April 22, 2020

Bottom Falls Out of Oil Market

The price of a barrel of oil actually fell below zero dollars. What happened?

“Oil falls below zero dollars a barrel,” blared headlines across the country on Tuesday, as the price of oil plunged to record lows, even reaching “negative” territory in some cases. It began earlier this year with a price battle between Saudi Arabia and Russia, both of whom ramped up production to undercut the other (and the U.S.). Then, with the world economy in the throes of the China Virus shutdown, demand for oil plummeted. According to the American Petroleum Institute’s calculations, current global oil production is 100 million barrels a day, but demand has slipped to just 70 million barrels, creating a massive oversupply that sent prices crashing.

However, the actual price of oil is not less than zero dollars; rather, the price has everything to do with available storage. The Wall Street Journal explains, “Oil traders are storing crude in the expectation that they can get a higher price later, but storage capacity is running out. Traders who are long in the market are having trouble finding storage for delivery, so they have to sell at a firesale price. Meanwhile, the oil price for contracts due in June was $21.40 on Monday, and for August it was $29.15.”

With the U.S. economy in a pandemic-induced hold, the nation’s storage capacity for oil is quickly filling up. America’s storage capacity is around 825 million barrels and, the Journal reports, “Actual storage has never previously exceeded 500 million barrels. Now there are fewer than 100 million barrels of storage left.”

Meanwhile, there’s the asinine celebratory sentiments of socialist Rep. Alexandria Ocasio-Cortez, who invoked her inner Marx: “You absolutely love to see it,” she crowed. “This along with record low interest rates means it’s the right time for a worker-led, mass investment in green infrastructure to save our planet.” She may have deleted her tone-deaf tweet, but, once again, AOC and her degree in economics is a testament to America’s failing system of higher education.

As economist Stephen Moore aptly put it, “Almost no one (other than radical environmentalists) favors decapitating an industry that has made America an energy powerhouse, created as many as 5 million new jobs, and almost single-handedly pulled our nation out of the 2008 to 2009 recession.” Few but AOC, anyway. She and her fellow ecofascists won’t shed any tears over the massive job losses in the oil industry that are already beginning.

There’s hope that the deal President Donald Trump negotiated with Saudi Arabia and Russia will help to shore up falling prices. Yet that agreement doesn’t go into effect until May 1. And even with that deal in place, as long as the U.S. economy is stuck in shutdown mode, it will likely be months before demand catches up with production. This reality has some calling for tariffs to be levied on foreign oil in an effort to shore up U.S. oil companies. That’s easier said than done, however, as the vast majority of U.S. refineries are equipped for refining foreign oil rather than the American shale oil. Retrofitting refineries will take time and cost companies tens of millions, effectively erasing any immediate gains. On top of that, raising tariffs on foreign oil would hurt American consumers.

There are no easy solutions, but the best options are to slash royalty payments and for oil nations to agree to significantly cut back on production until demand increases again.

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