Economic shocks from covid-19 and recovery plans

Recent developments across the worldhas made most of us rethink our priorities, change our ways of life andidentify what really matters to us. Some of us have had to do withoutlifestyles we never imagined we could live without. Postponement of theOlympics, suspension of sport activities, endless online meetings as a resultof home office, regular use of face masks and coronavirus contact tracing Apps inpublic places, having to stay home all day, week and month without compulsionare some of the highlights of the past months. However, normalcy is graduallyreturning as lockdowns are eased. Depending on which part of the world you arein, you can now hang out with family in a park, walk into the shopping stores, enjoythe sunshine and even go to work. The economy is picking up, businesses aregradually 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 thepandemic are increasingly obvious as businesses are strategizing to survive,governments are focusing on reviving the economy and the unemployed are lookingfor the way forward. Almost all sectors of the economy have been greatlyaffected by the pandemic especially the oil and gas. Demand for oil and gas hasslumped this year due to travel restrictions imposed during lockdowns. TheInternational Energy Agency (IEA) expects global oil demand for 2020 to fall byalmost 9.3 million barrels per day. Hence, oil and gas companies are employingdifferent measures to manage the situation. Recently, BP warned that this healthcrisis could cause less demand for energy for a sustained period. Hence, thecompany plans to write down the value of its assets by as much as $17.5 billionand cut 10,000 jobs. Despite a $6 billion increase in its debt in the firstquarter, BP has resisted pressure to cut dividends but will continue to keeppayout under review.

Exxon reported its first quarterlyloss 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 isconserving cash by cutting 2020 spending by up to $2 billion and pledging tocut costs by $1 billion. However, both companies are hoping to avoid loweringtheir dividends like other European giants are already doing. Norway’s Equinorwas the first large oil company to cut dividends. It lowered its dividend by67%. Royal Dutch Shell slashed dividend by 66%, the first cut for the oil giantsince World War II. Occidental Petroleum has slashed its dividend from 79 centsa share to just a penny, drastically cut spending and is selling off assets toraise cash.

The collapse in travels and otheractivities triggered by the pandemic lockdowns could slash the total carbonemissions by a record amount this year. These emissions are already rising fastagain as economies begin to open up. Climate enthusiasts want governments to prioritizestimulus spending on climate to avoid a repeat of the aftermath of 2008 globalfinancial crisis when CO2 emissions bounced back, with the IEA calling it thelargest increase ever recorded. Some government are already using thisopportunity to invest in clean energy and pivot their economies away fromfossil fuels.

France $17 billion support packagefor Airbus (EADSF) and the country wider aviation industry includes funds forresearch and development, with the goal of producing a carbon neutral aircraftin 2035. The bailout of Air France-KLM (AFLYY) also includes new environmentalcommitments. Germany is spending billions of euros on subsidies that will slashthe price of electric cars, which the government says is part of a drive to getto a carbon neutral economy by 2050.

The IEA with the InternationalMonetary Fund (IMF) released a blueprint that recommends governments spend upto a $3 trillion over the next three years on technology and infrastructuralprojects to create millions of jobs and make 2019 the definite peak in globalemissions. These agencies are encouraging governments to invest in greeneconomy recovery from the coronavirus pandemic. Combination of climate changeand slump in demand implies oil companies might face a bleak longer termoutlook. With some analysts warning that demand may never return to its 2019high record as the pandemic accelerates shifts that were already underway inenergy markets, such as the switch to renewables which will have a lastingimpact on the way people work and travel. This was further buttressed by astatement from BP management.

Heightened concerns about climatechange and growing rise of socially responsible investing has furtherrestrained capital to the growing shale drillers. This implies that access tocapital won’t get any easier for the US shale industry. New York, London, othercities and Public institutions have given their words to cut down their fossilfuel investments. Similar decisions are being made by dozens of universitiesaround the world, even the Vatican has repeatedly urged Catholics and theprivate sector to divest from fossil fuel companies and other harmfulenvironmental behavior that accelerates climate crisis.

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