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Oil markets face uncertain future after rebound from historic Covid-19 shock

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World oil markets have rebounded from the massive demand shock triggered by Covid-19 but still face a high degree of uncertainty that is testing the industry as never before, according to a new IEA report

The forecast for global oil demand has shifted lower, and demand could peak earlier than previously thought if a rising focus by governments on clean energy turns into stronger policies and behavioural changes induced by the pandemic become deeply rooted, according to Oil 2021, the IEA’s latest annual medium-term market report. But in the report’s base case, which reflects current policy settings, oil demand is set to rise to 104 million barrels a day (mb/d) by 2026, up 4% from 2019 levels.

“The Covid-19 crisis caused a historic decline in global oil demand – but not necessarily a lasting one. Achieving an orderly transition away from oil is essential to meet climate goals, but it will require major policy changes from governments as well as accelerated behavioural changes. Without that, global oil demand is set to increase every year between now and 2026,” said Dr Fatih Birol, the IEA’s Executive Director. “For the world’s oil demand to peak anytime soon, significant action is needed immediately to improve fuel efficiency standards, boost electric vehicle sales and curb oil use in the power sector.”

Those actions – combined with increased teleworking, greater recycling and reduced business travel – could reduce oil use by as much as 5.6 mb/d by 2026, which would mean that global oil demand never gets back to where it was before the pandemic.

Asia will continue to dominate growth in global oil demand, accounting for 90% of the increase between 2019 and 2026 in the IEA report’s base case. By contrast, demand in many advanced economies, where vehicle ownership and oil use per capita are much higher, is not expected to return to pre-crisis levels.

On the supply side, the heightened uncertainty over the outlook has created a dilemma for producers. Investment decisions made today could either bring on too much capacity that is left unused or too little oil to meet demand. Only a marginal rise in global upstream investment is expected this year after operators spent one-third less in 2020 than planned at the start of the year.

In the IEA report, the world’s oil production capacity is projected to increase by 5 mb/d by 2026. At the same time, the historic collapse in demand has resulted in a spare production capacity cushion of a record 9 mb/d that could keep global markets comfortable in the near term.

To meet the growth in oil demand to 2026 in the IEA report’s base case, supply needs to rise by 10 mb/d by 2026. The Middle East, led by Saudi Arabia, is expected to provide half that increase, largely from existing shut-in capacity. The region’s expanding market share would mark a dramatic shift from recent years when the United States dominated growth. Based on today’s policy settings, US supply growth is set to resume as investment and activity levels pick up, yet any increase is unlikely to match the lofty levels seen in recent years.

“No oil and gas company will be unaffected by clean energy transitions, so every part of the industry needs to consider how to respond as momentum builds behind the world’s drive for net-zero emissions,” said Dr Birol. “Minimising emissions from their core operations, notably methane, is an urgent priority. In addition, there are technologies vital to energy transitions that can be a match for oil and gas company capabilities, such as carbon capture, low-carbon hydrogen, biofuels and offshore wind. In many cases, these can help decarbonise sectors where emissions are hardest to tackle. It’s encouraging to see some oil and gas companies scaling up their commitments in these areas, but much more needs to be done.”

The global refining sector is struggling with excess capacity. Shutdowns of at least 6 mb/d will be required to allow utilisation rates to return to normal levels. Meanwhile, China, the Middle East and India continue to drive new capacity growth. As a result, Asian crude oil imports are forecast to surge to 27 mb/d by 2026, requiring record levels of Middle Eastern crude and Atlantic Basin production to fill the gap. 

The petrochemical industry will continue to lead demand growth, with ethane, LPG and naphtha together accounting for 70% of the forecast increase in oil product demand to 2026. Gasoline demand may have peaked, though, as efficiency gains and the shift to electric vehicles offset mobility growth in emerging and developing economies.

