Blog post

The coronavirus crisis and the energy markets

Nicholas Apergis, Professor of Economics at the University of Derby, explores the possible consequences of the coronavirus crisis on global energy markets.

25 February 2020

Coronavirus and the global economy

Many studies have recently pointed to the economic impact of the outbreak of the coronavirus onto the global economy, threatening consumption, tourism and other important sectors in the economy. The manufacturing industry is expected to suffer much less than tourism, air and road travel, at least in the short-run. If the virus crisis continues beyond summer, then the look of the world economy will be totally different from what we are currently used to. Moreover, the virus crisis has increased business risks, thus, undermining business sentiment.

In other words, the virus is another risk that supports the view of many economists and analysts that the world will probably live the experience of a new global recession. While central banks around the globe are expected to work overtime to stimulate the economy, at this stage it is harder to efficiently implement Quantitative Easing policies in a world of very low interest rates.

Coronavirus and energy markets

However, no study so far has offered any evidence on the impact of the coronavirus event on commodity markets, especially in relevance to energy markets. This is how this blog steps in to perform this job.

For the first time since the global financial crisis of 2007/08, the global demand for crude oil is expected to significantly decline by the end of the year, led by a precipitous fall in oil demand in China, the world's biggest oil importer. Concerns are now focusing on the energy sector as work slowdowns and transportation bottlenecks in China have had a ripple effect given the country's manufacturing dominance and its role as a top consumer of oil and natural gas.

Further (negative) spill overs are expected to result in slower growth in the global economy, huge losses of new taxes revenues, higher budget deficits and public debts, as well as lost markets for oil workers. Given that both oil and natural gas producers have been suffering from low energy prices over the recent years, they now expect a further sharp drop in global prices for their products because of slower economic growth. As a result, they are preparing to further slash investments in exploration and production, leading the energy markets into a vicious cycle that might take several years to rebound.

In addition, given the dominant role of China in the supply chain of rare earth materials (the country owns 97% of the world stock of rare earth materials mostly used in the renewable energy industry, such as in windmills and solar panels), production and transportation will be also disrupted, with further negative consequences in the price of energy consumption. Nevertheless, producers worldwide still have enough raw materials stockpiled to meet supply over the near future; however, eventually, the world will experience a significant shortage that could ripple through the rest of the supply chain for renewable energy.

Still some good news ahead

But there is also good news. While lower oil prices hurt producers (through the energy companies' profitability), they benefit drivers around the world. Average national prices of regular gasoline will substantially drop. That is a real benefit, particularly for lower-income motorists, who tend to drive older vehicles that are less fuel-efficient and spend a higher percentage of their income on energy. At the same time, refiners can buy and store cheaper fuels, especially in the summer season, for the future, when demand is expected to be much higher.

Overall, as with most market disruptions, there will be winners and losers. The negative projections raise the crucial question on how transitory the weakness in China's energy imports will be in the near future and whether there will be any long-run ramifications for energy use that are not yet anticipated. Maybe the news is still on the positive side depending on whether the demand for global freight is expected to support greater oil use and, in this manner, will be capable of offsetting any losses in relevance to demand conditions in the oil sector. Such demand conditions are closely related to an upsurge in sales of electric automobiles and other inroads for energy-efficient technology adoption. However, such good news could evaporate quickly if China, a major player in global trade transactions, is unable to recover its suffering economy as a result of the coronavirus outbreak.

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