The disruption to energy markets and enduring behaviour changes caused by the coronavirus crisis, may deliver lasting change to energy consumption, Moody’s Investors Service said in a report, with the oil and coal sectors taking longer to recover, as consumers opt for more renewable sources.
Recessionary forces and weaker long-term growth expectations will place pressure on both corporate and household demand.
At the same time, the risk of behavioural change, along with increasing use of biofuels, electric vehicles and improved engine efficiency adds to the risk of oil demand eroding over time.
“Oil demand may take a long time to recover to 2019 levels due to the combination of weaker economic growth, decarbonisation trends and behavioural shifts, increasing the possibility that demand peaked in that year,” said James Leaton, VP-Senior Credit Officer at Moody’s.
The potential for an accelerated structural shift in demand for oil increases the uncertainty around the commodity’s price in future, elevating risk for new oil production projects with long lead times.
The effects of Covid-19 could also limit any rebound in coal generation, and could speed the decline of coal in the US and Europe by a few years.
Renewables make up the majority of recent capacity additions, which continue to displace thermal generation, especially with reduced demand for power.
Two scenarios are considered in the report model starting points where monthly oil demand is 3% and 5% lower than 2019 levels going into 2021. The scenarios then model the potential future growth in demand for oil as economic recovery takes hold amidst structural changes due to decarbonisation trends and behavioural shifts.
In neither scenario does demand return to 2019 levels till at least 2025, with the second scenario highlighting risks that a recovery in demand would take even longer.
“Whilst not a forecast, the scenarios highlight the increasing challenges in estimating demand for oil, which contributes to the risks of making new investments in the sector,” said Leaton.
The report also notes that significant investments in low carbon infrastructure will still be required to achieve further decarbonisation from 2020 levels and that it is too early to tell what portion of the reduction in emissions that occurred since 2019 will persist over time.