Demand for aviation fuels, the area that was hardest hit by the pandemic, is forecast to gradually return to pre-crisis levels. But a shift to online meetings and conferences – along with persistent corporate efforts to cut costs and hesitation by some citizens to resume leisure travel – could permanently alter travel trends.

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India’s Opportunity to Become a Global Manufacturing Hub

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Beyond the unprecedented health impact, the COVID‑19 pandemic has been catastrophic for the global economy and businesses and is disrupting manufacturing and Global Value Chains (GVCs), disturbing different stages of the production in different locations around the world. Furthermore, the pandemic has accelerated the already ongoing fundamental shifts in GVCs, driven by the aggregation of three megatrends: emerging technologies; the environmental sustainability imperative; and the reconfiguration of globalization.

In this fast-evolving context, as global companies adapt their manufacturing and supply chain strategies to build resilience, India has a unique opportunity to become a global manufacturing hub. It has three primary assets to capitalize on this unique opportunity: the potential for significant domestic demand, the Indian Government’s drive to encourage manufacturing, and with a distinct demographic edge, including considerable proportion of young workforce.

These factors will position India well for a larger role in GVCs. A thriving manufacturing sector will also generate additional benefits and help India deliver on the imperatives to create economic opportunities for nearly 100 million people likely to enter its workforce in the coming decade, to distribute wealth more equitably and to contain its burgeoning trade deficit.

The World Economic Forum’s new White Paper entitled Shifting Global Value Chains: The India Opportunity, produced in collaboration with Kearney, found India’s role in reshaping GVCs and its potential to contribute more than $500 billion in annual economic impact to the global economy by 2030. The White Paper presents five possible paths forward for India to realize its manufacturing potential.

The insights presented in the White Paper reflect the perspectives of leaders from multiple industries in the region. The five possible solutions include:

· Coordinated action between the government and the private sector to help create globally competitive manufacturing companies

· Shifting focus from cost advantage to building capabilities through workforce skilling, innovation, quality, and sustainability

· Accelerating integration in global value chains by reducing trade barriers and enabling competitive global market access for Indian manufacturers

· Focusing on reducing the cost of compliance and establishing manufacturing capacities faster

· Focusing infrastructure development on cost savings, speed, and flexibility

“For India to become a global manufacturing hub, business and government leaders need to work together to understand ongoing disruptions and opportunities, and develop new strategies and approaches aimed at generating greater economic and social value”, said Francisco Betti, Head of Shaping the Future of Advanced Manufacturing and Production, World Economic Forum.

“A thriving manufacturing sector could potentially be the most critical building block for India’s economic growth and prosperity in the coming decade. The ongoing post-COVID rebalancing of Global Value Chains offers India’s government and business leaders a unique opportunity to transform and accelerate the trajectory of manufacturing sector”, said Viswanathan Rajendran, Partner, Kearney.

This White Paper aims to serve as an initial framework for deliberation and action in the manufacturing ecosystem. The World Economic Forum, in collaboration with Kearney, will continue to develop this agenda by working closely with the manufacturing community in India to generate new insights, help inform discussions and strategy decisions, facilitate new partnerships, and provide a platform for exchanges with the global community.

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New Skills Development Key to Further Improving Students’ Learning Outcomes

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Learning outcomes in Russia would benefit significantly from a focus on teaching new skills that are tailored to the modern labor market, says a new World Bank report, New Skills for a New Century: Informing Regional Policy.

Russia’s education system has traditionally been well-performing and efficient, with Russian students appearing among the top performers globally. However, today’s labor market requires “21st century skills” – a combination of skills, knowledge, and expertise that students need to succeed in the modern world.

“Russia’s education system could achieve better teaching and learning outcomes if it focused more on developing 21st-century skills,” says Tigran Shmis, World Bank Senior Education Specialist. “There is a strong relationship between the quality of the school environment, innovative teaching practices, students’ perception of school, and students’ learning outcomes.”

