The implications of the coronavirus crisis on the global energy sector and the environment

Flames emerge from flare stacks at Nahr Bin Umar oil field, as a worker wears a protective mask, following an outbreak of coronavirus, north of Basra, Iraq March 15, 2020. REUTERS/Essam Al-Sudani

The current drop in oil demand—caused, in large part, by severe reductions in travel due to the coronavirus—combined with the Saudi-Russia oil price war has simultaneously, if temporarily, lowered greenhouse gas emissions (GHG). However, the drop in GHG emissions is likely to be unsustainable in the long term, and the currently low cost of oil has raised questions about the future of clean energy deployment and climate action.

Atlantic Council Global Energy Center experts respond to the COVID-19 pandemic and its implications for the energy sector and the environment:

Randolph Bell, director, Global Energy Center, Atlantic Council

“It seems likely that the coronavirus-induced global economic downturn will cause carbon dioxide emissions to drop this year, the first time since the financial crisis of 2009, with one projection predicting an overall annual decline ranging from 0.3% to 1.2%. Some see this as a silver lining of the crisis—and the NASA satellite images of pollution reduction in China are truly remarkable, following an emissions drop of 25 percent over four weeks of lockdown—suggesting what a future powered by clean energy could look like.

“But this is the wrong lesson to take from this drop in emissions. That it requires a global pandemic with thousands of deaths, rapidly increasing unemployment, and huge amounts of economic dislocation to reduce emissions by a relatively small amount, should instead be one more wake-up call to the scale of the climate challenge and the complexity of solving it.

“Some commentators have gone so far as to say the future needs to look more like our locked-down coronavirus world in order to address the climate crisis. But this line of thinking is counterproductive at best. The world needs a functioning economy to continue to pull people out of poverty and make the scientific advances necessary to solve crises like this one.

“A reduction in emissions this year may buy a little extra time to act on climate change. But if the economic slowdown ends up hindering the development and deployment of clean energy technologies, which the International Energy Agency has said is likely, and if policymakers do not act to use their massive economic stimulus plans to support the low-carbon transition (it is worth noting that, as of publication, the draft third phase of the US stimulus package does not include any energy related funding beyond $3 billion for the strategic petroleum reserve), the remarkable satellite images of pollution will return to the way they looked before, just as they are already starting to do in China.”

Reed Blakemore, deputy director, Global Energy Center, Atlantic Council

“If the first phase of COVID-19’s effects on the global energy system is a story of energy consumption, oil demand, and emissions, the second phase will be how emerging supply chains of the energy transition shift as the pandemic reaches its turning point and the world begins to recover.

“In many ways, the liquefied natural gas (LNG), clean energy technology, and critical materials supply chains characteristic of the energy transition were already undergoing a period of transformation prior to the outbreak of the coronavirus. Natural gas was maturing as a commodity, with LNG bringing online a number of new suppliers and prices dipping so low that the long-term contracts that had characterized the natural gas trade thus far were looking less and less favorable. The clean energy technologies powering global low-carbon goals were slowly expanding their reach and developing supply chains stretching from China to Europe to the United States and Latin America. The critical minerals underpinning those technologies were, in turn, beginning to receive more pressure to embed transparency and sustainability throughout their development and trade.

“COVID-19 will touch each of those energy supply chains and more, at a moment when the global energy transition was beginning to build steam. Low oil and gas prices will place pressure on the economics of renewable energy sources and, without policy support, some renewables that have seen rapid deployment will have to wait for credit markets to recover, ceding ground to cheap hydrocarbons and fossil fuels. Furthermore, the impact of low oil prices on US shale producers might, at least temporarily, knock US LNG out of the game. Economic shutdowns wrought by the virus have revealed the weight that  China, South Korea, and others have in supply chains across global industry—renewable energy sources included. Companies and policymakers would do well to take note, particularly as the ambitions for low-emission and renewable energy technologies continue to grow.

“Meanwhile, the geopolitics of crisis, whether that be Chinese efforts to lead the global response to the pandemic, the Trump administration’s delayed and insular approach to the first global crisis of the decade, or the outcome of an ongoing price war between Saudi Arabia and Russia amidst a fracturing of OPEC+, will shape trade relationships as the global economy recovers. The effects of these events are uncertain and have a long arc, but the odds of a return to the geopolitical status-quo after the trauma of COVID-19 are wildly slim.

