As coronavirus shocks the energy sector and economy, is now the time for a new energy order?

The COVID-19 pandemic has affected every industry in one way or another. For oil and gas, prices have plummeted with the potential to cause disruptions well beyond the energy sector.

Though this is the worst possible way to begin a decade, the coronavirus pandemic and the collapse of oil prices also offer an opportunity to consider unorthodox intervention in the energy markets and global collaboration to support the recovery phase once the acute crisis subsides.

This giant reset grants us the option to launch aggressive, forward-thinking and long-term strategies leading to a diversified, secure and reliable energy system that will ultimately support the future growth of the world economy in a sustainable and equitable way.

The crisis has created an unprecedented alignment between the Organization of the Petroleum Exporting Countries (OPEC) and the G20. While the impact of this alignment in the short term has been low and insufficient, the medium- and long-term effects could be substantial. The alignment demonstrates that it is still possible to reach global agreements even in the context of reducing globalization and increasing nationalism. The agreement between Saudi Arabia, Russia and the US – as proxy of OPEC, OPEC+ and the G20 – to cushion the oil price shock sets a precedent for future collaboration for global energy security and economic growth.

The most important element of this agreement, beyond the cut in oil production, is the mobilization of parties with competing interests to work towards the shared and optimal objective of market stability.

Oil and gas are still considered key elements of the economy, with an important role in enabling prosperity for everyone (producers and consumers alike). While oil-producing countries make money from each barrel of oil sold, oil-consuming countries also generate an income on oil through the tax system at the state level and through dividends in saving funds, pension funds and the like, which are owned by individual citizens. And in some countries, the revenue from these taxes is used to finance green infrastructure projects.

Similarly, for electricity, the reliability and security of the system is necessary to support the sustainability agenda. Threats to the infrastructure from extreme weather events, the increasing risk of cyberattacks, and the disruption to supply-and-demand balance from external shocks such as COVID-19 expose vulnerabilities in the system. This can be detrimental to society at large. Lasting and systemic outcomes can only come from a balanced approach, which values economic growth, security and reliability along with sustainability, and promotes stability in energy markets.

A new energy body to promote stability?

Is this the time for an existing or new energy body to become the formal or informal enabler of energy stability across the board? Is it the time to conceive a body that will operate on the basis of market forces, within the limits of economic and environmental stability?

Until now, energy transition has been progressing slower that required by the Paris Agreement, due to the cost of the transition, financing constraints and the loss of jobs the transition entails, among other issues. It will cost trillions of dollars to reduce emissions and transition to a balanced energy system. (As a reminder, 67% of anthropogenic CO2 emissions come from energy production, transport and consumption.)

Countless jobs would be lost if the change is abrupt and uncoordinated; jobs in coal mining, oil and gas and their supply chains would take a while to be transferred to other energy sectors. Too many companies would go bankrupt, which would affect those dividends and yields for people and states.

We must act now – and here are two reasons why:

1. Due to this unprecedented situation, we are already paying some of those costs right now. There is an opportunity to reboot the system in a way to avoid returning to the past and invest in a recovery that accelerates the energy transition. A systemic approach to the transition requires simultaneous action on multiple solutions – including renewable energy, systemic efficiency, circularity of the economy, cutting emissions from fossil fuels and building human capital for the future energy system. As energy companies are revisiting their long-term investment strategies, prospects are open.

2. Energy expenditures for the large energy-consuming countries have been significantly reduced due to the collapse in oil prices. For example, every $4 decrease in commodity prices leads to about $5 billion in import bill savings for India, which is the world’s third-largest energy consumer. Countries can now use these savings to be reinvested in a more diversified energy system.

The compounded disruptions from COVID-19 emphasize the importance of stability in energy markets. And stability should be embedded in the system design, instead of being a concern only in the wake of emergencies. Moreover, market stability is not restricted to oil and gas; the electricity market must be stable, as well.

A new energy regulation body can harmonize the often-conflicting priorities and outline frameworks for a just and stable transition. It can balance some of these elements without requiring a shock like COVID-19. Furthermore, it can help prepare for the impact of future catastrophic events, such as a pandemic or extreme weather, while ensuring the market remains open and competitive.

Often, the political economy of any given country, or geopolitics globally, can drive change with gradual shifts. But right now, we are facing a dramatic worldwide shock. Many see COVID-19 as the planet’s response to the abuse from human activities. But clean skies and no traffic are only some of the things we will miss if we do not reboot in the right way.