According to the report, 38 percent of Russian schools today are not equipped with workshops and 46 percent do not have scientific laboratories. And, 77 percent of educational institutions do not have dedicated places for integrated lessons that stimulate the development of new skills and team interaction.

The way teaching is delivered, the physical characteristics of the learning environment, and the school’s psychological climate all affect students’ learning results. The study provides an insight into how these factors impact the development of students’ skills, including 21st century and digital skills. Along with data analytics, the study includes a qualitative perspective of modern teaching and learning in Russia, as well as the impacts of the COVID-19 pandemic on teaching and learning.

“Developing the ability of students to master 21st century skills is critical to ensuring their future employment and career success,” says Renaud Seligmann, World Bank Country Director for Russia. “Studies in Russia have shown that businesses having access to workers with these skills will also be critical for growth and productivity. In turn, high-quality human capital is a cornerstone of the resilience and sustainability of the national economy.”

The report provides recommendations for how schools in Russia can better help students excel. For example, teachers who practice innovative teaching are more likely to drive higher achievement. Modern teaching practices can be supported by expanding the use of technology and enhancing the learning environment in classrooms. Technology should be made available in schools on an equitable basis to improve student learning and enhance teachers’ professional development. Education policymakers should prioritize the prevention of bullying and the development of supporting measures to ensure a positive school climate.

Despite the physical return of students to schools, the COVID-19 pandemic is causing continued learning losses. Therefore, new equipment, ICT, and innovative teaching methods are needed to enable teachers to improve their practices and compensate such learning losses.

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Post-COVID-19, regaining citizen’s trust should be a priority for governments

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The COVID-19 crisis has demonstrated governments’ ability to respond to a major global crisis with extraordinary flexibility, innovation and determination. However, emerging evidence suggests that much more could have been done in advance to bolster resilience and many actions may have undermined trust and transparency between governments and their citizens, according to a new OECD report.

Government at a Glance 2021 says that one of the biggest lessons of the pandemic is that governments will need to respond to future crises at speed and scale while safeguarding trust and transparency. “Looking forward, we must focus simultaneously on promoting the economic recovery and avoiding democratic decline” said OECD Director of Public Governance Elsa Pilichowski. “Reinforcing democracy should be one of our highest priorities.”

 Countries have introduced thousands of emergency regulations, often on a fast track. Some alleviation of standards is inevitable in an emergency, but must be limited in scope and time to avoid damaging citizen perceptions of the competence, openness, transparency, and fairness of government.

 Governments should step up their efforts in three areas to boost trust and transparency and reinforce democracy:

 Tackling misinformation is key. Even with a boost in trust in government sparked by the pandemic in 2020, on average only 51% of people in OECD countries for which data is available trusted their government. There is a risk that some people and groups may be dissociating themselves from traditional democratic processes.

 It is crucial to enhance representation and participation in a fair and transparent manner. Governments must seek to promote inclusion and diversity, support the representation of young people, women and other under-represented groups in public life and policy consultation. Fine-tuning consultation and engagement practices could improve transparency and trust in public institutions, says the report. Governments must also level the playing field in lobbying. Less than half of countries have transparency requirements covering most of the actors that regularly engage in lobbying.

 Strengthening governance must be prioritised to tackle global challenges while harnessing the potential of new technologies. In 2018, only half of OECD countries had a specific government institution tasked with identifying novel, unforeseen or complex crises. To be fit for the future, and secure the foundations of democracy, governments must be ready to act at speed and scale while safeguarding trust and transparency.

 Governments must also learn to spend better, according to Government at a Glance 2021. OECD countries are providing large amounts of support to citizens and businesses during this crisis: measures ongoing or announced as of March 2021 represented, roughly, 16.4% of GDP in additional spending or foregone revenues, and up to 10.5% of GDP via other means. Governments will need to review public spending to increase efficiency, ensure that spending priorities match people’s needs, and improve the quality of public services.

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