For the first time in history, negative oil prices have been recorded, and so, in effect, producers must pay consumers to take the oil away. Strictly, this is the benchmark price that would have to be paid in May, of —$37.63 a barrel: a loss that traders were prepared to shoulder, in order to get around the conundrum of where to store the rising oversupply of oil. The lack of storage capacity is particularly acute in the US, which is why the price crash has been so remarkable for WTI.
Oil prices had been falling since the start of 2020, being above $60 a barrel in January, but which then plunged to around $20 for WTI, and $26 for Brent Crude. Typically, WTI trades at maybe 10% lower than Brent, for a variety of reasons, and when the two prices diverge far from this, or narrow, or even change order, it is a sign that something has dramatically perturbed the equilibrium of the oil market. The current market has been thrown off balance in an unprecedented way by a sudden collapse in demand for transportation fuels (and hence the oil they are refined from), as the world locks-down to slow the spread of the severe acute respiratory syndrome coronavirus 2 (SARS‑CoV‑2), along with continued robust production from shale, and elsewhere, leading to an excess of oil, which is beginning to overwhelm storage reservoirs.
However, very low oil prices impose considerable pressures, particularly on the shale industry, and it is a matter of debate whether, or for how long, the latter will be able to weather the current storm, but should the industry derail, the size of the oil glut will begin to ebb.
It has been speculated that the US Strategic Petroleum Reserve capacity may be expanded to one billion barrels, but it is likely that some oil companies will try to cut their losses by a shutdown of rigs and wells in order to ameliorate deepening debts or even avoid bankruptcy. The recent agreement to curb 10—20 million barrels worth of daily production, has been met with dismissive calls of “too little, too late”, taking the view that a market crash is still possible. Meanwhile, some 160 million barrels worth of oil are in “floating storage”, i.e. in supergiant oil tankers off major oil shipping ports, the largest quantity thus held since the economic crash of 2009, which, contrastingly, has been linked to a relative undersupply of oil against demand, although the matter is complex.
In that thinking of a decade ago, extreme price volatility was an expected sign that we had reached “peak oil”; this was before the shale bonanza came to our rescue, or in reality, masked the overall picture. In a nutshell, 81% of the world’s conventional oil fields are in decline, meaning that we will need to find at least 4 Saudi Arabia’s worth of new production by 2040, just to hold level. This will need to come mainly from unconventional sources, such as from fracking shale, and since that industry has been losing money for over a decade, it is hard to see how it could keep going for 2 decades more, even at above $60, let alone now that it is scraping along at well below the shut-in price.
The price of WTI rose by a formal +476% on Tuesday (to +$10), as traders began to focus on selling oil in June, while Brent fell by -32% to $19. However, these are such strange, and uncertain times, that it is difficult to make accurate predictions, on any level. Nonetheless, the security of the current global economic system and its underlying fossil fuels base, is further called into doubt.
Brett Fleishman, who is from climate campaign group at 350.org, is quoted as saying that the oil price crash is:
“another powerful example of how fossil fuels are too volatile to be the basis of a resilient economy”.
“We are experiencing an unparalleled upending in our economies. And it is time for the fossil fuel industry to recognize that, from now on, the cheapest and best place to store oil is in the ground.”
“While this recession shows us that we desperately need sustainable, resilient, and stable economic systems, based on renewable, accessible and just energy sources, the fossil fuel industry is not only trying to profit off of the current chaos, but continues to drive us further into climate breakdown.”
This line of thinking begs the question of “what next?” and climate change activists are urging against bailouts of the fossil fuel industry, in an effort to prop-up the status quo, which can do no more than place a sticking plaster on a corpus that is very ill indeed. Even prior to COVID-19, the fracking industry was already in dire straits, having lost around $280 billion in a decade, and, along with other fossil fuel industries, with efforts to address climate change biting at its heels. The present situation has compounded many of these troubles, and also exposed the fragility of the global system, and our accustomed complacency that what we need – be it food or face masks – will continue to flow in cheaply from “somewhere else”. When it does not, we are shocked and only then begin to understand the true value of what can be made available from more local sources.
However, even if we managed to tool-up to provide sufficient manufacturing capacity within these shores, some basic raw materials would still need to be imported: in the case of face masks, polypropylene from China. Thus, the question of supply is broad and complex, and redesign and substitution must be at least as important as moving the factories closer to home, for example using cloth face coverings, rather than plastic masks. In the longer run, to use items which are home grown from the beginning of the supply chain will curb the use of fossil resources and help to build local and regional resilience.
More generally, the concept of choice editing may prove a useful starting point in inaugurating a process of deglobalisation/relocalisation – i.e. do we really need 100 different kinds of breakfast cereal available? – and begin to produce less psychological angst in the realisation and acceptance that, in fact, we don’t.
Teaser photo credit: By Javier Blas – Javier Blas, CC BY-SA 3.0