average value EROI for fossil fuels declined from about 35 to 1 to 15 to 1. It might be as low as 6 to 1 now. In short, we are spending more to get less out.
This is a major reason why economic growth in the world’s advanced industrial economies has declined since the 1970s. We have counteracted this in various ways. Notably, we’ve outsourced manufacturing to reduce costs and invented ingenious instruments of credit to expand profits through debt financing.
But as the Finnish government study points out, economic growth in recent decades has thus rested on two increasingly brittle planks: growth in the oil supply and expanding debt. Both planks are now falling apart.
The pandemic has ground the global oil industry to a halt. Oil storage tanks are nearly all full. Oil service firms that supply the industry are shutting down. Gas stations are being forced to close as fuel sales dry up. And because oil wells are not just taps that can be turned on and off — they are organic deposits needing pressure to extract — shutting them down risks massive damage that could be too costly to repair.
As a result, by the time we recover from the COVID-19 crisis, much of the industry could be permanently and irreparably decimated. That could spur exorbitant price hikes that stymie economic growth and endanger transport networks and critical supply chains for manufacturing and the food supply.
We are unprepared for these impacts. But we also now have an unprecedented opportunity to speed the transition to a new world: one that no longer breaches environmental boundaries in ways that make pandemics like this one inevitable.
Government stimulus packages need to focus not on “bailing out” oil — an impossible task given the levels of debt across in the industry — but on rapidly building a new sustainable energy infrastructure free from the constraints facing fossil fuels.
We will still need oil and petrochemicals for some critical industrial processes, but we must move on rapidly. Meanwhile, we need to accelerate the transition to a more decentralized, renewable energy supply system. We’ll need less energy-intensive “agro-ecological” methods such as crop diversification, organic farming, and soil regeneration. We also should support clean biofuels programs as in Malaysia, where the government has mandated a transition to 100 percent deforestation-free, sustainable palm oil. This could offer a bridge to a clean transportation system while traditional petroleum distribution networks are at growing risk.
We’ll need to make manufacturing less dependent on oil inputs in all its phases: from production to transport to distribution. That means more “circular economy” recycling of locally sourced minerals and raw materials, and connecting industrial processes to clean energy sources.
COVID-19 is hastening the demise of the age of fossil fuels. There is no time to lose in building a new, post-carbon industrial revolution.
Nafeez Ahmed is executive director of the System Shift Lab, a research fellow at the Schumacher Institute for Sustainable Systems, and an investigative journalist. His latest book is “Failing States, Collapsing Systems: BioPhysical Triggers of Political Violence.”