Jennifer Gordon, managing editor and senior fellow, Global Energy Center, Atlantic Council

“The COVID-19 pandemic has caused a demand shock—and coincided with a supply shock—in oil and gas markets. It is likely too soon to determine what the consequences of the pandemic will be, but the current drop in carbon emissions is unlikely to be sustainable, while low fossil fuel prices could potentially hamper the competitiveness of alternative energy sources. However, it is clear at the moment that the global health crisis has revealed certain truths about international cooperation, governance, and the energy system. The pandemic will likely slow the energy transition for a number of reasons, even though it also has made the need for clean and reliable power even more immediate.

“The Trump administration’s unilateral and garbled restrictions on travel and trade with Europe seem to be the culmination of years of erosion in the transatlantic relationship, in which US President Donald J. Trump has repeatedly questioned alliances while praising adversaries like Russian President Vladimir Putin. Autocrats have used the threat of the pandemic to “crack down on dissent and suppress their political enemies,” or even to invalidate election results. The US oil and gas industry has learned quickly that the notion of energy independence is illusive at best, while a nascent conversation has taken shape around the supposed environmental benefits of the crisis—in spite of the enormous costs to human life and livelihood. The global health crisis has thrown the need for sustainable decarbonization of the energy system into sharp relief, and decisionmakers will have to confront this reality once the acute phase of the COVID-19 pandemic has passed.”

Julia Pyper, senior editor, Greentech Media; senior fellow, Global Energy Center, Atlantic Council

“Countries around the world are seeing reduced levels of air pollution and greenhouse gas emissions as the coronavirus pandemic slows travel and overall economic productivity. One analysis shows that China’s response to the virus temporarily wiped out around a quarter of the country’s CO2 emissions. Satellite data shows there’s been a sharp decline in pollution related to transportation across several major US cities.

“However, these environmental improvements are likely to be short-lived. COVID-19 has disrupted global supply chains, including for renewables and other clean energy technologies. Tesla has closed its factories in California and New York. And Siemens Gamesa, the world’s second largest wind turbine manufacturer, has closed a second plant. The virus could also make it harder to keep wind and solar farms up and running, due to travel bans and maintenance delays.

“Public transportation agency budgets will be severely strained in the coming months due to massively reduced ridership, undermining a sustainable mode of transit in many cities. A severe economic downturn coupled with sustained low oil prices is likely to slow consumer uptake of electric vehicles as well as newer, more efficient passenger cars.

“The International Energy Agency has warned that the coronavirus will weaken global investments in clean energy and broader efforts to reduce emissions. The agency has urged governments not to lose sight of the climate challenge and clean energy solutions as they craft stimulus packages to counter economic damages from COVID-19.  

“In the United States, a group of Democrats in the House of Representatives is pushing to include renewable energy tax credits in a larger stimulus bill. In an effort to buoy employment and reduce energy bills, advocates and trade groups have proposed boosting federal funding for sustainable infrastructure, energy efficiency, and weatherization assistance programs, electric vehicles, and other low-carbon technologies.

“But it is likely these measures will prove challenging for governments to adopt. European Union leaders are already under pressure to abandon the EU Green Deal. The focus on shoring up US oil and gas companies as well as airlines is likely to see these industries rebound, locking in greater emissions over the medium- and long-term, unless government support stipulates companies make efficiency improvements.

“For their part, oil majors that have recently made pledges to cut carbon emissions and diversify their businesses into renewables, electric mobility, and other low-carbon energy services may back away from the sector under balance sheet strain from low oil prices. One possible twist is that oil prices might remain volatile for several months, which could prompt energy majors to boost their investments in wind and solar projects that produce smaller but stable returns. Low interest rates could also help shore up the renewable energy market.

“Still, the outlook for curbing global emissions is hazy, boosting the likelihood of increased climate challenges in future, as the world grapples with immediate priorities. 

David Hobbs, senior fellow, Global Energy Center, Atlantic Council

“After twelve months in which global dialogue turned increasingly to climate policy, the world now finds itself confronting a crisis that threatens to cause harm now rather than in the long term. How countries deal with this will reverberate for decades to come because government intrusion into every day freedoms is often a ratchet. New powers are rarely relinquished. 

