How COVID-19 might delay energy transition?

Energy transition has recently become a very popular topic, and everyone sees the soon end of hydrocarbon economy, including the crude oil.

However, the current pandemic is likely to have a delaying impact on introduction of greener technologies and postpone reaching plateau demand for conventional energy for several years.

The key driver for introduction of any technology is its cost, which is the price its customer must pay. Green technologies do bring more advantages to the society, but their introduction will require customers pay a premium over conventional, more dirty technologies.

There is matrix of possible cost options along two dimensions — one dimension is whether the cost is paid directly or indirectly by end customer. And the second one is whether it is mandated by the market or by the government.

Pic 1. Overview of stimulation options

And here we have several factors which are playing against greener technologies due to the current situation with the global pandemic:

· Reduced demand for motor fuels due to numerous lockdowns and slower economic activity has led to lower crude prices. And given potential supply overhand, it is likely that they would persist at the level of USD55–65/bbl for the next several years. This would make the cost gap between conventional and green technologies too wide to stimulate market-driven migration. And given current hard times for many industries, more and more customers will try to benefit from lower energy prices in short-term.

· Increased need for government support in 2020–2021 has stretched the public budgets across the globe. It is likely that in the sort- medium -term the state investments will be spend on higher priority area, supporting damaged industries and stimulating quicker recovery, rather than subsidizing higher cost of new technologies for the customers.

· Introduction of some indirect motivation from the state or international bodies (like sticker IMO regulation for bunkering industry) could in theory be a cheaper solution for the state, but in fact it could further pressurize damaged industries, like travel, aviation, automotive, which are seeking direct support and state subsidies.

Pic 2. Crisis effect stimulation options

All in all, it might be obvious that energy transition is inevitable, but somebody will have to pay for it, and it will be the end customer. As the pandemic evolves in 2021 and probably even beyond, putting the enormous stress on entire industries and public budgets, it will likely delay the transition, and keep the oil with us, at least by several more years.