Like a bat out of hell part one: Energy implications
The first of a five-part series from the BRG energy and climate practice analyses the impact of Covid-19 on the global economy and the demand for and supply of energy
By any measure, the social and economic impact of Covid-19 will be extremely high. Like the bats from which this disease apparently originated, global policymakers have been forced to fly in the dark in their initial efforts to vanquish the virus. Lacking adequate testing and proven vaccines, governments have so far resorted to mandatory social distancing and quarantines.
But these measures come at an exceptionally high cost. The combination of multinational and national resources committed to ensure financial stability and provide fiscal stimulus amounted to $6.3tn for G20 countries as of 29 April, and more relief is on the way. These investments in stability come at the same time as governments are losing substantial revenue from reduced personal and corporate earnings, driving deficits and borrowing to levels unprecedented in peacetime. For all the aid these investments provide to citizens and businesses, the economic and social costs are already staggering and climbing.
The World Trade Organization’s (WTO) early estimates of the impact on US and global GDP in 2020 indicate severe economic pain in the near term. US GDP shrunk by 4.8pc in Q1 2020, and the WTO expects an overall decline of 5.9pc for 2020 as a whole. In addition, the organisation expects the GDPs of France, Germany and Italy to decrease by 7.2pc, 7.0pc and 9.1pc, respectively, in 2020. Europe’s economic contraction is of a speed and magnitude not seen since the Second World War. In the US, unemployment claims have toppled rates not seen since the Great Depression.
The combined impacts of the new global war against Covid-19 will be to devastate energy demand, slash energy prices and force out uneconomic energy production and generation sources
The mid-term impacts in 2021 and 2022 are harder to assess. Early indications suggest the economic recovery will not be rapid, complete and V-shaped, but is more likely to be gradual and partial. Sustained structural damage is likely because of the lasting socioeconomic impacts of massive contagion, permanent business closures and the loss of lives and livelihoods. For many lower-income workers, with few labour protections and limited healthcare, the economic recovery will take longer and be more painful.
The sustained impact of Covid-19 on international commerce could also be dramatic. Trade was already losing momentum after several years of mounting protectionism. The pandemic has highlighted the business risk of long-distance, single-source supply chains and the outsourcing of the supply of critical goods. The combined effect may lead to greater local and national self-sufficiency and leave a long-lasting dent in global trade volumes for years to come. The WTO estimates global trade will decline by between 13pc and 32pc in 2020.
Finally, the massive government investments in financial stability and fiscal stimulus in 2020—and the lost revenues from personal and corporate income and reduced economic activity—will leave gaping holes in national fiscal budgets worldwide, with a substantial need for increased revenue over the coming years. Widespread stimulus spending is expected to see the US deficit reach 18.7pc of GDP (or $3.8tn) in 2020.
Similarly, the EU has been studying an additional €1.5tn stimulus fund on top of its €500bn rescue package and other national fiscal policies. Such outlays, combined with declining tax revenues, will exacerbate fiscal deficits and—in the EU—worsen tensions over fiscal austerity. In the eurozone alone, the European Commission forecasts the budget deficit will reach 8.5pc of GDP (c.€938bn) in 2020, up from 0.6pc in 2019.
Uncertainties about the magnitude, pace and form of the economic recovery have significant implications for the energy sector because of the direct relationship between economic activity and the consumption and price of energy. Our view is that, over the next year or two, the combined impacts of the new global war against Covid-19 will devastate energy demand, slash energy prices and force out uneconomic energy production and generation sources.
Rather than deter society from the climate-change imperatives of the energy transition, as many have speculated, it is more likely the economic destruction wrought by the post-Covid-19 era will instead drive us more swiftly towards these goals. In addition to the climate-change imperative for the energy transition, the economic rebound from Covid-19 will involve reduced fuel demand and intensified demand for high-efficiency, low-cost sources of electricity supply.
$6.3tn G20 fiscal stimulus to tackle pandemic
Indeed, institutions such as bank Morgan Stanley and asset manager BlackRock have pledged to avoid investments in assets that present a high degree of unsustainability-risk. These developments have the potential to materially accelerate the energy transition by clearing out uneconomic and inefficient forms of power generation.
The short-term destruction of economically inefficient energy sources will open market space and create the economic basis in the coming years for accelerated investment in economically efficient sources such as renewable energy, battery storage and natural gas-fired, combined-cycle gas turbine (CCGT) plants. Finally, the pandemic’s destructive fiscal and labour impacts could also provide a powerful economic rationale and stimulate political consensus for carbon taxes and carbon border tariffs (CBTs). If broadly implemented, these policies would further accelerate global energy transition investments.
This article is the first of a five-part series from the consultancy BRG’s energy and climate practice that analyses the near- and long-term effects of the Covid-19 pandemic on global energy markets, the energy transition and climate change policy. The next article in the series will evaluate the impact on the global oil market and the trajectory of its recovery.
Chris Goncalves is chair and a managing director of the energy and climate practice at Berkeley Research Group, LLC (BRG). He has 30 years of experience in the LNG, natural gas, thermal generation and renewable energy industries, with expertise in energy markets, economics and finance. He provides both expert witness and business advisory services.
Robert Stoddard is a managing director in BRG’s energy and climate practice. He has over 30 years of experience as an energy economist in the US and European electric power industry, both as an expert witness and business advisor. He is also CEO of an ocean wave energy technology company and a member of the Energy Working Group of the State of Maine Climate Council.
Alayna Tria is an associate director in BRG’s energy and climate practice. She specialises in financial, market and economic analysis for business advisory and dispute resolution in the areas of oil, natural gas, LNG and renewables.
Tristan Van Kote is a senior associate in BRG’s energy and climate practice. He provides analysis in the areas of power and natural gas markets, climate change policy and project finance.