Oil markets’ crash raises tough questions for the industry’s future

A price war between Russia and Saudi Arabia started oil's global decline, and then came the pandemic

A mural with figures from Texas Revolution is featured on the side of an oil storage tank at the Vopak Terminal Deer Park in Houston on Tuesday. (Mark Felix/AFP via Getty Images)
A mural with figures from Texas Revolution is featured on the side of an oil storage tank at the Vopak Terminal Deer Park in Houston on Tuesday. (Mark Felix/AFP via Getty Images)
Posted April 22, 2020 at 6:00am

​​​​​​There's nothing quite like a price war and an economy in a dive to show how low oil prices can go.

A push in March from a price war between Russia and Saudi Arabia, followed by the near shutdown of the economy in response to the COVID-19 pandemic, forced oil prices into the red Monday night. Oil sellers had to pay customers to take oil off their hands as they neared their capacity to store it.

West Texas Intermediate, the U.S. oil benchmark, closed Tuesday at $10 a barrel, a rebound from the previous day’s negative territory but still far below a sustainable level for producers.

Earlier Tuesday, President Donald Trump pledged to help the oil industry, though he has offered no public plan for how he will do so. In Congress, oil-state lawmakers have sought federal help for U.S. oil and gas companies, arguing they are key employers and integral to the economy, while Democrats have largely bristled against what they see as bailouts for a destructive industry.

The idea of federal aid for the oil industry is certain to trigger fierce partisan and ideological clashes about the role of the government in protecting favored industries, the future of oil as a lifeblood of the economy and Democrats’ goals to zero out carbon emissions in decades.

Here are answers to some questions that will swirl through these debates:

Why are oil prices so low?

Even though prices picked up from Monday’s negatives, they still remain historically low and well below the break-even point for producers.

The market troubles started in early March with a price war between Russia and Saudi Arabia.

The two oil-producing nations failed to agree to continue 2016 oil production limits as a way to help stabilize oil markets just as the novel coronavirus ground global economies to a halt.

Instead, the countries flooded the markets with excess oil at a time when global demand was weakening.

After weeks of falling prices, Russia, OPEC and its partners agreed to limit their production starting in May. But by that time, the markets were drowning in oil and running out of capacity to store it. Those realities helped push the prices of contracts for May delivery, which were expiring on Tuesday, into negative territory.

“We've never seen a collapse in U.S. and global oil demand that's as big or as fast as what we're seeing now,” said Mark Finley, a fellow focusing on energy and global oil at Rice University's Baker Institute for Public Policy. “As bad as it is now, it could get worse from a global perspective until we get global supply and demand back into balance.”

Many market analysts acknowledge that even with government help, the oil industry may not start to recover until the coronavirus pandemic is eradicated and global economies reopen.

What’s West Texas Intermediate?

West Texas Intermediate or WTI is the term used for U.S. oil, mostly produced in the Permian Basin, that is “light and sweet” because of its 0.24 percent sulfur content and its low density. It’s also used as the benchmark for U.S. oil trading. WTI is often compared to Brent, the global benchmark, which has tended to trade at higher prices since the shale revolution increased U.S. oil production. Prices of the two major crude oil grades have both tumbled in recent weeks because of the Saudi-Russia price war and the coronavirus pandemic’s impact on demand.

WTI closed at around $10 a barrel on Tuesday, while Brent was at $19 a barrel.

If the U.S. is a global energy leader, why does it still import oil?

The discovery of shale oil and gas deposits, as well as fracking technology to harvest those deposits, led to a boom in U.S. oil production over the last decade. Still, the U.S. continues to import oil from other countries, including Saudi Arabia, Canada and Mexico.

The U.S., however, produces a different kind of crude than the countries it imports from.

Finley of Rice University said U.S. refineries are better equipped to handle heavier oil than the American-produced light crude. Because of this, the U.S. exports its surplus light oil, and imports the heavier crude from other countries.

Imposing tariffs or embargoes on crude oil imports would hurt U.S. trade partners like Canada and Mexico, from which the U.S. imports more crude than from Saudi Arabia, Finley said.

“And the reality is that, forcing U.S. refineries that are optimized to produce and to process heavy crude oil — forcing them to process domestic light crude oil — would be suboptimal, and it would hurt the economic competitiveness of those refineries,” he told CQ Roll Call.

Will Congress help the oil industry in the next relief package?

Several oil state lawmakers are pushing Congress to approve $3 billion for the Energy Department to buy oil at the low prices and fill the Strategic Petroleum Reserve. Democrats kicked that provision out of the second economic relief package (PL 116-136). Still the lawmakers have introduced a draft bill that they’re demanding be included in a subsequent relief package.

