Oil, it’s back to the way it was

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The fall in oil prices at the start of the Corona crisis made the headlines, but the rapid recovery is receiving much less attention. Bad news sells better than good news. Never before in history has the oil price risen so sharply in a single month. This made up for a large part of the losses in March and April.

Today the OPEC meets. In April OPEC reduced production by 9.7 million barrels a day, equal to approximately 10 percent of global production. Not that everyone within OPEC has complied with that agreement, but it seems that OPEC including Russia and the United States wants to extend this reduction in production until September.

Earlier this week, the American Petroleum Institute (API) and the Energy Information Administration (EIA) reported that oil stocks have decreased rather than increased. The difference compared to what was expected is about 3.5 million barrels at API and 5 million barrels at EIA. Stocks in Cushing (Oklahoma) fell by 2.2 million barrels. A month ago, the oil price (WTI) was still negative, partly because there was no more room in Cushing to store oil. American oil futures require physical delivery at expiration in Cushing, in contrast to the Brent-future where cash payments are made. The decreasing stocks are a consequence of less supply and more demand. Supply has decreased as a result of the extremely low oil price. Demand has risen as the US economy opens up.

There may not be so much flying yet, but all the more driving. Only 8 percent of fossil fuels are used for air transport, more than 50 percent goes to road transport. Now that the plane is exchanged for the road trip, the consumption of fossil fuels increases on balance. The Memorial Day weekend (25 May) marks the start of the ‘driving season’, not only for holidays, but also for family visits, the car is now preferable to the aeroplane. A similar phenomenon can be seen in the rest of the world, for example in Asia. In connection with the Corona measures, employees there prefer to go to work by car rather than by public transport. Chinese demand for oil is now at 90% of pre-crisis levels, a remarkably strong recovery. Traffic jams around Beijing are as long as before the crisis.

The rapid recovery of the oil price is bad news for climate activists. They had hoped that the Corona crisis would be a turning point for the use of fossil fuels. Despite the sharp fall in the oil price, alternative energy shares have therefore risen. Fossil fuel shares have fallen sharply this year.

Over the next twenty years, the world economy will grow by 2 billion people, an increase of 25 percent. In the same twenty years, the urban population will increase by 50 percent. That means an even faster growth of the middle class. As a result, global consumption will double in the next ten years, with Asia accounting for 90 percent. A rising standard of living means a sharp increase in energy consumption. The middle class uses exponentially more energy for lighting, household appliances, digital services and transportation, among other things. These are all products that, in turn, require energy to produce, transport or operate. Products that are often also made entirely or partially from fossil fuels. Before the crisis, the impact of alternative energy was not visible, witness the record consumption of more than 100 million barrels of oil per day. It seems that this record will be broken in the coming years, strange that energy stocks have not yet recovered.

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