IEEJ：May 2020

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Special Bulletin
A Japanese Perspective on the International Energy Landscape (481)

May 21, 2020

Viewpoints for Considering International Energy Situation under COVID-19
Pandemic
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn May 20, the Institute of Energy Economics, Japan, held the Second IEEJ Energy Webinar
titled “COVID-19 Pandemic and Latest International Situation,” where some 400 participants
discussed relevant issues based on my presentation on COVID-19 and the international energy
situation and IEEJ Oil Group Manager Tetsuo Morikawa’s report on an oil supply and demand outlook
through 2021. In the following, I would like to summarize six viewpoints for considering theinternational energy situation under the still rampant COVID-19 pandemic.
First, the future course of the pandemic itself is the most important factor. The internationalenergy market is plagued with a grave oversupply as symbolized by the crude oil price crash because
the pandemic exerted huge impacts on the world oil demand. While COVID-19 infections and deaths
have been expanding globally, people in Western countries among the recent infection epicenters
increasingly view the pandemic as having peaked and expect stabilization. As these countries are
moving to reopen business and ease or lift traveling and outing restrictions, hopes have begun to beplaced on a recovery in energy demand. In contrast with growing hopes for the end of the pandemic,
however, concerns are growing about the second and third COVID-19 pandemic waves. The future
course of the global economy or global energy demand would differ depending on how fast thepandemic would end or whether the second and third pandemic waves would come. The IEEJ has
considered three scenarios – a reference scenario for relatively early stabilization, a prolonged
pandemic scenario for the stabilization’s delay until the second half of this year and a scenario for thesecond pandemic wave coming next year. In the first and second scenarios, global energy demand
would plunge this year before restoring the 2019 level next year. In the second pandemic wave scenario,
however, energy demand would remain sluggish in 2021. The international energy situation would
thus differ depending on the future course of the pandemic.
Second, the energy situation would differ depending on global economic conditions thatwould be closely related to the future course of the pandemic. The IEEJ has projected the reference
scenario in line with the International Monetary Fund’s latest World Economic Outlook forecasting
the world economy in 2020 to contract 3% from the previous year. In the scenario, demand this year
is projected to crash 9% from the previous year for oil and 8% for liquefied natural gas. The demandcrash is behind the serious oversupply. However, concerns are growing on a greater global economic
contraction than the IMF-forecast 3% decline that would be the worst since the Great Depression. Inthe United States, for example, second-quarter gross domestic product is predicted by some analysts
to contract from the previous quarter at an annual rate of 40%. A similar economic deterioration is
expected in Europe. The IMF has already indicated that it would forecast a greater contraction in its1

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©IEEJ 2020next revision to the World Economic Outlook. If the world economy posts a greater contraction than3%, energy demand would plunge more, as indicated in the prolonged pandemic scenario, adding fuelto the oversupply pressure. Attention should be paid to this point.
Third, many countries in the world are moving to reopen business and ease or lift travelingand outing restrictions, exerting influence on energy demand and crude oil futures price trends. Given
that lockdowns and other severe restrictions have been a main factor behind the dramatic fall in oil
demand, their relaxation or lifting will pave the way for an oil demand recovery. Moves to ease or lift
restrictions began in May in many Western countries, Asian nations and Japan, leading to hopes for an
oil demand recovery and crude oil prices’ rally above $30 per barrel. This indicates these restrictions’great impacts. However, it is still uncertain whether restrictions could be eased or lifted smoothly. If
COVID-19 infections expand again due to the easing or lifting of the restrictions or if the second andthird COVID-19 pandemic waves come, energy demand could plunge again.
Fourth, attention should be paid to how the supply and demand sides of the internationalenergy market respond to remarkably low prices and oversupply that have become real under theCOVID-19 pandemic. The supply side has made characteristically different responses – strategic andpolitical supply cuts by oil-producing countries including the Organization of the Petroleum ExportingCountries and non-OPEC oil producers and a decline in U.S. shale oil production under the economic
pressure of low prices. In the LNG market free from any measure like joint oil production cuts by theOPEC-plus group, the economic pressure of low LNG prices is affecting supply. A key point on thedemand side is whether low prices could stimulate demand. Particularly, attention is focusing onwhether price falls could stimulate demand for natural gas and LNG exposed to competition fromother energy sources. We will have to closely watch how responses from the supply and demand sides
would influence the supply-demand balance.
Fifth, we should look at low prices’ impacts on the energy industry and energy-producing
countries. A key point in this regard is that the serious deterioration of the business environment under
low prices could discourage the international energy industry from making energy investment required
for future supply and lead to a potentially tighter supply-demand balance and market destabilizationin the mid-term future. Oil-producing countries that depend heavily on oil and gas revenues now see
their economic deterioration due to a substantial revenue fall caused by a demand fall under theCOVID-19 pandemic and by price plunges. Economic deterioration could be coupled with the
pandemic expansion to destabilize their domestic situation. The international energy market is now
plagued with oversupply due to low prices that could lead to the market’s future destabilization.
Sixth, we cannot ignore the international energy market’s medium to long-term changes
under the influence of the pandemic. Various conceivable medium to long-term and structural changes
include those related to energy choices in a post-coronavirus world. Would an increase in telework
and web conferences bring about a fall in demand for energy (including oil) for transportation and anincrease in demand for electricity? How would energy choices be for plans to base post-coronaviruseconomic and social reconstruction on decarbonization initiatives and investment as seen typically inEurope? How would energy policies be influenced by increasing initiatives to raise energy selfsufficiency rates and give priority to national security in each country? As indicated by these questions,future energy mixes, and winner and loser energy sources are attracting interest. An issue looming in2

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the future could be what energy strategies should be for coping with the geopolitical environment in apost-coronavirus G zero world including rising U.S.-China tensions. It will become more and more
important to assess such global trends as an important determinant of global energy landscape.

Contact: report@tky.ieej.or.jp
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