“The solution that governments are adopting to fighting the coronavirus accelerates the move away from free markets, exacerbating the impact of trade wars that were already swinging control back towards governments. The solution to the current crisis will have broad ramifications. Where once, it was inconceivable that the US government would extend financial support to the domestic oil industry, the pandemic opens the opportunity for a response to the oil price war between Saudi Arabia and Russia to be dressed up as economic support to an increasingly important sector of the US economy. Global economic growth and tax revenues may suffer from a reduction in the role of free trade and competitive markets. Such a long-term slowdown would dampen energy demand and limit fiscal capacity to support the renewable energy transition. This would lead to oil and gas prices remaining lower for longer and slow decarbonization efforts. But it does not have to be this way. 

“One area where governments have proven effective is support of fundamental, innovative research. Channeling the energy of state intervention, under the cover of economic support to combat the coronavirus, may end up accelerating the energy transition by developing technologies for generation and storage that do not require massive fiscal support for deployment. Perhaps we will harness the storm to ride to a new, more exciting destination rather than just battening down the hatches, hoping to survive and arrive where we were already heading.”

Irina Markina, senior energy advisor, The Delegation of the European Union to the United States; senior fellow, Global Energy Center, Atlantic Council

“Governments and industries around the world are grappling with responses to the novel coronavirus health crisis that is affecting the economy and daily life. The unfolding economic slowdown is compounded by the collapse of global oil prices and the erosion of global energy demand. With a supply surplus in global energy markets and a significant demand shock, the current state of global affairs has no precedent. Concerns are mounting that the current crisis may set back climate action, which was just getting into the right gear with growing pressure to decarbonize the energy system.

“Major economies will have to tighten their belts to manage the economic fallout of COVID-19. There may be fewer funds available to invest in decarbonization as a consequence of a potential economic recession, and far less political will. There is a risk that societies would lock in choices that will affect the pace of the energy transition for years to come.

“However, the economic stimulus responses present an opportunity for transformation across hard-to-decarbonize economic sectors, ensuring that the next growth strategy is resilient to climate-related risks. In the prolonged low interest rate environment created by central banks, there is a golden opportunity for long-term infrastructure financing that could direct low-cost investments to clean power systems, or that could help industrial sectors to decarbonize as industries work to optimize supply chains disrupted by COVID-19. The International Energy Agency (IEA) has called for using large-scale investment to boost clean energy technologies such as solar, wind, hydrogen, batteries, and carbon capture (CCUS) at the center of stimulus plans. There is also room for greening sector-specific bailouts, for example, the airline or cruise line industries

“In the United States so far, the focus largely has been on mobilizing stimulus funding to purchase crude oil for the Strategic Petroleum Reserve to prop up domestic oil and gas producers. Congressional discussions are still continuing on the two proposed stimulus bills by the House and Senate. The final outcome could potentially include provisions benefiting renewable energy deployment.

“It remains to be seen how governments manage to make policy during the current crisis. Even as policymakers work to solve near-term challenges to economic and health systems, they must not overlook the long-term global threat of climate crisis.”

E.W. Stetson, senior fellow, Global Energy Center, Atlantic Council and Roger Sorkin, executive director and producer, American Resilience Project

“Recent satellite images over major cities across the globe have revealed a sharp reduction in air pollution, likely as a result of the social upheaval caused by the spread of COVID-19.

“For years the environmental community has called on employers in the public and private sectors to accelerate telecommuting plans, reduce international travel, and implement general policies to reduce carbon emissions, though little has been done on the scale required to make a dent in reducing the exponential increase in emissions over the past decades.

“Behavioral scientists might argue that a shock is required for rapid, widespread changes in human behavior to bring carbon emissions quickly down to levels that would continue to provide the conditions required for a sustainable biosphere, and the moment for rapid decarbonization might have actually found us.

“This may be wishful thinking, but one can only hope that this moment might just allow leadership in public and private sector entities to embrace a paradigm shift to telecommuting that significantly limits reliance on automobiles for getting to and from work.

“The US automobile industry spends billions researching electric vehicle and other cleaner options for personal and commercial transportation. Will the clearer skies above this global disaster zone finally resonate with the industry, with consumers, with the citizens of the world?

