Slow Vaccine Rollouts Damage Energy Demand

The success of vaccine rollouts in the US and other energy hungry economies will have considerable implications for energy demand in 2021. The Trump Administration dropped the ball on the vaccine roll-out, and distribution now becomes the first crucial test of the Joe Biden presidency. Unfortunately, current vaccination trends suggest a bleak recovery.  

A recent Morning Consult poll reported that 60% of Americans are frustrated with the COVID-19 vaccine rollout process thus far. The US is still short of its goal to vaccinate 20 million people by the end of 2020; as of January 19, 14.7 million doses of the two-stage injection have been administered, but only 1.8 million Americans have received both parts – less than 1% percent of the population. 

In Maryland, the state this writer calls home, only 551,700 vaccine doses were distributed with just half of those administered – less than 8.5 percent. The number of shots per day is barely rising. 

In other US states the situation is not much better. The responsibility for the glacial pace of vaccine distribution is with the governors, state, and local authorities who failed to receive enough doses from the federal government or drug companies, and mobilize the private sector for mass and rapid inoculation.

Presently, none of the top ten energy consuming countries have surpassed a 5% vaccination rate. Worldwide, only Israel, Bahrain, the UAE, and the UK achieved this milestone. No country in the EU — the world’s third largest energy consuming economy — has administered vaccines to more than 2% of its population. 

All of this coincides with oil industry’s worst year in modern history. In 2020, WTI future prices went negative as oversupply generated by the Russian-Saudi price war swamped storage capacity, and border closures and lockdowns cut demand for transport. Full-year oil demand came in at nearly 9 million barrels per day (b/d) less than in 2019.

In the US, total energy consumption experienced a sharp -7.8% drop. Weak demand for oil was compounded by slumping electricity usage from the industrial sector, harming both gas and coal. The drop in commercial sector energy consumption was only partially compensated by an increase in residential consumption. Industrial and commercial electricity use fell by 6% and 7.9% respectively, while residential consumption rose by 1.3%.

Demand for oil is expected to remain depressed through the end of 2022, relative to pre-COVID levels. The EIA predicts petroleum and liquid fuel consumption will rebound by 5.6 million b/d in 2021, followed by 3.3 million b/d in 2022. These increases will be fueled by continued GDP growth, which the World Bank predicts to be 4% in 2021, and a gradual return to normal travel patterns following widespread vaccination. 

While this anticipated bounce-back is significant, the final estimated figure would fall 100,000 b/d short of 2019 figures. It is also noteworthy that the World Bank’s 4% growth estimate for 2021 includes a downward revision of -.2% globally, and -.6% in advanced economies compared to its October estimate. These revisions reflect continued uncertainty arising from new spikes in cases and emerging strains of the virus that have led authorities to renew lockdowns, curfews, and regional travel restrictions in many countries, including the EU member states and China.

In its December monthly oil report the IEA noted the recovery effort as “going backwards” in some developed economies, describing the oil demand outlook in OECD economies as “bleak.” The Paris-based organization pointed to weak demand for jet fuel as a principal factor in its pessimistic revisions, a decline stemming from continued travel restrictions and border closures expected to remain in place until Covid-19 vaccines are widely available.

The strongest positive trend can be found in China, where the IEA attributed increased oil demand in recent months “almost entirely to China’s fast recovery.” With a World Bank projected 7.9% GDP growth forecast for 2021 this would appear on the surface positive for energy producers. However, valid questions remain about the efficacy of the Chinese Sinovac vaccine, and the Chinese government recently placed millions under lockdown due to the country’s worst outbreak since the summer.

Given restrictions on mobility, vaccine distributions is are tightly linked to energy demand. Until herd immunity can be achieved through widespread vaccination or infection, reaching 70-90 percent, governments must continue to rely on stay-at-home measures, business closures, and travel restrictions to maximize social distancing. For international travel restrictions to be safely lifted, all or most countries will need to reach comparable rates of vaccination.

Until these measures are no longer necessary, daily commutes, tourism and air travel will contribute little to aggregate energy demand. In 2019, vehicles accounted for 28% of energy consumption in the US, of which over 65% could be attributed to public and private transportation. In Spring of 2020, road passenger vehicle use fell almost 40% in the US, with the total vehicle miles driven by Americans in Q2 of 2020 falling to the lowest level since 1995. 

Globally, the IEA estimates that 25% of world energy use goes to transportation, of which roughly 70% can be attributed to passenger cars, buses, motorcycles, and air travel. In regions with lockdowns in place, road transport dropped between 50% and 75% through Q1 of last year. As of January 4^th, the number of scheduled flights worldwide is down 43.5% compared to the same time last year.

As the virus and its novel strains show few sign of slowing down, widespread vaccination becomes ever more important in pushing the world towards recovery. If the incoming Biden Administration does not accelerate vaccine distribution, demand growth predictions for 2021 will likely continue to be revised downward in months to come.

With Assistance from Luke Harris