Crude Oil Falls in Wake of Low Demand … Temporarily
Why the Canadian Energy Industry is expected to be the lifeline for the recovery of the Canadian economy.
The coronavirus pandemic has hit the world economy harder than any event since World War 2, and it’s expected to have a lasting impact on energy demand. The enormity of the shock caused by the Covid-19 is prompting governments around the world to develop economic recovery plans that will shape infrastructure and industries for decades. There is a very strong case for the energy sector to play a crucial role in these plans.
As governments have shuttered businesses and restricted the freedom of movement for billions of people, consumption of oil, gas and power of course has fallen. The spread of Covid-19 has caused major disruptions in both the global financial and commodity markets, as well as the oil and gas industry in general.
Our Question is this? How will the Canadian energy industry emerge in the wake of the Covid-19 pandemic?
In order for markets to return to a pre-pandemic state, we know demand must recover. It’s widely believed that after the world starts to return to “normal”, people will want to rebuild their lives and resume lifestyle habits similar to those before the pandemic. They will want to go to work, see friends, family, and go on holidays. The powerful societal forces are expected to drive demand to pre-pandemic levels.
Low Prices Stimulate Growth
It is without a doubt the pandemic has created disruption in the global energy sector like no other, but low prices will ultimately stimulate demand growth as the economy begins to recover. With that, the energy industry is expected to maintain and create jobs, boost economic growth, and improve energy sustainability and resilience.
What Does that Mean for Canada?
The biggest concern for the Canadian Energy Industry is how long will this pandemic last and will investment return in a meaningful way. The industry is experiencing its third price collapse in twelve years. Covid-19 just amplified the challenges the Canadian industry was already experiencing – a scarcity of pipelines due to political and regulatory hurdles along with infrastructural bottlenecks, leaving producers without access to bigger markets. As was before the pandemic, Canadian energy companies’ only option is to sell their products at a discounted rate to their one and only customer – the U.S.
That said, the impact of Covid-19 on Canadian energy businesses wasn’t as severe as in other parts of the world. Canadian companies were able to react very quickly, making capital cuts and paring back budgets. Sadly, after six years of stress in the industry most cost-cutting measures had already taken place – which included many rounds of layoffs. There wasn’t a lot of fat on the bone for more cuts. Most companies were already running lean.
When economic recovery kicks in, it is expected to be powered largely by natural gas and oil, which is great for countries like Canada, who are in a supply position. It is well known the world can’t avoid oil and gas. Without fossil fuel energy, global societies would literally be at a stand still, production of goods and services would be halted immediately, transportation would end, and our global supply chain would stop.
There are sceptics that say post Covid-19, demand for oil and gas will continue to decline due to the adoption of renewables and low-carbon energy. That is not a likely scenario before we’re out of recovery. Currently only 17% of global energy is supplied by renewables, leaving the remaining 83% to be supplied by oil and gas. And as long as global economies are in an economic recovery state, significant investments and policy actions into new energy and renewable energy will likely remain weak.
If there is a silver lining to come from the pandemic, a bridge may be forming between the Canadian energy industry and public opposition. Governments are aware that the economic restructuring needed to pay for the debt and deficits caused by this crisis will be supplied in large part by the Canadian energy industry. In fact, the Canadian energy industry is considered to be a very powerful force in getting people back to work and supporting the finances of the country as a whole.
People will want jobs, they’ll want to put food on the table and rebuild their lives. Knowing the Canadian energy industry supplies 10% of the overall Canadian GDP and supports 500,000 jobs directly and indirectly, governments are now looking towards a strong Canadian Energy industry as a lifeline to recovery.
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