Will Covid-19 end the age of Big Oil?

by Nafeez Ahmed, 24 April 2020


The Drake Well, Pennsylvania. cc. Trey Ratcliff

US oil prices have dropped below zero for the first time in history. The crisis is a direct consequence of the sudden slump in economic demand as the world locks down due to the Covid-19 pandemic. But given the likely duration of our economic woes, this could well be the beginning of the end for the age of oil.

The global oil crisis is laying bare structural vulnerabilities in the hydrocarbon energy system — and industrial civilization — that Big Oil has obscured for decades. Seven years ago, I wrote in detail about some of those structural vulnerabilities: ‘The shale gas revolution was meant to bring lasting prosperity,’ I warned. ‘But the result of the gas glut may be just a bubble, producing no more than a temporary recovery that masks deep structural instability.’

Read also Nafeez Mosaddeq Ahmed, “The great oil swindle”, Le Monde diplomatique, March 2013.The pandemic has unmasked the unsustainable bubble economics behind the shale boom, revealing an industry with no resilience and inflated on the basis of unrepayable debt levels.

The most important scientific concept needed to understand this is ‘Energy Return on Investment’ (EROI). The metric, pioneered by systems ecologist Professor Charles Hall of the State University of New York’s College of Environmental Science and Forestry, is the foundation of the emerging discipline of ‘biophysical economics’.

EROI is designed to measure how much energy is needed to extract energy from a particular resource. What’s left is known as surplus ‘net energy’, which we can use to support goods and services in the economy outside the energy system. The higher the ratio, the more surplus energy is left for the economy. Over the last decades, that surplus has run increasingly thin.

By the time the world is on the way toward recovering from the Covid-19 crisis, the oil industry will be decimated to an unprecedented degree.

In the early twentieth century, the EROI of fossil fuels was sometimes as high as 100:1. This means that a single unit of energy would be enough to extract a hundred times that amount. But since then, the EROI of fossil fuels has dramatically reduced. Between 1960 and 1980, the world average value EROI for fossil fuels declined by more than half, from about 35:1 to 15:1. It’s still declining, with latest estimates putting the value at between 6:1 and 3:1.

As we use more and more energy just to extract energy from our resource base, we are left with less ‘net energy’ to support financing of public goods and services. This has acted as a background ‘brake’ on the rate of economic growth for the world’s advanced industrial economies, which has also declined since the 1970s.

According to Professor Mauro Bonaiuti, an economist at the University of Turin in Italy, mainstream economics has failed to account for these key ‘biophysical’ underpinnings of the economy: material flows are dependent on energy. Since the 1970s, industrial societies have been in a ‘phase of declining returns’, he argues, measured across GDP growth, EROI, along with labour and manufacturing productivity.

To make up the shortfall, Bonauiti argues, we have kept the economy growing based on accelerated levels of debt. After the 2008 financial crash, a massive program of quantitative easing (QE) drove global debt even higher than pre-crash levels — barely sustaining a much slower level of GDP growth.

But the scale of debt keeping the industrial machine chugging along far outweighs our energy resource base. At some point, he warned, this unsustainable heyday was bound to grind to a halt.

These dynamics have made the economics of oil particularly unsustainable. In 2005, conventional crude oil entered a long plateau. To meet growing economic demand the industry shifted to more expensive unconventional forms. Since then, US shale supplied some 71.4 percent of global oil supply growth.

In February, as most of the world was sleepwalking into the Covid-19 pandemic, the Geological Survey of Finland — a Finnish government agency overseeing the EU’s mineral resource modelling — published a comprehensive study. It confirmed my earlier warning that this much-lauded expansion was in reality a debt-driven ‘bubble’.

Although there is ‘plenty of oil left,’ it is ‘increasingly expensive to access’, the report warned. Record shale oil production came at higher costs and declining well productivity. Most shale oil companies faced negative cash flow, compensated for by drawing down billions of dollars of unrepayable debt.

The pandemic was a pin that burst this oil bubble. And it may not ever come back.

Part of the reason is that the demand slump will probably last more than a year. The more optimistic anticipate that a vaccine could be developed within around 18 months, but this estimate doesn’t account for the regulatory hurdles that usually make vaccine development a complex 10-15 year process. So a vaccine is most likely several years away — if one is even possible. According to top systems biologist Professor David States, there are many reasons it may not be.

This means that the most likely scenario will see a prolonged economic contraction keeping demand too low for the global oil industry as we know it to survive. Prior to the pandemic, several analysts suspected that the US shale industry’s debt-levels were largely unrepayable — now it seems plausible that the debt can never be repaid.

