The coronavirus pandemic has created a supply and demand crisis for oil and gas worldwide as lockdown restrictions continue to mount.
The demand for oil has reduced by 23 million barrels per day since March 2020, consequently creating an imbalance in the commodity supply. According to Boris Ivanov, the industry has recorded the lowest prices in 15 years due to a decline in demand and a global oversupply. The major impacts are seen in the difficulties storing the commodity and in an all-time low in oil prices.
Oil capacity issues
One of the effects of the COVID-19 restrictions has been a severe shortage of pipelines and tanks used to store surplus oil due to the oversupply of oil products on a global scale. According to Boris Ivanov, the worldwide supply issue has seen traditional oil stores nearing breaking capacity. Using tankers as a form of storage has not been tested or proven to be effective and the Saldana bay oil storage terminal in South Africa has historically been used as an outlet for excess crude oil whenever there is reduced demand, but that facility has also reached nearly full capacity. The stock pileup caused by the demand and supply imbalance has the risk of overwhelming the oil industry’s logistics as well as saturating the storage capacity
Due to the overwhelming capacity issues, there have been recommendations to reduce the production of oil and gas. Oil producers have been urged to cut daily production to meet low demands and deal with the commodities’ oversupply. According to the International Energy Agency, the demand for fuel is expected to drop, creating a risk of wiping out the demand growth experienced over the last decade. Boris Ivanov has hailed this decision as a necessary step in dealing with oil’s oversupply.
Effect on the world economy
The coronavirus pandemic has challenged the cornerstone of the world’s economies by disrupting businesses and operations. The low demand can have a devastating impact on countries relying on crude oil for revenue. Countries that rely on crude oil for revenue are especially impacted by the reduced demand due to the coronavirus pandemic and some oil-producing African countries have reported a reduction in the sale of crude oil, which means the storage tanks and pipelines remain overwhelmed unless the supply is also cut.
Preparing for the new oil world
Boris Ivanov has argued on the need for oil companies to adapt to the new oil world. With these new realities combined with technology and climate change awareness, oil companies have to adjust their operations.
Periods of dramatic change are an opportunity to embrace technology in the oil sector. The application of new technologies has been shown to improve efficiencies and to reduce inventory costs for large firms. Furthermore, the new oil reality is also under the microscope with increased discussion about green energy use. More firms are embracing renewable energy and more efficient use of crude oil. According to Boris Ivanov, the reduced demand in oil and gas presents businesses with an opportunity to implement green energy and to reduce carbon emissions. Many governments are looking at different ways of embracing energy transition as they reduce their dependence on oil and gas. With increased global warming, experts have reported that renewable energies are an opportunity to take over. It is highly likely that the demand for renewable energy will increase after the coronavirus pandemic due to the low demand for oil and increasing awareness of climate change.
Future Implications
Oil supply is predicted to continue outstripping demand as economic activities remain restricted across the world. Oil and gas companies have to prepare for the new reality after the coronavirus pandemic by investing in technology and green energy. They should be ready to modernize their processes and improve operational efficiencies to remain relevant. Furthermore, oil companies need to adapt their operations in line with the changing consumer preferences. As a result, the current inventory overhang requires market participants to reflect on the challenges of storing oil and its effect on the industry. Some oil companies have been turning to tankers to hold and transport the oil as a temporary solution to the problem. However, the extreme demand shock in oil markets means this solution will not last. Other probable solutions have seen oil producers considering paying buyers in taking the commodity instead of shutting down the operations.
Conclusion
The COVID-19 effect on the oil industry has caused plummeting prices and imbalances in demand and supply. While market experts expect the economy to recover and revive the oil industry, there are fears that prices will not return to where they were before the lockdown restrictions. As economies open up by lifting lockdown restrictions, demand for oil and gas will also increase to match the supply. However, it might take time before a turnaround on oil prices is reached. However, this industry has gone through several periods of market volatility without collapsing and one would hope will emerge from this pandemic stronger.