Petroleum Price Will Never Be The Same After Covid-19

Petroleum Price

The coronavirus pandemic has shocked the oil industry, flooding companies with more supply than the world can burn and bankrupting small players. The damage has only just begun. “In a few years’ time, when we look back on 2020, we may well see that it was the worst year in the history of global oil markets,” said Fatih Birol, the head of the International Energy Agency (IEA), on a call with journalists. “April may well have been the worst month. It may go down as Black April in the history of the oil industry.”

However ugly the view backwards is at that point, what remains will look very different too. Many players will have restructured or disappeared. The companies that survive will likely face reduced political power and need to grapple more urgently with the reality of climate change. That will be a sea change. For as long as almost anyone roaming the planet today has been alive, oil has powered our lives and shaped our politics and way of life.

How did we get to this point?

How did we get to this point? In theory, the speculators help ferret out errors in the calendarised petroleum 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 US West Texas Intermediate crude oil (WTI) markets earlier this month.

Any trader buying a WTI oil future contracts 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.

Oversupply of cheap petroleum price

Put simply, there is virtually no storage capacity left for a supply glut of the commodity, which likely puts a cap on the petroleum 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.

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.

Is cheap petroleum price forever?

The plunging demand for oil wrought by the coronavirus pandemic combined with a savage petroleum price war has left the fossil fuel industry broken and in survival mode, according to analysts. It faces the gravest challenge in its 100-year history, they say, one that will permanently alter the industry. With some calling the scene a “hellscape”, the least lurid description is “unprecedented”.

A key question is whether this will permanently alter the course of the climate crisis. Many experts think it might well do so, pulling forward the date at which demand for oil and gas peaks, never to recover, and allowing the atmosphere to gradually heal.

The boldest say peak fossil fuel demand may have been dragged into the here and now, and that 2019 will go down in history as the peak year for carbon emissions. But some take an opposing view: the fossil fuel industry will bounce back as it always has, and bargain basement oil petroleum price will slow the much-needed transition to green energy.

Petroleum price collapse and politics

The collapse of the crude oil market today presents different kinds of challenges. Forget the idea of shale oil/gas reviving. Much like Monty Python’s “dead parrot,” there is no chance of reviving a sector whose economics were marginal at best, even when the oil petroleum price was much higher. Thanks to the coronavirus, these questionable economics (and correspondingly high depletion rates associated with the deposits) will kill the industry. Bargain basement shale gas petroleum price, a byproduct of credit bubble finance and shale oil production (which enabled operators in aggregate to generate positive cash flow, even though the natural gas outputs in isolation were otherwise non-economic), will disappear. From the point of view of carbon emissions, this is an unfortunate development, given that cheap natural gas has catalyzed the transition away from dirtier forms of energy, such as coal.

Even if there weren’t a coronavirus pandemic, it would still be a peculiar moment for the global energy market, where many conditions are rapidly changing. The debt-fueled shale oil bonanza has hitherto enabled the U.S. to flood world supply and weaken the revenues of perceived geopolitical rivals. That leverage is now gone. Furthermore, as John Dizard of the Financial Times has observed, “Asian LNG petroleum price have collapsed much faster than U.S. petroleum price. That means it no longer pays to chill American natural gas, load it on to LNG tankers, ship it across the Pacific, and re-gasify it. So U.S. LNG exports are ex-growth.” That shifts the balance of geopolitical power in the energy markets in the near and mid-term back to countries like Russia and Tajikistan, as they are likely to re-establish a pipeline primacy that it looked like they had lost.

By the same token, the relative position of the major oil-consuming economies has improved. And all 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 U.S. 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 overreliance 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.