COVID-19 and the Oil and Gas Industry: What You Need to Know

Economies all over the world are reeling from the impact of the coronavirus pandemic. Leaders in many industries continue to hope for a return to normal, but the reality is that we may never see a pre-pandemic normal again. The oil and gas industry in particular has been negatively impacted by the global economic shutdown resulting from the coronavirus pandemic. Fossil fuels are seeing incredible losses and oil prices are hitting record lows.

An increase in supply coupled with a sudden decrease in demand essentially crippled the industry, and the recovery might be slower than you think. So, what happened, and how did the coronavirus pandemic help to create the perfect storm that nearly crippled the oil and gas industry almost overnight?

The Start of the Problem

When did the problem in the oil and gas industry begin? Most people point to the first issue coming up in March of 2020, when an expected agreement between OPEC (led by Saudi Arabia) and Russia suddenly fell through. The OPEC/G20 plan would have limited production. It was expected to keep oil prices low but sustainable, both for consumers at the gas pumps and for the major oil producers around the world.

However, in an unexpected move, Russia suddenly decided to back out of the agreement at the last minute. This caused Saudi Arabia to retaliate by immediately increasing production by millions of barrels a day. These actions suddenly increased the oil supply by a significant amount in a market that was already completely saturated with oil.

Coronavirus and Its Impact

Part two of this perfect storm occurred because of the global coronavirus pandemic. All around the world, economies in multiple countries came to a sudden and screeching halt. Businesses shut down, workers and families were confined to their homes, and virtually no travel in any form was happening. As you might expect, the direct effect of this was that demand for oil completely plummeted. Airline travel on its own dropped by nearly 90 percent in the aftermath of the economic shutdown.

And this does not even take into account how little people were driving their cars or taking public transportation. Prices at the gas pump dropped to lows that hadn’t been seen in decades (down to $1/gallon or less in some places), and drivers were stuck contemplating low prices they couldn’t take advantage of, since there had been essentially no reason— or ability—to travel.

Dropping Prices

The combination of a vastly oversaturated oil market and little to no demand for the product caused oil prices to plummet, reaching lows that hadn’t been seen in 30 years or more. This situation was a completely unprecedented scenario for the industry, and the low prices of $20 or less per barrel are significantly below levels necessary for certain American oil producers and frackers to stay in business at all, much less produce any kind of profit.

In order for these companies to stay in business, the general consensus is that oil prices must be at least $40 dollars a barrel or more. The Trump administration in America quickly scrambled to encourage all parties involved to reconsider their positions and make changes for the good of the global economy, but even massive production cuts might not work at this point.

An Uncertain Future

As the oil and gas industry slowly begins to recover, many wonder about the future of the industry beyond the coronavirus pandemic. Though the reality right now is that the world economy still uses massive amounts of oil and gas for a number of applications, that won’t last forever.

With more pressure than ever on big oil companies about the negative environmental impact of fracking and drilling on the planet, renewable sources of energy are getting increased attention. But it’s not only that environmentally-friendly methods can help save the planet. The truth is that research and development is continuing, and soon, alternative energy sources will become cheaper than oil.

Similar to the cost/performance curve seen with computers and technology, alternative energy sources will become less expensive as the technology is improved and production becomes easier. Competition in the alternative energy sector will continue to ramp up, encouraging better performance, lower prices, and even more adoption across a broader section of consumers.

Moving past the coronavirus pandemic, the oil and gas industry needs to take a hard look at the future. Renewable energy is poised to become serious competition in the next several decades. Additionally, changing policies designed to reduce carbon dioxide emissions along with the increasing popularity of electric vehicles and other sources of power (like solar panels on homes) will continue to drive innovation in that sector. The future of oil may change significantly in coming years.