The conventional view is that we are now drowning in cheap oil. We have so much oil we are running out of storage. While marginally true, this view fails to recognise that the dynamics of the crisis are rooted in the deepening ‘biophysical’ constraints that have emerged from having shifted to forms of fossil fuel energy which are, ultimately, far more expensive and difficult to extract than ever before. And that is why many pundits have not realised that the current ‘oil glut’ is a precursor to an unprecedented supply crunch. Oil companies are now caught between a rock and a hard place.

If they keep pumping, the price will plummet further as demand remains flat and the industry is forced to begin paying more than the market price just to store the oil: a dynamic that could trigger a spate of industry-wide debt defaults and bankruptcies.

Even if they stop pumping, the problem is that you can’t just turn oil wells on and off like a tap. Because these wells are organic deposits needing pressure to extract, a prolonged shut down risks massive damage to reserves that could be too costly to repair.

In either scenario, by the time the world is on the way toward recovering from the Covid-19 crisis, the oil industry would be decimated to an unprecedented degree. And while the immediate losers would be the US shale sector, major producers such as Saudi Arabia and Russia remain well within the firing line — facing the prospect of haemorrhaging state revenues within months.

In such a post-Covid-19 world, the resurgence of economic demand amid a permanently decimated oil industry would likely drive new price hikes. The oil glut is paving way for an era of long-lasting oil scarcity from which there may be no recovery.
It is only a matter of time before the earthquake that has hit Big Oil reverberates out across the global system.

As Abhi Rajendran of Columbia University’s Center on Global Energy Policy has warned, a ‘bailout’ cannot resolve the industry’s problems. Any support to the industry must be to hone it down it to protect immediate supply chains, and rehabilitate it to supply petro-chemicals and other key industrial services in a post-carbon age.

It is only a matter of time, then, before the earthquake that has hit Big Oil reverberates out across the global system. In coming months and years, Big Oil’s breakdown will pose an escalating risk to critical supply chains underpinning the energy flows, transport, manufacturing and food production activities of all societies. Petrol stations are already being forced to close as fuel sales dry up, endangering transport networks and critical supply chains. The global industrial food system, which is fundamentally dependent on oil inputs at every point — fertiliser, pesticides, on-farm machinery, processing, packaging, transport and distribution — would face unprecedented strain. The core mining and manufacturing processes that sustain industry as we know it could hit a wall.

National governments and international institutions are currently unprepared for the potential impacts, because they are not built or designed to anticipate or respond to complex risks.

That is why we urgently need two responses: a ‘life-boat economy’ approach designed to mitigate immediate risks, and a longer-term transition to sustainable and resilient economic foundations based on a fundamentally different energy paradigm.

Amid this unprecedented crisis, we face a unique opportunity to transition to a regenerative civilizational paradigm which no longer breaches environmental boundaries in ways that make pandemics like this inevitable.

This is, potentially, the making of a paradigm shift. But it’s not simply one that could be ‘right’, ‘good’ or even ‘better’ — a paradigm shift that recognises how interconnected and embedded we really are in environmentally-based energy flows is now absolutely critical for the continued survival of human civilization.

Although there remains resistance to this paradigm shift, voices around the world are waking up even in unexpected places. ‘Whichever way we look at it, this pandemic and crisis requires an unprecedented transformation of economics as we know it,’ said Vinod Sekhar, Chairman and Chief Executive of environment and biotechnology conglomerate, The Petra Group. Sekhar, who has made it to Forbes’ Asia rich lists, recently set up the Good Capitalism Forum to promote responsible business. ‘We need a true form of capitalism premised not merely on private profit but dedicated to social purpose and public good,’ he told me.

I asked him whether such a paradigm could still be called ‘capitalism’. Sekhar’s answer was that some of the best innovations are still happening in the private sector — the challenge is to ensure that the benefits accrue to society, rather than being horded by an ever-tightening network of elites. ‘We need an approach which protects planetary boundaries, not one which ignores them to make money. This is now the urgent mission of our times,’ he said. ‘To understand that to create wealth we need to lift society as a whole. All business leaders that want to remain relevant, if not survive, must be attentive to it. The world has changed permanently and the economic order must change with it. This is a fact we must accept.’

To some extent, the ingredients of this paradigm shift are now underway — even in the heartlands of neoliberal capitalism. Despite alarming levels of mendacity and incompetence, we have also seen unprecedented efforts by US and British authorities to safeguard vulnerable people at various levels. But it’s important to remember that we only are at the very early stages of what has to be a wide-ranging process of deep and comprehensive structural transformation.

