Oil industry has the virusBy JACK RYAN ENTERPRISE JOURNAL,
This is no surprise. Even before the virus forced much of the developed world’s economy to shut down, Saudi Arabia and Russia got tied up in a competition to dominate the oil market by pumping extra crude and riding out the inevitable lower prices. It took until this month for the two countries to slow down.
But the impact of the virus reduced demand for oil more than anyone could have foreseen. The best example is in your own driveway: How often do you fill up your car with gasoline now compared to normal times? The second best example is at your favorite convenience store, where the price of a gallon is poised to fall below $1.50 in the next few days.
Lower fuel prices usually are good news for the public, because it means there is plenty of supply to meet demand. Not so much this time, because there is so much less demand.
Prices are crashing because oil companies are running out of places to store their product, since so much less of it is being used. The Wall Street Journal reported that an estimated 10 percent of the world’s tankers are being used to store oil instead of to ship it from one place to another. Put another way by a Texas regulator, oil usually is a valuable commodity. But now there’s so much oil that it has far less value.
The effect of this overproduction on prices is beyond stunning, especially for anybody who remembers the gasoline shortages of the 1970s and other times when fuel prices seemed to rise daily. It’s as if every driver bought a solar-powered vehicle in the last six weeks and abandoned oil as an energy source.
A barrel of oil for delivery in May sold for about $9 on Tuesday, a drop of 80 percent from just a few weeks ago and “less than a cheap bottle of wine,” as The Associated Press put it.
On Monday for a brief time, and surely for the first time in history, the price of a barrel was negative — meaning that traders who owned oil for May delivery were willing to pay somebody to take it off their hands.
Tuesday prices for delivery in June through August ranged from $11 to $21 — very low numbers that make clear the market believes the economy has a ways to go to get back to normal.
Again, this will be great for gasoline prices in the coming weeks, but there’s no way to sugarcoat this price collapse. It’s going to get tougher for those who work in the oil industry. Airplanes aren’t flying and individuals aren’t driving, and the AP reports that no oil producer, large or small, is making money in these conditions.
All this is likely to result in oil industry layoffs and filings for bankruptcy reorganizations. Today’s conditions are even more threatening to companies producing oil by fracking, since their cost per barrel is higher than traditional operations.
There’s only one way to stop this virus of extremely low prices, and that is to stop the drilling, or at least scale it way back. In effect, the American oil industry and the rest of the world’s producers are going to have to shelter in place for a while. Join the club.
Jack Ryan, Enterprise-Journal