An existential crisis for oil supply: this is how one Rosneft executive referred to BP’s and Shell’s recent commitments to a renewable energy shift. This shift, Didier Casimiro said, would lead to much tighter oil supply while demand continues to grow. And this existential crisis has the potential to benefit companies such as Rosneft by driving prices higher. For much of this year, the focus, when it comes to oil markets, has been on demand. It was demand that made this oil industry crisis an unprecedented one. Prices have fallen before, and as a result, supply typically falls to balance the market. But now, for the first time in history, it was demand that was the bigger culprit for the oil price collapse from this spring. Demand was eviscerated by the coronavirus pandemic. Demand is what is still keeping oil prices low despite a major cut in production made by OPEC+ and by non-members of the extended oil cartel.
Demand is also one of the factors that spurred Big Oil into such swift action on renewable energy. Their plans were in the making before the crisis, but it was the crisis that gave them a major push. Now, BP and Shell both plan to reduce their oil and gas production and invest more heavily in renewables. Investors remain wary as BP’s recent stock price drop suggests, but for now, the shift appears to be inevitable and unstoppable. And it may well create a gap of supply.
“I think that to go away from your core business, which is what they are doing, somebody will need to step in . . . somebody will need to take that responsibility,” Rosneft’s Casimiro told a Financial Times event. “It is an existential threat for supply. It is an existential threat for price volatility . . . we will have a [supply] crunch, price volatility, and yes higher prices,” he added.
Related: Saudi Aramco Doubles Down On Oil During Worst Demand Crisis Ever
It may be difficult to see so far into the future when all we hear these days is that continued fear about this oil demand is keeping prices low. Even three consecutive weekly crude oil stock draws reported by the Energy Information Administration could not help prices, because at the same time, airlines were again hogging headlines with their pleas for more government aid—and air travel accounts for a lot of fuel demand. Until air travel recovers, oil demand cannot recover to pre-pandemic levels.
Meanwhile, the pandemic continues, and fear of new lockdowns is also running high, fueling the bearish sentiment. How justified this fear is, is questionable as the governments that enforced lockdowns in the spring paid for them dearly and are unlikely to risk them again unless infection numbers continue to rise, and fast. But this is the thing with this pandemic: it is possible that infection numbers will continue to rise, and fast—whether the death counts will match remains unclear. Uncertainty is the name of this game, and the whole world is playing it.
Read More: Could Big Oil’s Shift To Renewables Be Good For Prices?