When a staple commodity collapses to negative value it signals that something is clearly amiss in the global economy. When it is a global energy source like crude oil, it does not just signal pain in the oil patch, but an economic dislocation evocative of the Great Depression. Rare is the time when a commodity over which nations have fought wars in the past presents itself as something that traders would literally pay you to take off their collective hands.
To be sure, there are good technical reasons why US West Texas Intermediate crude oil (WTI), the underlying commodity representing the New York Mercantile Exchange’s (NYMEX) oil futures contract, actually traded negative in the second half of April, and continued to stay low (even though the June contract has now turned positive).
Put simply, there is virtually no storage capacity left for a supply glut of the commodity, which likely puts a cap on the price, especially in a world of virtually non-existent demand. That doesn’t mean you’ll be getting paid any time soon to fill up your car the next time you choose to fill it up with gasoline, or even rewarded for storing some in your swimming pool; after all, Brent Crude, the North Sea oil that serves as a benchmark to the majority of worldwide oil markets, is still trading around US$20 a barrel.
Oil wells aren’t like sink faucets; if you stop the flow, it’s a lot of work to get the systems running again. And many oil-producing countries and private companies live basically paycheck to paycheck on sales to pay their bills. Economic pain in the United States will lead to more mergers and consolidations across the oil and gas industry, and, for the world’s leading oil export producers, difficult choices to privatize more of their nationalized industries to foreign buyers like China and Western petroleum companies.
For many countries that have relied on crude oil for export revenues, notably most of the members of the Organization of the Petroleum Exporting Countries (OPEC), the collapse in price spells big trouble.
In addition to the largest swing producer, Saudi Arabia, there is Iran, already suffering from the twin ravages of harsh US economic sanctions and a massive outbreak of Covid-19. Venezuela is in dire straits. These are countries with debts to pay off, and investments that require steady – and predictable – flows of capital to sustain.
Russia, to its credit, has developed a strategic hard-currency position that can see the country out of price crashes, and oil revenues are just cash on the barrel. Its economy is far less exposed to international finance, but still vulnerable, as it does not have a mixed export economy.
Leaders in these countries will likely have to make some devil’s bargains with China, Germany and Western oil majors and the International Monetary Fund just to stay afloat.
The United States has had so many oil-price crashes in its economic history that dealing with another one is a matter of bureaucratic and financial muscle memory: a matter of forcing mergers for future efficiency, renegotiating debt and subsidizing the idle workforce. While the oil and gas companies may not volunteer to merge on their own at a time when their core products have cratered in value, banks and governments will see the value in simplifying the playing field.
Major net importers like India, Turkey or China should benefit only somewhat, as they only can store so much oil, so the effects of any consumer stimulus are limited, given storage capacity constraints and the fact that the entire global economy is still shut down.
We’re now experiencing the legacy of Saudi Arabian Crown Prince Mohammad bin Salman’s ill-conceived attempt to flood the markets with oil in the hopes punishing Russia (which had previously refused to support Riyadh’s decision to cut production to elevate prices), and the US shale-oil industry, “whose burgeoning output had transformed the United States into the world’s biggest oil producer and one of its biggest oil exporters,” writes Eric Reguly of Canada’s Globe and Mail. How did we get to this point?
In theory, the speculators help ferret out errors in the calendarized price structure of the trading model, but as we have all experienced, it is typically the speculators that distort the true price and value of our commodities. And they are the ones that gave the world the bizarre negative pricing phenomenon in the WTI markets earlier this month.
Any trader buying a WTI oil futures contract commits to receiving a tanker full of oil in the next couple of weeks. The problem is that demand for oil products globally has collapsed – no flights, no factories, dramatically lower car usage.
The petroleum producers continue to see their necessity undermined by the day with the growth (and rapidly improving economics) of renewable energies, climate-change policies that encourage de-carbonization, and what looks like a rebirth of the nuclear industry.
Although Russia and China now dominate the export of nuclear power plants, national-security considerations are likely to push the United States more aggressively toward reviving its own nuclear industry. Uranium could over the next decade join the cadre of traded energy commodities with crude oil and natural gas as a geopolitical flash point.
In any case, there is no need to lament the loss of a phony US energy independence, which was built on the mirage of a credit bubble that artificially skewed the market toward otherwise uneconomic and environmentally degrading modes of production.
We are going to see a new set of political imperatives guiding the energy policy of the industrialized world. Much like needed medical supplies, or sensitive high-tech developments, new crude realities will force a similar discussion over national interest versus over-reliance on multinational supply chains, as well as forcing ugly geopolitical compromises, vast increases in research and development, and a growing distaste for being at the mercy of any one energy source.
This article was produced by Economy for All, a project of the Independent Media Institute, which provided it to Asia Times.