WITH a frightening slump in oil prices raising questions about the oil wealth that Guyana can expect from the rest of our 2020 lifts, it’s important to take a step back and view the current crisis from a long-term perspective.

The COVID-19 pandemic is a once-in-a-lifetime event. It has undeniably crippled oil demand globally on an unprecedented scale, driving prices to their lowest levels in decades and compounding the problems of an already-saturated oil market. But as dire a situation as that might seem, oil development projects are always a bet on the next few decades, not the next few months.

Oil is a highly cyclical commodity at the best of times. We find ourselves in a down cycle driven by an extraordinary but fundamentally temporary event. Just as the rest of the world is already looking forward to a COVID-free world, so too can Guyana’s oil industry.
Once economies and businesses reopen and populations are freed from restrictions on their movement, demand will gradually push prices back up. Additionally, a downturn this steep has already seen some supply coming off the market and will likely force some indebted or low-margin producers out of business, further decreasing supply over time and raising prices long-term. This will leave Guyana with more room to sell its oil.

Obviously, we are not going to see $100 oil anytime soon. Demand will not bounce back to pre-pandemic levels overnight and it will take a while to work off the supply glut that has led to very high global storage levels. But prices will stabilize. Analysts at energy consultancy, Wood Mackenzie, recently predicted that demand would push oil prices back up above $40 per barrel later this year.

Though some may wonder why Guyana would continue to produce oil given current market conditions, commentators like the University of Houston’s Tom Mitro warned that Guyana would be unwise to panic and halt production in light of a temporary crisis. As Mitro noted, halting production or development now would leave Guyana in a worse place when prices rise again. Complex deep water wells cannot be shut on and off like a faucet – doing so is a time-consuming and expensive process. Comments from Mark Bynoe, Director of the Department of Energy, have confirmed that Guyana has no plans to slow or cap its production.

These decisions are driven by a belief that the global demand for oil will not look particularly different after this pandemic than it did before. Influential analysts at Wood Mackenzie and the International Energy Agency predict that oil demand will remain high at least throughout the first half of the 21st century.

That’s not what some anti-oil activists would like to see, but so far global oil use has continued to rise steadily, year after year, even as once-niche technologies like electric cars become more mainstream amidst a global effort towards carbon transition. The American Petroleum Institute, which analyses demand and supply in the industry, forecasts that oil demand will continue to closely track global gross domestic product (GDP) growth after the pandemic. Historically, oil demand increases at about half the rate of GDP, so a 3 per cent global growth rate would mean 1.5 per cent higher global oil demand.

That’s because even as much of the developed world is moving gradually towards more electric cars and greater fuel efficiency, the developing world—particularly Asia—produces tens of millions of new drivers every year. That is a major factor behind predictions that demand for oil will continue rising relatively steadily at least over the next couple decades.
Even if the demand for cars somehow declines, the demands for shipping, air travel and non-transportation uses of oil are all still increasing rapidly, year after year, although 2020 will likely prove to be an exception.

Beyond their uses as liquid fuels, oil and natural gas are vital building blocks for everything from ink to plastic to medicine. Strong, lightweight plastics, in particular, are very important materials for building more efficient vehicles and will be critical for building electric cars and, eventually, planes. This kind of industrial demand for fossil fuels has accounted for an increasing share of the overall global need for oil.

This long-term demand puts Guyana in a relatively strong position, despite concerns about the current downturn. Our oil is relatively cheap to produce, especially for an offshore deposit. The near-term development plans for the Stabroek Block are still on track and Guyana is still set to be a major oil producer within a few years, even though future developments like Payara will suffer delays from the prolonged political uncertainty of this election and related delays in the approval process.

There will be numerous challenges the next government will have to navigate and, in the short-term, navigating this turbulent economic and oil-market situation will be one of them. But it’s important to remember that a temporary crisis is unlikely to permanently shift the world’s need for oil.