Economic shocks from covid-19 and recovery plans
Recent developments across the world has made most of us rethink our priorities, change our ways of life and identify what really matters to us. Some of us have had to do without lifestyles we never imagined we could live without. Postponement of the Olympics, suspension of sport activities, endless online meetings as a result of home office, regular use of face masks and coronavirus contact tracing Apps in public places, having to stay home all day, week and month without compulsion are some of the highlights of the past months. However, normalcy is gradually returning as lockdowns are eased. Depending on which part of the world you are in, you can now hang out with family in a park, walk into the shopping stores, enjoy the sunshine and even go to work. The economy is picking up, businesses are gradually returning, soccer is back, though without the loud cheers of fans. Summer holiday looks possible and air travels are returning slowly.
Nevertheless, the effects of the pandemic are increasingly obvious as businesses are strategizing to survive, governments are focusing on reviving the economy and the unemployed are looking for the way forward. Almost all sectors of the economy have been greatly affected by the pandemic especially the oil and gas. Demand for oil and gas has slumped this year due to travel restrictions imposed during lockdowns. The International Energy Agency (IEA) expects global oil demand for 2020 to fall by almost 9.3 million barrels per day. Hence, oil and gas companies are employing different measures to manage the situation. Recently, BP warned that this health crisis could cause less demand for energy for a sustained period. Hence, the company plans to write down the value of its assets by as much as $17.5 billion and cut 10,000 jobs. Despite a $6 billion increase in its debt in the first quarter, BP has resisted pressure to cut dividends but will continue to keep payout under review.
Exxon reported its first quarterly loss since 1999, announced it will slash 2020 spending by 30% ($10 billion) to $23 billion and plans to reduce cash operating expenses by 15%. Chevron is conserving cash by cutting 2020 spending by up to $2 billion and pledging to cut costs by $1 billion. However, both companies are hoping to avoid lowering their dividends like other European giants are already doing. Norway’s Equinor was the first large oil company to cut dividends. It lowered its dividend by 67%. Royal Dutch Shell slashed dividend by 66%, the first cut for the oil giant since World War II. Occidental Petroleum has slashed its dividend from 79 cents a share to just a penny, drastically cut spending and is selling off assets to raise cash.
The collapse in travels and other activities triggered by the pandemic lockdowns could slash the total carbon emissions by a record amount this year. These emissions are already rising fast again as economies begin to open up. Climate enthusiasts want governments to prioritize stimulus spending on climate to avoid a repeat of the aftermath of 2008 global financial crisis when CO2 emissions bounced back, with the IEA calling it the largest increase ever recorded. Some government are already using this opportunity to invest in clean energy and pivot their economies away from fossil fuels.
France $17 billion support package for Airbus (EADSF) and the country wider aviation industry includes funds for research and development, with the goal of producing a carbon neutral aircraft in 2035. The bailout of Air France-KLM (AFLYY) also includes new environmental commitments. Germany is spending billions of euros on subsidies that will slash the price of electric cars, which the government says is part of a drive to get to a carbon neutral economy by 2050.
The IEA with the International Monetary Fund (IMF) released a blueprint that recommends governments spend up to a $3 trillion over the next three years on technology and infrastructural projects to create millions of jobs and make 2019 the definite peak in global emissions. These agencies are encouraging governments to invest in green economy recovery from the coronavirus pandemic. Combination of climate change and slump in demand implies oil companies might face a bleak longer term outlook. With some analysts warning that demand may never return to its 2019 high record as the pandemic accelerates shifts that were already underway in energy markets, such as the switch to renewables which will have a lasting impact on the way people work and travel. This was further buttressed by a statement from BP management.
Heightened concerns about climate change and growing rise of socially responsible investing has further restrained capital to the growing shale drillers. This implies that access to capital won’t get any easier for the US shale industry. New York, London, other cities and Public institutions have given their words to cut down their fossil fuel investments. Similar decisions are being made by dozens of universities around the world, even the Vatican has repeatedly urged Catholics and the private sector to divest from fossil fuel companies and other harmful environmental behavior that accelerates climate crisis.