It may seem as if the oil industry is bullet proof. They’re loaded right? It may seem that way, but like any commodity, it is subject to its history and the current market.
So, why are prices at the pump so low, dipping below $2 in some places? And how does a commodity sell for less than zero?
The part of history that led us to this point happens in the 1970’s. The Arab Israeli war put the US square in the middle with Arab countries nearly over running Israel – who is our ally. The US sends Israel a large amount of weapons, allowing them to defend themselves but making the Arab countries mad. They couldn’t very well invade us so they used the one advantage they had over us – oil. Many of us “of a certain age” can remember the oil embargo and the long lines, shortages at the gas station, rationing (you had to go to the gas station on a certain day depending on the last digit on your license plate). It went on for many months and made voters very mad.
At that moment, the US decided we needed to secure our own oil and energy supply. How did we do that? In a couple of ways over the next few decades. First, we made up and made friends with Saudi Arabia – one of the largest oil producers in the world. We also ramped up American production of oil, and we built oil storage.
Now we are fine, right? Sure, until China and India begin using more oil in the early 2000s. And of course more demand means producers can charge more. Crude skyrockets and gas prices overtop $5 a gallon. Now, the US is annoyed again and sometimes when things are bad innovation happens.
The US has always produced oil. California and Texas have been oil producing states for decades. There has been oil in places like Wyoming and Utah but in a form we couldn’t get to – shale oil. The innovation was a kind of fracking or mining of this type of oil where we could collect it and refine it. Over the next several years the US becomes a large oil producer and even begins to export oil again.
Leap forward several years to this year. You may have heard of the Saudi-Russia oil price war. Oil prices had already started to decrease at the beginning of this year and in order to shore up the prices Saudi Arabia asked Russia to reduce its oil production, but in short, they said ‘nope’.
At the same time, as we know there was a pandemic, COVID-19, surging around the world. By the time the US-Saudi-Russia agreement comes about countries around the world are issuing stay at home orders to prevent the spread of the virus. We in the US are all shut up inside – not driving to work, driving less to other places like the store, not going on road trips on the weekend – and lowered demand means lower price.
While we are all social distancing, oil in tankers is on the ocean making their way to our refineries (tankers can’t make u-turns). Oil production has not significantly slowed (apparently very difficult and expensive to stop an oil pumping site) so while the regular amount of oil is being produced, oil use is being radically reduced. In the US we have alternatives to oil to heat our homes and for manufacturing, but our transportation is largely run on oil.
On top of all the mitigating events that have led us here commodities markets are now bidding on “summer” oil – the slightly different gas that is produced for hot summer months. But as oil has been produced and shipped it has gone into available storage – and that storage is running out. But the oil keeps coming – and so here we are at the moment when an oil producer is so desperate to offload their product that they would pay someone to take it off their hands – thus paying to give it away. That, in a few nutshells, is how oil got below zero.