Ellen Wald, president, Transversal Consulting; senior fellow, Global Energy Center, Atlantic Council

“The coronavirus and low oil prices are the biggest setbacks to the energy transition since the concept arose. With coronavirus, the energy transition and even climate change are not priorities. From now, and for a while after this disaster, governments and people globally will be facing economic recovery. In the United States, without an administration that is committed and focused on alternative energies, there should be no expectation for this economic disaster to lead to financial support for the transition as it did in 2008 and 2009. Moreover, the exceedingly low oil and gas prices provide less incentive for the free market to buy into alternative energy technologies. 

“In the long-term—perhaps a decade from now—today’s low oil prices, coupled with the resulting low revenues for oil companies, should lead to a serious contraction of oil supply. In short, major oil companies that had already cut their exportation and production budgets will be doing so further in 2020 and perhaps beyond. Years from now, a resulting shortage of oil could lead to higher oil and gas prices and subsequently a greater appetite for alternative energies.”

Neil Brown, managing director, KKR Global Institute and KKR Infrastructure; senior fellow, Global Energy Center, Atlantic Council

“Collapsing oil prices are a warning that alternative cleaner energy technologies must improve their cost competitiveness rapidly.  More and more, oil producers in the Middle East are planning for a future in which declining oil demand and increasing competition for customers is the norm. Indeed, oil demand destruction is a central goal of most climate change policies.

“However, in Saudi Arabia’s rush to punish Russia by surging its production at the same time that demand is in freefall due to coronavirus, OPEC producers have also unintentionally provided a sneak peek into the oil market of the future: extremely low oil prices backed by massive, low-cost, and quickly deployable reserves concentrated in the Middle East. This should be taken as a warning for cleaner transportation alternatives such as electric vehicles, biofuels, and hydrogen. Successful climate policies may over time, perversely, create fiercer price competition with ultra-cheap oil. Technology and policy need to accelerate efforts to prepare.

“While trans-Pacific collaboration on research and manufacturing has been instrumental in bringing down costs of clean energy technologies, coronavirus has vividly exposed the downside of over-reliance on a single region for so many critical minerals and manufacturing. As China’s manufacturing engine shut down from coronavirus, essential links in clean energy supply chains were severed. From solar power developers left scrambling to secure panels for installation, to electric vehicle manufacturers clambering for lithium hydroxide necessary for batteries, supply chain risk reverberated across the clean energy landscape. Fortunately, supply chains are already starting to recover. However, our long-term national security and climate interests are at odds with over-dependence on a single region for the essential building blocks of clean tech. Policy-makers and the private sector now should put in place measures to rebalance and diversify supply chains to continue the cost-saving benefits of trans-Pacific trade while also ensuring that viable alternatives for minerals and manufacturing exist.”

Jean-Francois Seznec, senior fellow, Global Energy Center, Atlantic Council

“This month, Mohamed bin Salman easily got his wish to crater prices. However, cutting production by 20 percent to force Russia to cut its own during the COVID-19 pandemic is backfiring on the Kingdom. COVID-19 is fundamentally changing global economies, and it is mostly likely to provoke a steep recession, in spite of government efforts throughout the world, as well as the present decline in energy prices. Demand for oil will not return quickly, even if US shale producers disappear. Russia is not likely to cut production by the many millions of barrels per day that it would take to bring prices up. 

“With prices of oil in the low $30s to mid-$20s for the foreseeable future, Saudi Arabia will be forced to dip into its cash reserves to the tune of $120 to $150 billion per year. Although this may not initially cause harm to Saudi Arabia, this may prove more of a hardship than Saudi Arabia had anticipated, and it could limit the Kingdom’s ambitions for Vision 2030, as well as in global trade and diplomacy.”

Ragnheiður Elín Árnadóttir, senior fellow, Global Energy Center, Atlantic Council

“Iceland is heavily dependent on a working global economic system, especially air and sea transportation as well as international trade and tourism. Iceland is not alone in relying on global trade and supply chains, which is why the whole world is in shock, trying desperately to react to the new reality brought on by COVID-19.

“There have already been geopolitical effects of the COVID-19 crisis, and there will likely be more. All talk of international solidarity, whether transatlantic or European, seems to be meaningless in situations such as we have been witnessing. Unilateral travel bans, border closings, and export bans on medical equipment have been put in place without any previous notice or discussions with neighbors or allies. The actions of governments in the midst of the crisis will likely require the restoration of trust once this moment has passed.

