Fossil fuels - again at the heart of economic recovery

The unprecedented global economic crisis has had a devastating effect on the fossil industry and, above all, on its operating results. Severe restrictive measures in industrialized countries and uncertainty in the business environment have significantly affected not only oil prices, but also the prospects for the development of the sector. Thus, a number of key oil and gas companies in the United States were on the verge of bankruptcy, and others - went bankrupt. The global decline in consumption, geopolitical instability and the deteriorating investment climate have had a detrimental effect on these companies. However, despite the operational turmoil in the entire hydrocarbon extraction, processing and export sector, the economic crisis will one day end and recovery will begin. In the oil era, this means only one thing - consumption will increase, and this will boost the development of all companies in the chain - not only those directly related to production, but also those in the processing industry.

Energy transformation in the oil era?

The claims of most Western governments are that the recovery from the economic crisis will give a new impetus to the transition to a "green economy". Beyond loud promises and learned phrases, however, the world economy hardly has the time and resources for such a rapid transformation - especially when it is in turbulent economic times, where nations want to return to the path of growth and prosperity as soon as possible. Currently, the leader in demand is China, which is the world's leading oil importer. It is estimated that in January imports increased by 32% compared to December 2020, which is an indication of a significant recovery in energy markets not only in China but also in Asia. The Asian continent has become the home of the next energy revolution in the last decade, and the data in the midst of the economic recession only confirm this trend. Liquefied natural gas (LNG) supplies from the United States to Asia increased by a whopping 67% in 2020, although global energy markets were shaken by an unprecedented supply and demand crisis.

And while most Asian countries have subordinated their energy needs almost entirely to economic development, this is not the case in the leading Western economies. With the arrival of the new administration in Washington, the United States immediately returned to the Paris Agreement. Joe Biden hastened to halt one of the largest oil projects in the United States, the Keystone XL pipeline, and the president's determined tone on green policies suggests that the administration could find itself in a state of "cold war" with the leading American companies in the fossil industry.

The situation is identical in the European Union, where plans for a Green Deal are in full swing, despite the growing imbalances in the Union's energy system. Leaders' obsessive staring at Brussels to drastically reduce carbon emissions is increasingly suffocating businesses, and ideas to further tighten eco-regulation and introduce new carbon taxes could make industrial capital simply leave the European community.

Emission levels still follow economic activity

The fossil industry is at the heart of carbon reduction policies because fossil fuels are a major source of greenhouse gases. And while some energy sectors (such as electricity) can be transformed into low-emission industries, by switching to nuclear power plants, renewables and to some extent natural gas, other sectors such as transport and agriculture do not have this option, at least for the foreseeable future. Yes, innovation in transport electrification and the introduction of new energy sources should not be overlooked, but it seems that the forthcoming economic recovery will take place mainly with the help of the well-known fossil fuels. In fact, it is not surprising that coal, natural gas and oil will be the focus of recovery, and the reason for this is extremely simple - they remain the most cost-effective energy resources.

As for the levels of carbon emissions, a certain parallel can be drawn with the last major financial and economic crisis – the one of 2008-09. Then CO2 emissions decreased by -1.4% in 2009, but next year began to grow significantly - 5.9% in 2010, 3.2% in 2011. The basis for this growth was the rapid recovery of carbon-intensive production, especially in emerging Asian economies. Today, 10 years later, it seems that the world is still living in the era of hydrocarbons - evidence of this is the data of the US Energy Administration (EIA), which in its short-term forecast for 2021 expects growth in US coal consumption, especially for electricity generation, and growth in emissions from the transportation sector, which will be at the heart of the economic recovery in the United States.

Natural gas, on the other hand, retains its leading role, albeit with a slight projected decline in consumption of 0.9% compared to the previous year, due to the turmoil in the sector caused by the corona crisis. On this basis, one can expect similarities with the last crisis in terms of emission dynamics - immediately after the end of the crisis begins an increase in the emission footprint caused by the recovery of industrial production, transport and services. In 2010, the demand for primary energy was dominated by fossil fuels - coal (28%), natural gas (21%), oil (32%). In 2019, almost ten years later, the structure of the world's energy balance is identical - coal has fallen slightly to 26%, demand for natural gas has increased to 23%, and oil has maintained its position with a share of 31% . Given that the structure of the global energy balance has not changed significantly, the requests to increase emissions are completely reasonable.

The main threats to the fossil industry in the recovery period are political

The direction of development of the energy system has always been influenced by public policies. Traditionally, the main threats to the global energy sector have been geopolitical clashes in key extractive regions and, to some extent, the regional policies of leading economic players. The first paragraph may highlight possible instability in the Middle East region, which continues to play a leading role in oil production. It is expressed both in the maintenance of a certain price stability on the stock exchanges and in the physical security of the oil fields and the main logistics routes.

Closures in the EU will in any case affect energy consumption in the union, but against the background of expected growth in demand in Asia and the United States, Europe alone is unlikely to have a negative impact on global hydrocarbon demand. In this spirit, regional policies can be explained by the intentions of individual countries or alliances for energy transformation, which will distance them from the use of fossil fuels. It is important to note that these demands are primarily ideological, and even if they have some practical dimensions, their economic efficiency is seriously questioned. Not because the intentions are necessarily bad, but because the reality is different - fossil fuels are difficult to compete unless administratively regulated - with new taxes and inequalities with other "chosen" energy sources.

The conclusions

In times of uncertainty, people rely on the safest and the most effective. Energy is at the heart of any business operation and economic agents will aim to use it in the most efficient way, at the lowest possible cost. This means that fossil fuels (oil, natural gas and coal) will bear the brunt of the economic recovery after the corona crisis. Of course, those efforts to diversify energy resources should not be overlooked. But this diversification must be viewed pragmatically and with a cool mind. In this line of thought, electricity is the sector for which there have long been solutions to its transformation.

Conceptually, the transition there is not complicated - the share of nuclear energy, assisted by renewable energy sources and natural gas, simply needs to be increased. But this transition brings with it a number of political challenges - nuclear energy continues to be stigmatized and politically incorrect in most Western countries, at the expense of renewables, which enjoy all the political and financial privileges of governments. This creates preconditions for other imbalances, which are also not to be ignored by the so-called Policy makers in the electricity sector. But even with these policies, fossil fuels continue to play a key role in electricity generation, a sure sign that they are important to the stability of the system. In other leading economic sectors such as transport and agriculture, fossil fuels will also be decisive. It's just that at the moment the alternatives are not able to "take away" the market share of the established energy resources. As in the recovery 10 years ago, fossil fuels retain their leading role because they are affordable, established and cost-effective.

Every economic crisis is unique and gives new lessons. Access to energy resources has always been crucial for the sustainability of the recovery and the rapid return of economic agents to the path of growth. It is important to note that the post-crisis period requires, above all, maximum security and predictability in energy supply, and at the moment the realities in energy are such that only fossil fuels can provide it.