Lower oil demand likely to persist beyond 2021 – World Bank study

Lower oil demand likely to persist beyond 2021 – World Bank study

BY ABBION ROBINSON
Business reporter
robinsona@jamaicaobserver.com

Wednesday, October 28, 2020

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While almost all commodity prices have recovered in the third quarter of 2020 following steep declines earlier in the year due to the COVID-19 pandemic, energy prices — despite some recovery — are expected to stabilise below pre-pandemic levels until at least 2022, the World Bank has said.

Energy prices suffered the most among commodities in the pandemic as they dropped nearly 60 per cent between January and April 2020, according to the bank's semi-annual Commodity Markets Outlook report.

Oil prices in particular are expected to average US$44 per barrel (/bbl) in 2021, up from an estimated US$41/bbl in 2020. While this forecast is slightly above the April projections of US$35/bbl, it is still significantly lower than its 2019 level of US$61/bbl.

The collapse in oil consumption triggered a sharp fall in prices, and in response, many oil producers slashed production, most notably the Organization of the Petroleum Exporting Countries (OPEC) and its allies who collectively agreed to production cuts of 9.7 million barrels per day — almost 10 per cent of global output.

The report further indicated that the main risk to the price forecasts include the probability of an intensifying second wave of COVID-19 in the Northern Hemisphere that would result in more lockdowns and less consumption, and ultimately, the speed at which a vaccine is developed and distributed.

The pandemic could also have lasting impacts on oil demand through changes in consumer and employment behaviour as demand is expected to rise only slowly as tourism and travel continue to be held back by health concerns.

“Air travel could see a permanent reduction, as business travel is curtailed in favour of remote meetings, reducing demand for jet fuel. A shift to working from home could reduce gasoline demand, but may be somewhat offset by increased use of private vehicles if people remain averse to using public transport,” the report stated, noting that several oil companies have announced changes in strategy including a significant reduction in investment in new hydrocarbon projects.

It added that energy use more broadly is expected to increasingly shift away from fossil fuels toward renewables, in large part due to their increasing competitiveness, with several countries announcing plans to reach net-zero carbon emissions within the next 40 years.

“The recovery from COVID-19 offers an opportunity to direct stimulus funds toward green energy and infrastructure. However, so far, more government stimulus has been directed to fossil fuel energy than clean energy,” the World Bank said.

According to Ayhan Kose, World Bank Group acting vice-president for equitable growth, finance and institutions, when declines in commodity prices are short-lived, policy stimulus can buffer their impact.

“When prices remain depressed for an extended period, policy makers need to find solutions so their economies can adjust smoothly to a new normal. Because of COVID-19, the new normal for oil-exporting emerging and developing economies arrived earlier. In the post-COVID world, these countries need to be more aggressive in implementing policies to reduce their reliance on oil revenues,” he said.

The report recommended that for countries that rely heavily on commodities that are subject to permanent shocks, structural policies such as economic diversification and broadening the tax base may be needed to facilitate adjustments to new economic environments.


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