“However, as history demonstrates, innovation will thrive at this time of crisis, and this time may provide an opportunity to explore the use of renewable energy and take the leap into the next generation of technologies.”

Craig Hart, lecturer, Energy Policy and Climate Program, Johns Hopkins University; senior fellow, Global Energy Center, Atlantic Council

“The energy transition requires initiative, as well as investment of human and financial resources. However, the coronavirus pandemic is consuming global leadership and execution capacity, and the economic aftermath will strain and possibly break countries, municipalities, companies, and households.

“Given this, the energy transition will, during the crisis, be driven more by circumstances—markets (low fossil fuel prices) and emergency response—rather than by longer term plans.  Public utility commissions and utilities are rightly shifting resources to crisis response, so renewables and other clean energy planning and investment will face delays. 

“At the same time, resilience of supply will gain in priority, so distributed energy resources, efficiency, microgrids, and other measures that aid transition will gain traction.

“It is simply too early to tell what influences will dominate in any given timeframe, but when the world moves beyond this, the business case for investing in resiliency will be strengthened and widely accepted.”

Branko Terzic, senior fellow, Global Energy Center, Atlantic Council

“In response to climate change impacts, many countries and localities have initiated programs to transition away from carbon emitting fuel sources (coal, petroleum, and natural gas) to non-carbon emitting technologies including solar, wind, tidal, geothermal, and in a few instances new nuclear power. In this evolving scenario the substitution of lower CO2 emitting natural gas for the higher CO2 emitting coal for electric generation was considered for a period a part of a reasonable transition plan. However, immediately before the coronavirus crisis, a number of highly visible parties were changing their view of natural gas as not a transition fuel but itself a significant primary CO2 emitter at both power plants and as a heating fuel. In parallel, many parties concerned with climate change looked at electrification of transportation—for passenger vehicles and trucks—based on renewable fuels as a major new initiative to reduce petroleum atmospheric internal combustion engine produced carbon emissions.

“Now, however, the oil price war and demand reduction for natural gas due to commercial and industrial downturn caused by the coronavirus have had the combined effect of the lowest crude oil and gas prices in two decades. The economic downturn will no doubt focus political attention on jobs retention and creation and rapid economic recovery, which will likely push the climate change issue to the back of or even off the immediate political agenda. For example, in the United States, low global crude oil will mean lower prices at the gasoline pump, and lower natural gas prices will mean lower electricity bills for consumers. These lower prices will make it difficult for new clean energy development sources to be introduced. To sum up, the energy transition and clean energy development could both be delayed or even suffer setbacks.”

Phillip Cornell, founder, PM First; senior fellow, Global Energy Center, Atlantic Council

“The COVID-19 pandemic and the forthcoming global recession will have major consequences for budget considerations around the world over the next few years, as recovery and growth are prioritized after many months of severely curtailed real economic activity. The impact will be most significant among oil producers weathering a concurrent battle of wills between Russia and Saudi Arabia to endure rock-bottom prices—one that pits Saudi production costs and access to credit against a more austere Russian budget and capacity for autarky. 

“Moscow is unlikely to blink. Putin has been insulating the Russian economy for years, from the energy industrial sector to food production, and perceives a profound geo-strategic opportunity in the wider crisis. In an epic worldview where societies compete around who can best self-insulate and endure hardship, the strategy is to sow discord among adversaries, and then exploit catastrophic moments to test their mettle. With the Saudis caught in the middle of an unfinished economic transition, the United States divided and over-leveraged, and global cooperation severely eroded, now is such a moment. Saudi shock-and-awe will not bring Russia back to the negotiating table, no matter how desperately Riyadh or Washington wants that to happen.

“That means that both the economic impact of COVID-19 and also very low oil prices will persist, forcing producers and supply chains to adapt. Saudi Vision 2030 and other expensive transition schemes are now untenable, and vulnerable oil producers from Iraq to Algeria to Iran will face profound political pressure. US shale production will collapse in the near term, and already-low natural gas prices will suffer too. On its face, huge fiscal pressures and low fossil fuel prices are bad for the global transition to low-carbon energy. 