For the first time in decades, such radical thinking is becoming the mainstay of serious political parties. I spoke to Labour MP Sam Tarry, parliamentary private secretary (PPS) to the shadow secretary of state for business, energy and industrial strategy about his views on the global energy crisis. ‘The oil market crash is perhaps the biggest sign that business-as-usual simply cannot continue,’ he said. ‘It raises the question — what if we had weaned ourselves off fossil fuels much earlier? What if our societies had made much more progress in transitioning to a new renewable energy infrastructure, creating a new clean transport networks, with households and businesses producing and sharing energy? What if we had created new hubs of local, organic agriculture reducing our dependence on traditional supply chain networks? We would have had a country far more resilient to this crisis. If anything, then, this crisis must spur us to move as rapidly as possible to such a more resilient society.’

Tarry is spot on. There is simply no time to lose. We need not only to rapidly shift to a new renewable energy system, we also need to recognise that doing so is going to mean the end of the ‘endless growth’ paradigm that, in many ways, caught us sleepwalking into this pandemic. Despite years of warnings from scientists that industrial expansion was increasing the risk of exotic diseases jumping to humans due to the encroachment of human systems on natural wildlife, we continued with abandon.

This means that global stimulus packages being rolled out to sustain workers, businesses, industries, supply chains and beyond need to go beyond emergency reaction. They need to facilitate a longer-term re-design of our economies so that they function to support life, rather than simply maximise fossil-fuelled material throughput.

This means we need to take seriously the vision of adaptive resilience outlined by Tarry to envision a comprehensive transformation of our social and economic structures. Industrial agriculture and manufacturing will need urgently to become less dependent on oil inputs from production, to transport, to distribution. That means organic ‘agroecological’ methods, as well as ‘circular economy’ recycling of locally-sourced minerals and raw materials.

We also need to consider the need for more immediate mitigation measures. As the traditional petrol supply infrastructure breaks down due to plummeting fuel sales, there are alternative bridge fuels that could be urgently scaled up. One potential source of clean biofuels for this purpose is Malaysia, where the government has created mandatory national regulation to support a transition to 100 percent deforestation-free sustainable palm oil.

It was in November 2018 that a new Malaysian government finally rose to power and made this landmark declaration — and just months after that the EU chose to ban palm oil for biodiesel on environmental grounds in a well-intentioned but misconceived move that undermined Malaysia’s nascent efforts.

To be sure, the initiative still has huge room for progress, but new research proves that bans and boycotts will only displace the deforestation problem onto more land-intensive commodities like soy and rapeseed (which happen to be produced in the West). A new partnership here could offer a bridge for a clean transport revolution, precisely at a time when traditional petrol distribution networks are at growing risk.
It requires dismantling the global structures of debt dominated by Western financial institutions, banks and governments.

This sort of levelling of the playing field between East and West can pave the way for a wider historic partnership between North and South, to finally break the global structural inequalities that define the unjust way in which the global system extracts wealth from the ‘developing’ world. These are the countries most vulnerable to the pandemic — facing a stark and horrific choice between a virus that could kill millions from the uncontrolled spread of disease, and lockdowns that could kill millions by preventing those already poor and food-insecure from accessing work, food and water.

That requires dismantling the global structures of debt dominated by Western financial institutions, banks and governments. And it also means levelling the playing field to open up new opportunities for North and South to work together to tackle the crisis. For instance, instead of allowing millions of garment workers across Asia to languish as Western retailers slash their production chains, Western governments could rapidly solve their domestic shortages by switching to new orders for mass production for PPE from these suppliers, and paying them fair wages.

Read also , “Covid-19: a shock to the system”, Le Monde diplomatique, April 2020.The huge structural changes suggested here are merely the tip of the iceberg. Many of them may seem aspirational. But the current collapse of oil markets is a huge signal that we have reached a new civilizational inflection point, with one core lesson: If we do not shift as rapidly as possible to a new system whose fundamental orientation is about the protection and flourishing of life, human societies face a level of risk that is barely conceivable.

It’s time to face the fact that the Covid-19 pandemic is forcing us to leave the fossil fuel era behind us.

Nafeez Ahmed
Dr Nafeez Ahmed is executive director of the System Shift Lab, a research fellow at the Schumacher Institute for Sustainable Systems and an award-winning investigative journalist and change strategist. His latest book is Failing States, Collapsing Systems: BioPhysical Triggers of Political Violence (Springer).