Written by Ged Davis, Executive Chair, Scenarios, World Energy Council
The COVID-19 pandemic has had a devastating impact on global public health and caused severe strains on the economy and on energy systems around the world. As of 13 May there have been over 4.4 million confirmed cases and over 297,000 deaths globally, and a massive cost to the global economy with far-reaching impacts for energy. This is just a start, as the numbers of those infected will rise. The main impact has been in the Northern Hemisphere, as the epicentre has moved from East Asia, to Europe and North America, and the virus is now heading South. How might this play out?
Act 1: The virus arrives—slow its spread!
COVID-19 is highly infectious. Uncontrolled each person can infect, on average, three others leading to rapid exponential growth of infections and threatening to overwhelm health systems. Only through strict controls, such as social distancing and restricted movement, combined with increased capacity to test, contact trace, and isolate those with the infection, can we supress the rate of transmission to below one and preferably closer to 0.5. Governments have implemented these measures with varying success around the world.
All countries have seen a reduction of mobility, especially road and air, with dramatic declines in economic activity. Most radical has been the impact on aviation, road transport, tourism, hospitality and energy sector value chains. We have seen significant reductions of electricity consumption, for example, 25% in Italy, 20% in France, and 12% in the United Kingdom. Oil and gas demand have collapsed in the face of a supply glut. Oil and gas prices have tumbled, and energy companies have seen sharp declines in earnings. Current estimates of global E&P revenues are set to fall this year by $1tr, a drop of 40%, to $1.47tr.
In a recent World Energy Council survey covering 53 countries, 96% of energy businesses have been COVID affected. 95% see the greatest impact falling on society, and 87% on the economy. For many energy companies the issue is survivability and achieving some form of financial strength – thus mothballing projects, curtailing investments, seeking government support and cutting dividends are the order of the day. Even so many of the weaker companies will not survive. And the implications for oil producing governments is for a major reduction of revenue and a need to profoundly restructure budgets and borrow where possible.
Finally, governments realise that the one sure way out of this situation is to discover, manufacture and distribute a vaccine on a global scale, but this will take time. The EU leadership has raised €7.5bn from G20 countries to speed up the development of vaccines, treatment and testing capacity.
Act 1 ends when governments realise that the costs of their lockdown programs just cannot be borne forever.
Act 2: Tough choices – lives versus livelihoods
For many moving on from lockdown will be a relief, but the hard work has only just begun. The new challenge is to keep transmission rates below one while opening up the economy. Societies and governments will need to compare the costs and benefits of a myriad of options. Many of the choices can only be made locally and a network of consultations will be needed. These choices will play out in terms of the ongoing number of infections, and – if they increase – governments will need to act quickly and appropriately.
However, governments will not be managing blind. Large-scale testing will be crucial. Testing and tracing can isolate those with new infections and enable the tracing of their contacts, helping arrest the spread of the disease. The biggest challenge will be in those countries where the number of infected rises and forces a second period of stringent lockdown.
The coronavirus has begun to hit the Southern hemisphere, which is more vulnerable to spread of the virus, due to denser cities, poorer sanitation, more people with pre-existing health conditions, and less robust health systems. For many there are no safety nets and there are many who may feel the need to continue to work if infected, increasing the likelihood of a local epidemic. Just as the costs of handling the virus have ballooned in the North, so this could happen in the South.
The fundamental dilemma of balancing lives and livelihood would be an international concern. Hopefully we will learn from each other.
For energy companies the legacies of facing survival needs to be complemented with defining the way forward – the key question is how much of the energy demand reduction is temporary and how much will turn out to be permanent.
Act 3: The last act—tragedy or victory?
It is in Act 3 we will learn if the hero triumphs or whether we face deep tragedy. The outcome will depend not just on leadership but also on creativity, deep commitment, the outcome of fine judgements, perseverance and luck. We learn whether a vaccine can be manufactured and rapidly distributed; if not countries may be on the journey to achieving herd immunity at great cost.
Tragedy would be the inevitable outcome if we are unable to contain the virus, which would depend largely on finding a vaccine. This would be a major disappointment and economic activity could remain weak for several years. Not all countries would fare equally, with particular advantage to those who have eradicated the infection locally, who could strengthen their borders. Firms seek a critical mass of production close to home. Cross border trade could drop a third. The priority will be on stimulating the economy and job creation.
In Victory a vaccine is manufactured and widely distributed within two years, and economic activity rebounds. There is a strengthening of global solidarity.
But the outcome remains open. We must work for victory and avoid tragedy.