“The silver lining will depend on using the crisis to learn valuable lessons. Massive economic stimulus packages can emphasize low-carbon industry and resilient infrastructure (particularly as political instability among oil producers underscores the risk of fossil fuel dependence). Depressed electricity demand can yield new lessons for managing electricity security with high shares of variable renewable power. And if international cooperation is revived by the immediate need to overcome a global health crisis, that could bode well for overcoming the longer-term global climate crisis… and serve to reject a bleak contest of suffering plucked from Russian literature.

John Roberts, senior partner, Methinks Ltd.; senior fellow, Global Energy Center, Atlantic Council

“Expanding production to squeeze out its rivals is what Saudi Arabia should have done decades ago. It briefly adopted such a policy when it abandoned its role as swing producer in August/September 1985 but effectively reverted to OPEC solidarity in 1986 and had to wait four years to reap the benefits of both high production and high prices in the wake of Saddam Hussein’s invasion of Kuwait in August 1990.

“In the past, the problem the Kingdom faced was that, by adopting such a policy, it risked using up its financial reserves to cushion the initial blow, before increased output could compensate for reduced prices.

“In all probability, the Kingdom currently possesses sufficient financial reserves to tide it through any immediate challenge to this policy. But in the long run, a high-volume production policy is likely to help to underpin an era of relatively low oil prices. Once Saudi Arabia starts to worry about the state of its financial reserves, possibly at some point next year, then it will either have to modify its policy or have to introduce real economic and financial reforms across the board.

“The question facing the Kingdom is this: What is the point of attempting to control the oil market at a time when the world faces the immediate problem of coronavirus-induced economic collapse, which will curtail the market for oil, and a longer term problem concerning the reduced use of fossil fuels in order to combat global warming?

“The timing of the Saudi policy change is particularly bad because of COVID-19. While hindsight shows that the Saudi planners should have at least attempted to model the impact of the virus on the oil market, it has to be acknowledged that most planners in the rest of the world also failed to assess its economic impact.

“What is perhaps more pertinent now is that, while COVID 19’s impact on the oil market will cause strains for both the Kingdom’s hydrocarbons sector and for all those businesses dependent on it, the non-oil sector, including a host of small-scale businesses, now has to consider the possibility of an even greater financial hit: cancellation of the Hajj. This is due to start at the end of July, with anticipated timing from July 28 to August 2.

Do the Saudis dare hold it in the wake of the coronavirus outbreak? If they go ahead, what kind of medical facilities will they have on standby? The Tokyo Olympic Games, which were due to be held at the same time, from July 24 to August 9, and which were expected to draw around 600,000 overseas visitors will be postponed. So it’s hard to see the Saudis managing to hold a full-scale Hajj, which normally draws around two million pilgrims a year.

Andras Simonyi, senior fellow, Global Energy Center, Atlantic Council

“No doubt the COVID-19 crisis will cause Europe to rethink its relationship with Russia and China, which can have two opposing effects. For some, this will lead to more cozying up to both countries. Russia and China have already found cracks (and an opportunity) in Italy, which will certainly remember that the two countries have been the first and only ones who heeded Italy’s desperate call for help, with China sending medical equipment and Russia sending military assistance. Supporting Italy, a founding member of NATO, is both a strategic and a political move for Russia and China, which will impact Russian and Chinese energy supplies and infrastructures in the future. Russia, especially, will continue to try to undercut US energy exports at any cost. 

“Others however might want to move away from Russian dependency even more, and this could increase demand for US LNG. This is the time for the United States not to withdraw from Europe; instead, the United States must stay the course for infrastructure investments, especially in Eastern Europe, even in these economically trying times. Withdrawal should not be an option. Quite the opposite, this should be viewed as an opportunity for the United States to cement itself as a long-term player in European energy security.

“The European green transition will probably slow down, as surviving the coming recession at any cost will take front seat. This in return will most probably make Europeans rethink the energy mix. Natural gas might come out as the winner. However, the lack of solidarity among European countries in facing the COVID-19 crisis will have an impact on the ability to continue to drive a common climate policy, as the Commission has been doing in the last six months. There is already loud criticism within the European Union that the Commission’s total focus on climate left EU member states unprepared politically, institutionally, and economically. 

“Energy cooperation has been a solid pillar of the transatlantic cooperation in the toughest of times. Therefore, the importance of maintaining this cannot be over-stated.”

Further reading: