Like all other industries in the world, the automobile and gas industries have been gravely affected by the COVID-19 pandemic that is currently ravaging the world. The industry experienced its third price collapse in 12 years in mid-May this year after most world economies placed a shutdown of their economies thereby greatly reducing vehicular movement.
In the past, the price shocks that have affected the industry have easily corrected themselves and rebounded within a short time. However, this time around, the situation appears to be different. The reason for the difference is because the current situation has provided a combination of a shock in the supply side due to an unprecedented drop in the demand for oil due to a global humanitarian crisis. It is also important to note that the current situation is further worsened by a weak financial and structural situation of the industry. Currently, the global prices are below a 30-year low and this has resulted in more pressure on society with experts in the industry not sure of what the future holds for the entire sector. Indeed, the situation has accelerated a scenario of an industry that was already in decline due to more fuel-efficient engines being manufactured.
The duration, depth, and effects of the crisis are still uncertain. However, indicators are suggesting that if there is no fundamental change in the next few months, it will be impossible to return the industry to an attractive option as it has been before. The industry is already battling a lot of competition, technological advancement making more efficient engines, lowered demand. Also, the industry has been facing a lot of backlash from governments, environments that have been questioning its impact on the climate and general environment. Its role in the provision of energy that is affordable has made it retain its aura despite the many challenges it has been facing. However, the big question remains as to how value will be created in this sector in the days to come.
To change the narrative, industry players must go deep and evaluate long-held beliefs and cultures with a bid to seek long term solutions. They must change structural moves, make innovations, and produce environmentally friendly solutions that are easy to implement. The reality is that those who use this current crisis to perform a reposition of their operating models are bound to reap greatly in the future.
A TROUBLED INDUSTRY ENTERS THE CRISIS
The oil industry had a major restructuring in the early 1980s which was a time when it created a great increase in shareholder value to those who owned companies in the sector at the time. Since that time, companies in this sector have returned better returns to shareholders than companies in the S&P 500 index which is a great indictment on the performance of the general industry. During this time, the demand for oil and gas has grown tremendously owing to globalization, cheaper vehicles, growth in local populations, and other factors. More people means more vehicles, plans, and hence more demand for oil and gas.
The situation started changing in the late 2000s when the production of more fuel-efficient vehicles and planes began. Due to the increased cost of oil and gas, customers began asking manufacturers to explore ways in which they could come up with products that consumed less fuel to help them save costs and increase the return on capital to their investors. Companies such as Boeing started manufacturing engines that consumed up to 30% less fuel compared to older planes and others available in the market. Vehicle manufacturers were not left behind as they now try to outdo each other on the production of engines that are fuel-efficient to their owners.
The COVID-19 pandemic is likely to create a paradigm shift in most sectors. The oil and gas sector is likely to suffer from reduced demand as fewer people travel across the world. At the moment, international traveling has ground to a halt. Even if the situation ends, companies are already making changes in the way they do business and there are likely to be more virtual meetings which will reduce the travel times that existed before. For this reason, companies and industry players in this industry need to have a paradigm shift in the manner in which they will be doing business.