5 explanations of the negative price of oil – and what climate activists can do now
On Monday April 20, reports began to emerge that the price of oil is now negative. Here are five explanations of what this means, and what climate activists can do now.
1. Can I get paid for owning oil?
Oil prices have been collapsing for months. There are multiple global prices of oil for different areas of the world that roughly track each other. The May futures market for the USA – West Texas Intermediate – turned negative, over the course of April 20, falling from $21 to -$40.32.
A futures market is an market in which participants buy and sell commodity contracts, in this case for delivery on a specified future date, in this instance May 2020. It is a way of locking in the price for a product in advance, which can be used, for example, by an airline that knows it will need oil in May to fly a plane. Using a futures market will give that airline certainty on the price.
So, if you are in the USA and have somewhere to store oil then you could get paid for owning oil in May (although be careful, if you store it wrong, it will probably kill you). The price for West Texas Oil in June is still around $11.71 (as of April 21). Oil prices are falling everywhere in some cases to levels never before seen.
2. Is oil not something quite useful, why is it suddenly so cheep?
Oil Speculators have bought contracts for oil delivery on this date sometimes years in advance and need to sell them, or else they will take on the physical delivery of the oil. However, planes are not flying, cars are not driving, and speculators have no one to sell the contract on to. They could store it, and hope the price goes up, but even storage space is running out. Speculators and other owners of futures contracts have no place to put the oil and need to store it somewhere, so they end up paying storage firms to hold it and the price of oil turns negative. April 21 was when desperate traders dumped their contracts in a market where there was no demand for the produce and little storage.
The reason that the speculators could not offload their contracts is down to Covid-19 sparking a massive demand shock, as the world economy shuts down. Meanwhile, the oil cartel OPEC – in discussion with Russia – could not agree supply cuts for over two months, and even that was inadequate. Meanwhile, the USA – the world’s largest producer was unable to cut production.
As is so often the case, this tweet from Donald Trump aged badly:
The big Oil Deal with OPEC Plus is done. This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all!
— Donald J. Trump (@realDonaldTrump) April 12, 2020
The production cut did not work ,due to a massive mismatch between demand and supply.
3. So this is just a blip, and we resume normal service in a few months?
Lets go back a bit. As the global economy expanded during the early 2000s, major oil prices hit $147 a barrel in 2008. Investing in oil seemed a certain win, banks and firms poured money into exploring for oil and also extracting even more costly to produce sources, such as deep sea oil and tar sands.
This has led to overcapacity.
Additionally, OPEC and Saudi Arabia in 2014 deliberately crashed the oil price to drive new producers out of the market, particularly targeting the new US fracking firms. Many firms went under, but the USA banks keep extended credit, keeping a large number of shale firms going, but holding lots of debt.
At the same time, renewables enjoyed an unprecedentedly successful decade.
From being reliable stock market titans, Oil firms stocks have being falling out of the top of the stock market and there is the ever present threat of the carbon bubble bursting.
Ultimately this is not the end of oil. We are going to need oil in large quantities for the next decade, as more sustainable transport and industrial solutions have not yet been deployed at sufficient scale.
This is without mentioning the most powerful force standing behind the oil sector – the US government, which is already bailing out the oil sector.
What happens next?
No-one can be sure, as this is an unprecedented global situation. But there are a few possible implications.
In 2014, 110 countries where dependent on a commodities product for 60% of their export earnings. Mostly in the global south, many of these countries are also dealing with Covid-19 and dictatorial governments. A squeeze in patchy health budgets could spark mass suffering and unprecedented unrest.
Oil firms will cut back on investment in exploration (probably good as we do not need more oil) and there will be massive layoffs (bad).
There is also some anecdotal evidence that firms are preserving their renewable investments despite the Covid-19 related difficulties the sector.
5. What can you do?
Key to what happens next is going to be the public policy response and the pressure that voters, NGOs and political parties can exert. The oil sector is going to be going to governments around the world asking for various forms of support, either though direct investment, central banks buying their debt, or relaxation of environmental regulations.
It is vital that this is not unconditional money that allows them to keep drilling and operating as before.
Image credit: Larry D Moore, Creative Commons