The Senate on Tuesday passed a $483.4 billion relief bill (HR 266) that did not include funding for oil.

Jeffrey Miron, an economics professor at Harvard University, said the government should not try to interfere with the market.

“Congress should do nothing about the low oil prices,” said Miron, who directs economic studies at the libertarian Cato Institute. “The world has spent most of the last 50 years worrying about high oil prices; why are we looking a gift horse in the mouth?”

Demands for money to aid the oil industry are certain to be further rebuked by Democrats, who are eager for a transition to zero-emission energy sources, and some farm state Republicans who are seeking support instead for biofuels.

“Oil companies already receive billions in tax breaks,” House Energy and Commerce Chairman Frank Pallone Jr., D-N.J., said in a Tuesday evening tweet. “Know who really needs our help? The industry’s workers. I wholeheartedly support assistance that benefits them directly. But this pandemic simply cannot be used as an excuse to bail out oil conglomerates.”

The White House has in the meantime moved to allow oil producers to lease space at the Strategic Petroleum Reserve to store their excess oil while demand remains weak. As the oil markets remain volatile, more oil producers are taking their rigs offline. By Friday, the U.S. total rig count was down to 529 from 1,012 the same time last year, according to oil field services company Baker Hughes, an indication of the pressure on oil producers.

WIll climate initivaties be placed on the back burner because of COVID-19?

The coronavirus pandemic has temporarily tabled the debate over how to address climate change despite environmentalists warning that COVID-19 provides a grim glimpse into the consequences of waiting to mitigate and prepare for that crisis.

From a climate perspective, environmental advocates are focusing on the long-term effects of COVID-19 on the climate, which they say will be driven by the government’s inaction on environmental measures such as the 2015 Paris climate agreement.

“We’ve confronted major crises before, and typically we see a small blip in emissions followed by the continuation of the pre-crisis trend. So, at least for addressing climate change, far more important than the crisis itself is how we respond. In the United States, we’ve lacked political will,” said Dr. Noah Kaufman, a researcher at Columbia’s SIPA Center on Global Energy Policy.

“My fear is that we are entering a prolonged economic downturn in which all other priorities fall by the wayside.”
What about gas prices?

Alan Krupnick, senior fellow at Resources for the Future, a nonpartisan research organization, said demand for gasoline is down 20 percent compared to averages of the last five years

“That’s a big drop,” Krupnick said. “And it’s particularly a big drop because the lower oil prices cause a rebound effect.”

Driving typically peaks in the summer. Krupnick said if the economic lockdown persists, demand for gas could fall 23 percent in the summer, extending savings for drivers.

“This is a huge benefit for consumers to have these low gasoline prices,” he said in an interview. “That's a tremendous benefit to anyone who's driving, though they’re not driving as much as they did.”

The average price of regular gasoline sunk to $1.81 per gallon Tuesday, down from $2.84 a gallon on average a year ago, according to AAA figures.

How has the crisis affected vehicle fuels?

In a note to clients, Rhodium Group, an economic research firm, said the “most dramatic effect” of COVID-19 on energy markets appeared in the transportation sector “as air travel has ground to a halt and personal vehicle usage has declined dramatically.”

Compared to averages a year ago, gasoline demand is now down 46 percent and demand for jet fuel is down 73 percent, while demand for diesel fuel — used in large vehicles like trucks — is down just 27 percent, according to the note.

“Trucking hasn’t been as impacted as personal travel, so — in contrast to the Great Recession where diesel demand experienced the sharpest declines — so far diesel demand is dropping less rapidly than gasoline and jet fuel,” it reads.

Are emissions down? By how much?

Electricity from wind and solar surpassed electricity from coal in the U.S. this month, while emissions from power generation have been lower than usual for this time of year as many large commercial facilities remain closed and many employees have been idled or are working from home. Still, that is due in part to warmer weather, according to Rhodium.

Emissions across the economy were likely 15 percent to 20 percent higher from mid-March to mid-April of 2019, versus the same window this year, the note reads.

The Energy Information Administration predicted in a monthly forecast that energy-related carbon dioxide emissions would drop 7.5 percent this year due to a weakening economy and travel and business restrictions due to the pandemic. Preliminary figures from EIA show emissions dipped 2.7 percent in 2019. The agency estimates energy-related carbon emissions will increase 3.6 percent in 2021.

As the world warms, greenhouse gas emissions avoided due to the pandemic are negligible. The National Oceanic and Atmospheric Administration said Earth experienced its second-hottest March on record, only behind March of 2016, which remains the hottest year to date.

"From a climate perspective, this is a drop in the bucket,” Krupnick said.