The price of oil dropped below zero for the first time ever yesterday, with futures for U.S. crude delivered in May wrapping up at negative $37.63 per barrel. In practical terms, this means that anybody who is supposed to receive a shipment of American crude but doesn’t want it will have to pay somebody else to take it.
The oil glut will be with the world for some time. And in places like Russia, it portends an economic depression in 2020 that will continue through 2021. The glut means that oil is essentially worthless if the law of supply and demand holds. You know that countries such as Russia and Venezuela will turn the valve to the right as soon as they can. Mexico’s economy is slightly more robust, but this will throw them into a depression – more serious than a recession. For the US, there are roughly one million highly paid workers in the oil business who won’t be working outside of refining and distribution. The trickle down of that income loss to the nation (the metric is 14x the base income plus the overhead expenses associated with the oil business) is staggering.
It happened in the US in the 1980’s when the bottom dropped out of the oil market. Drilling rigs were abandoned and offered as scrap to anyone who wanted the parts, free. Colorado, Texas, Oklahoma, Alberta, and the Gulf are about to take a serious thumping.
Yes, there is unemployment, but a million Americans won’t be buying new cars, or appliances, or spending. President Trump suspended foreign immigration while the US is experiencing this unemployment problem. But the current number of 23 million will get worse.
We are literally running out of places to put all of the extra oil we’re not using, because people have stopped driving, flying, or living any semblance of normal life while the country descends into a state of coronavirus-induced catatonia.
“The historic low price reflects uncertainty about what buyers would even do with a barrel of crude in the near term. Refineries, storage facilities, pipelines and even ocean tankers have filled up rapidly since billions of people around the world began sheltering in place to slow the spread of the deadly coronavirus.” – Wall Street Journal
This is happening despite the deal Donald Trump helped broker between Russia and Saudi Arabia to cut production and stabilize prices.
Buyers are still willing to pay positive sums of money for crude delivered later in the year. Contracts for June closed the day above $20 a barrel, which suggests that traders expect the current glut to ease up a bit, either due to further production cuts or because they think the economy will have recovered ever so slightly by then. They just really don’t want to be responsible for dealing with a bunch of hydrocarbons right now. So the commodity’s price is higher in the future than the present.
The storage problem also appears to be worse in the United States. Investors are worried that storage is reaching capacity in Cushing, Oklahoma, the domestic industry’s key transit hub. Brent crude, the international benchmark variety that mostly gets shipped out on tankers, is still trading at $25.70, presumably because it has a wider market and there are just more places to park it.
To make matters worse, a group of oil tankers that left Saudi Arabia before the country agreed to cut production is currently heading toward the U.S. That oil will further strain storage capacity unless another country buys them before they reach the U.S.
“It’s like some movie from the 1980s where the U.S. president and the Soviet premier come to an agreement” to halt a nuclear war, “[but] one plane missed the call back.
And these million out-of-work oil and oil-related workers…what will happen to them? They’ll find other work, not in the oil field if the problem extends long enough.
What will happen when it’s time to start drilling for oil again, when the experts have departed and found new lives?