Try to remember when was the last time you read a newspaper or watched the news and the headlines were not COVID-19 related. Since the virus burst into our lives, media outlets all over the world are constantly updating devoted viewers about the rising numbers of fatalities, the World Health Organization estimates, the economical implications of the quarantine policy, and so on.
With the epidemic at the headlines, one of the most dramatic and influential phenomena of recent years has captured momentum quietly, away from media and public attention. If not the drastic events of the past week, many people who are not reading the economic section daily, would not have been exposed to the trend that is shaking the global economy: the oil crash, with prices breaking negative records on a daily basis.
Being one of the pillars of the global economy, such a drastic change in oil prices has many implications that affect almost every area of our lives. We will all feel the immediate outcome, with a drop in fuel prices, cheaper flights (when they become operational), and cheaper factory costs, which will enable lower prices for many products. In the long run, the dramatic fall in oil prices is likely to have far-reaching consequences, with the main beneficiary expected to be the renewable energy sector.
Supply, demand, and housing costs
Before we dive into those long-term consequences, we must first understand the causes of the current crisis. Like any economic move, the oil sector is also directly affected by two different forces: supply and demand.
The spark that started the oil crisis is the collapse of demand throughout the world due to the spread of the coronavirus and the economic paralysis that followed. An almost complete halt to global flights, disabling huge factories, and a drastic reduction in private vehicle use, all resulted in an estimated decline of tens of million barrels of oil per day.
Unlike past global economic crises, the current collapse is drastic, immediate, and not limited in time. By comparison, even after the 9/11 attacks, the flight market was hit, and so was the demand for oil. Back then, the effect was short-term. The current crisis, as mentioned, presents a completely different picture.
In stark contrast to the cut in demand, world oil supply has not dropped at all. The main reason is that many oil producers consider not only the price they will receive for producing a barrel of oil, but also the cost of halting operations. In many outdated oil fields which are operated by water pressure, stopping the oil pump means permanently closing the field and stopping oil production. Therefore, many oil producers prefer to continue to flood the market, no matter the cost.
The last factor that must be added to the equation is oil storage capacity. In a reality where oil is outstripping demand, someone needs to store the oil for the day demand rises. Because the storage capacity is limited, the price of oil is pushed further down, even into the negative realm. This is an almost imaginary situation, which is expected to change, yet may affect the entire field for a long time. And while no one can know where the market is headed, many experts estimate that the low price level ($ 10-40 a barrel) might be here to stay.
A dramatic change
While a low price level is very bad news for oil producers, it is great news for the planet and for the renewable energy sector.
Traditionally, renewable energy was considered a secondary investment option relative to its older brother, the oil and gas sector, since traditional areas of energy were considered a much more lucrative investment. While there is an element of risk (as only a small percentage of search licenses lead to finding oil deposits and a successful project), in any case of success, the return on investment (ROI) is tremendous, much higher than for investments in (almost) any other sector, including renewable energy.
That is no longer the case. At a low oil price (even if not as extreme as it is today), the ROI in oil will be much lower than before, and will no longer justify the high risk in the dynamic and ever-changing market. With high-risk levels and limited return on investment, the oil sector is no longer as magical as before, and more particularly, it is no longer better than investing in renewable energy projects. Clean energy companies present much lower risk investment opportunities with a stable and solid ROI.
These have led to a dramatic change in the energy market: the renewable energy sector is not only offering a greener, more sustainable, and responsible investment option, but also a more economically viable one.
A new, green reality
Global crises do not create reality, but accelerate social and economic processes that have already begun. This is also the case in the energy market. The “exchange of power” between the traditional oil and gas to renewable energy has been on the table for a long time, yet nobody could tell when and where this change will happen.
Now, the global crisis and oil prices crush are accelerating the trend and moving it a few steps forward. The post-crisis economic reality will not be the same as we knew; in the energy field, we are expecting a revolution and a new world order. The green energy sector will not only be able to survive the crisis but emerge from it as a winner, and present investors with a more sustainable, responsible, ethical, and profitable investment opportunity.