The oil price sort of went negative yesterday. What are the implications for the oil industry?
As the oil price sort of goes negative, what does the future of oil look like?
If you want to be 100 per cent accurate, the price of oil never actually went negative. Rather it was the price measured on the futures market for West Texas Intermediate. There was a technical reason for the price falling into negative territory— traders with futures contracts due to expire within 24 hours went into something of a blind panic — they didn’t actually want to receive the oil and if they did, they had nowhere to put it.
But there is an underlying trend here. This has never happened before and the negative pricing came about as producers are running out of places to store all that oil that they have produced.
Implications for oil industry — short-term
Clearly the Covid-19 crisis represents a disaster for oil companies in the short and perhaps medium term. Then again, with the exception of companies that have learned how to embrace digital, or those that provide digital technology, the Covid-19 crisis has been pretty disastrous.
It has been awful for us humans too.
But what about when this is all over. What about then?
Tyranny of today
I think that all of us are struggling to think beyond this crisis. At the best of times we are all vulnerable to recency bias, when we perceive recent events as perhaps being more significant than they really are. Linked to recency bias is availability bias when we focus for example on more high profile risks. For example, when I was a child I used to stay awake at night thinking a lion may come into my bedroom. I didn’t give any thought to the many many risks that were real.
Or after 9:/11, people stopped flying and drove more, with the corresponding rise in fatal car crashes exceeding the number of people who died as a direct result of the terrorist attack.
Right now, things feel awful and the world looks like a different place. We clap the NHS, we talk about being less materialistic and focusing on the things that matter, we enquire after strangers — from a safe distance — checking they are okay, and talk about how clean the air is.
In two or three years time, whether we will be living in a new normal or things go back to normal remains to be seen.
And that takes me to oil. Yes, we are driving less. Will we be driving less in three years’ time? I am not so sure.
What is clear is that a massive reserve of oil is being created. If governments wanted to build strategic oil reserves, now is the time to do it.
Once the crisis is over, much of that oil that was drilled will still be around. I think it will be several years before oil returns to the levels seen before the crisis — let alone the price it was at in the first half of the last decade.
Right now we are being told that the Covid-19 crisis will see the acceleration of electric cars. Maybe it will.
With oil so cheap, the economics of internal combustion engines cars is transformed. We may see a rise in sales of these cars.
With oil, people react slowly. When oil is cheap we react slowly, but we do react, we change habits, become less worried about energy efficiency. And slowly demand for oil rises, and as the glut of oil inventory slowly disappears, the oil price edges up. Then when the inventory is gone altogether, the price shoots up. This is why we have an oil market cycle.
On the other hand
So that above narrative is quite contrary to what most are saying.
But there is an alternative view. The cost of renewables and energy storage is falling so fast that by the time this crisis is fully over, the economics of electric cars may be truly compelling.
If that is right, then oil may have had its day — gone forever.
PS. An article on Bloomberg has suggested that oil is now so cheap that climate activists could buy it and permanently remove it from the supply chain. If the oil price is negative they could buy all reserves and finish with more money in the bank. A great idea, not so sure it is serious.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees