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Energy won’t be the same when this is over

The coronavirus is rewriting the future of fossil fuels and renewables

Southern California Edison foreman Louie Garza poses with lineman Eddie Varrioz, 43 (L) and lineman Daniel Manzo, 32, (R) after installing a new overhead switch for circuit reliability in Ventura, Calif. During the coronavirus pandemic Edison is focused only on essential work to maintain the grid. (Brent Stirton/Getty Images)
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With planes grounded, cars parked, factories shuttered and offices dark, the coronavirus has carved a big hole in the energy economy and redirected its future in ways that could hardly have been imagined four months ago.

Even once the world picks up again, the basics of the business will reflect the legacy of the 2020 pandemic.

Coal, already staggering, has taken yet another serious blow. Some analysts wonder whether we have now passed peak oil — whether we will ever again burn 100 million barrels a day. Will investors take a pass on capital-intensive liquefied natural gas terminals and plants? Advocates for renewable sources of energy say they can survive the price challenges of the near future and emerge stronger than ever.

A lot is unknowable right now. A second surge of the coronavirus could flatten the economy for many months to follow. Even now, optimists and pessimists argue over the likely pace of recovery. If President Trump is reelected in November, he can be expected to look kindly on fossil fuels. Presumptive Democratic nominee Joe Biden has promised, if elected, to rejoin the Paris climate accord, set new vehicle fuel economy standards, promote renewables and push for carbon pricing by 2025.

“The trend toward renewables and greener energy is unstoppable,” said Andrés Gluski, the chief executive of AES, which operates electricity generation plants and is developing lithium ion batteries in projects around the world. From Washington to New Delhi, he said, people are seeing the benefits of cleaner skies and air during the shutdown and will not want to go back to the way things were.

Yet open roads and cheap gasoline beckon, at least for now and in the near future.

“If you ask a lot of Americans and tell them we’ve dropped our CO2 emissions 11 percent over the last year, they’ll say I’m trapped in my house and I’m unemployed, so if this is what it takes to tackle climate change, no thank you,” said Kate Konschnik, director of the Climate and Energy Program at Duke University’s Nicholas Institute for Environmental Policy Solutions. “That is a real risk going forward.”

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The two biggest consumers of energy in the United States are electricity generation and transportation. Power companies rely on natural gas, ever smaller amounts of coal, nuclear reactors and a growing helping of renewables. Gas- and coal-fired plants are the easiest to fine-tune during the day. Gluski said advances in battery storage technology will soon make wind and solar competitive on that score.

Transportation is almost entirely powered by petroleum — from planes to trucks to cars to motorcycles to freight trains to tugboats to tractors to ferries. Crop-derived ethanol and electricity play a small role. Petroleum production in this country has been slashed by 12 percent since February, all because of the economic slowdown and stay-at-home orders stemming from the pandemic.

Output will begin to head upward again someday — but how quickly, and how far?

In North Dakota, 55 rigs were working the Bakken shale formation when the year began. Today just 14 are still in operation. Wells producing 550,000 barrels a day have been shut in — turned off, in effect — in the state.

One big operator, Whiting Petroleum, has declared bankruptcy. (In Oklahoma, Chesapeake Energy — the pioneer of hydraulic fracturing, or fracking — is widely thought to be headed in the same direction.) Oil-field services companies have laid off workers and cut hours for others. Some outfits have gotten a two-month reprieve through the federal Paycheck Protection Program.

“The economy’s going to do what the economy’s going to do,” said Ron Ness, head of the North Dakota Petroleum Council. “Until we see demand recover, we have no idea what’s going to happen.”

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There has been some recovery from April’s dismal numbers. The futures price for West Texas Intermediate is at nearly $30 a barrel. A few dollars more, Ness said, and some shut-in wells may restart.

“But what drives the economy,” he cautioned, “is new wells and new investment.”

And that might require a price back in the $50-to-$60 range, to regain the confidence of investors and banks.

One problem is in keeping the trained workforce intact despite the layoffs. Most of those in the oil fields of western North Dakota are originally from somewhere else, and if they could find work, many might be happy to move on.

It is essential, Ness said, to have workers “ready to ramp up when you need them.”

“That gets to be problematic as this goes on,” he said.

A shakeout in the sector is likely. It wouldn’t be the first time.

“Many of the players were highly leveraged,” U.S. Energy Secretary Dan Brouillette said in a video conversation with Daniel Yergin, vice chairman of IHS-Markit. “I think it’s fair to say that you’ll see some of those players go by the wayside. They may be purchased by larger players in the marketplace. They may just simply close up shop and go by the wayside.

“That’s the free-market system. It’s the way it works here in the United States. But I have no doubt that in a few months, or perhaps six months, we’re going to see our industry almost back to where it was pre-pandemic levels. That assumes, of course, we open up the economy.”

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If there is a sharp recovery late this year or early next year, analysts expect the price of oil will meet or surpass Ness’s $50 tipping point. The glut that helped send prices tumbling this spring has led to so much production being cut that, once the surplus is gone, producers may have to scramble to meet demand again.

But that assumes a sharp recovery. The economy could stagnate. Or people could rethink so much traveling. Millions have been able to work from home; videoconferencing, for all its faults, could take the place of a great deal of business travel. If the virus lingers, vacationers might be reluctant to get aboard planes again.

And if Gluski and Tesla chief executive Elon Musk have their way, more of the transportation burden will be shifted to electric power plants and away from liquid petroleum.

Even the head of BP, Bernard Looney, said recently that it is time to accelerate the demise of the internal combustion engine.

And public policy on electricity — almost worldwide — strongly favors renewables and discourages coal. Bruno Brunetti, head of global power planning for S&P Global Platts, pointed out in a webinar that coal-burning plants tend to be older and that any idled now because of the drop in demand are unlikely to be restarted if the shutdown extends for several months. Most of the world’s nuclear plants are also heading toward retirement age, he said.

Brunetti’s colleague Roman Kramarchuk, head of energy scenarios at S&P Global Platts, said that European countries, at least, are not wavering on renewable energy, even as their economies falter and fossil fuel prices crater.

“We’re not seeing a as an excuse to walk back on energy transition,” he said.

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As Gluski points out, wind- and solar-energy facilities are extremely cheap to operate once the equipment is in place and up and running. Storage to meet demand hours has been an obstacle, but he argues that battery development will soon make storage even on a large scale a practical reality.

Of all the fuels, natural gas has the most diversified uses. Roughly equal amounts go to power generation and manufacturing, with another large portion devoted to heating and cooking. That could make it a little less susceptible to sudden swings in demand. Its historically low price has held fairly steady during the pandemic, even as consumption has declined about 2 percent worldwide because, as oil wells are shut in, the gas they had been capturing as a byproduct is also left in the ground.

In the United States, people like to say they want the market to drive decisions, but politics and public opinion tend to hold sway in the end.

“Do we decide that, hey, telecommuting works, and we like not having as many cars clogging up downtown streets and let’s make this the new normal?” asked Drew Shindell, an earth-science professor at Duke. “Or do we decide that … the economy is in really poor shape and we need to pour money into tried-and-true things like propping up fossil fuel industries?”

Either way, it’s not the market that is calling the shots.