The price of oil (WTI Crude) is down to just $11 USD per barrel and falling. It’s the lowest it’s been since 2004. For the first time ever, futures for West Texas Intermediate have dropped below zero, deep into negative territory, for the first time ever which means producers are literally paying buyers to take it from them. For those of us that do not follow the every up and down of oil futures trading, we may not have even noticed what is sure to be a history-making event. However, futures traders have been saying things like, “never in my life”, “a day our children will remember” and “this will be written into history books”. So how did we get here and what could this possibly
Supply and demand- not quite that simple
I’m no oil expert, but from what I have read, the problem starts with economics 101- supply and demand. As predicted in my recent article, The Green Lining of Social Distancing, I discussed the upside to staying put. One of the major environmental benefits I pointed to was the reduced use of fossil fuels. Indeed this has bourne out in a huge way. That is to say, demand for crude oil has plummeted.
Why then don’t producers simply cut production, you might ask. Unfortunately, it isn’t that easy. Turns out ‘shutting in’ production is not a simple nor an easy decision. Read more about the difficulties or cutting oil production here. Yes, you may have heard that OPEC, Russia and the Middle East producers, have agreed to cut production by 10%, but that’s close to the best they can do and it isn’t nearly enough. So while demand plummets, production has only been moderately reduced.
With so much oil being produced and nowhere for it to go, storage is the new problem. With nowhere to put it an more coming down the pipeline (literally), this is why producers are literally paying buyers to find a place to store it. Governments have seized on the opportunity and are topping up their strategic reserves with cheap crude, but they too are nearly all at capacity.
Not a bad thing
Before going on, I want to acknowledge the tremendous pain and uncertainty families dependent on the crude industry are facing. They, and everyone else, left reeling by the rapid economic crash we are living through will find it hard to see the “green lining”.
Remember that old adage so many of us learned in school- reduce, reuse and recycle? “Reduce” comes first because, of the three, it is the best option, form an environmental perspective, since products are never manufactured in the first place. That’s what we’re doing here and we’re buying future generations valuable time as a result. Crude oil left in the ground is carbon not pumped into the atmosphere.
Adjusting to the new normal will always come with serious growing pains, but I hope we can come out on the other side with a greener future. The economy will pick back up again, though perhaps never to the level it once was, and my hope is that we use this opportunity to retool our energy demands. Ramp up and invest in renewables now so that when the world economic motor gets humming again, it isn’t belching black smoke.