Oil markets between Scylla of recovery and Charybdis of climate policy

Abstract

In 2020 the energy transition path was distorted by the COVID-19 pandemic which caused a sharp economic decline and a fast global recovery in 2021. Unlike that period, the years between 2001 and 2019 illustrated a different type of energy evolution for developed and developing countries regarding primary energy consumption. During this period the composition of energy balances of these two major groups demonstrated dramatic disparity, notably marked by the high share of coal in developing countries. The shock of 2020 led to a belief in expediting the transition to green energy, but in 2021 the economic recovery revived demand for oil and coal, dashing hopes for the growing renewable energy sources sector in the European Union that year. The return of coal, however, to the EU energy sector and stable demand for motor fuel globally led to the restoration of the GHG emission growth against the backdrop of the climate policy implementation failure. The current energy transition is denoted by features such as the flat oil demand in developed countries, the flat global demand for motor gasoline and the growing demand for diesel. The econometrics of demand for two motor oil products are quite opposite. For gasoline we have almost all hypotheses met: the negative influence of climate policy and oil prices, strong effect of dummies for shock of 2020 and 2021, and naturally 0.3 coefficient at GDP growth rate. Nevertheless, for diesel everything is exactly the opposite - only 0,4 coefficient at GDP and practically nothing else. This effect shows the strong role and trend for cargo use of diesel fueled trucks in the global economy. The high income of oil and gas majors in 2021 did not secure the investment upturn. A mature oil industry receives substantial profits for its investors, supplying dividends, and buying back debts without enlarging production capacities. At this point climate policy expectations of phasing out fossil fuels in the foreseeable future operated as a braking mechanism against reinvesting oil incomes. Moreover, at this junction we can observe governments' limited capacity to pursue policies toward multiple objectives simultaneously: modest energy prices, energy transition and securing the sufficient capital formation for energy. The continued fusion of the economic upturn and energy transition will be dependent on demand and supply matching in the oil markets. It is also possible that the sanctions policies of 2022 may aggravate the situation, triggering high prices and uncertainties.