Energy demand to shrink for first time since early 1980s

An aviation shutdown and traffic-free streets will lead to an historic moment for energy consumption.

As energy demand heads for its first fall since the 1980s, investors with BP (LSE:BP.), Royal Dutch Shell (LSE:RDSB) or Premier Oil (LSE:PMO) in their portfolios will be asking if this year is the start of a sustained downtrend.

The answer this week from analysts at UBS points to energy consumption recovering from the Covid-19 pandemic over the rest of the decade, driven by emerging markets as newly urbanised communities with higher incomes use more energy.

The Swiss bank predicts that demand for most energy resources, including oil, coal, and natural gas, will continue to rise despite aspirations to diversify away from fossil fuels.

UBS bases its findings on BP's recent Statistical Review of World Energy, which showed that growth in primary energy consumption slowed to 1.3% last year from 2.8% in 2018.

The BP document reveals that China was by the far the biggest driver of energy, accounting for more than three-quarters of net global growth. India and Indonesia were the next largest contributors, while the United States and Germany posted the largest declines.

Renewable energy saw a record increase in consumption, with the largest contribution coming from wind and then solar power. While UBS expects that the supply of renewables will continue at an unprecedented pace over the next few decades, it said the transition from fossil fuels will only be gradual due to cost and time constraints.

They added:

“Over time, diversification is needed to mitigate the risk of instability in energy availability and pricing, particularly during supply or demand shocks in the oil and gas markets. A cleaner, more sustainable, and secure energy supply base is both essential and feasible, in our view.”

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Demand for renewables grew by 12.2% in 2019, but its market share of 5% compares with 84.3% for fossil fuels. The share of natural gas rose to a record 24.2%, while the figure for crude oil weakened slightly to 33.1% and coal declined to 27%, at a 16-year low despite increased demand in Asia.

The impact of Covid-19 lockdowns and the near shutdown of the aviation industry will mean that 2020 sees the first contraction in full-year energy demand since the early 1980s – demand has only fallen in 1981, 1982 and 1983 since BP’s data series began in 1965. Brent crude plunged to below $20 a barrel at one point in April as the world started to run out of places to store unwanted oil.

Sharply lower prices and weaker outlook contributed to Royal Dutch Shell cutting its dividend for the first time since the Second World War, and created a perfect storm for the likes of debt-laden exploration and production companies Premier Oil and Tullow Oil (LSE:TLW).

In the case of Premier, the slide came not long after a landmark deal to buy UK North Sea oil and gas assets from BP. The terms were subsequently amended, with CEO Tony Durrant reporting today that the completion of these “value-accretive” acquisitions positioned the company to benefit from a recent recovery in the oil price. Brent oil was today at $43.38.

Durrant added that the debt pile remained at just under $2 billion after Premier took decisive action to reduce its expenditure during the first half. It expects to generate cash across the 2020 financial year, based on current price expectations.