Global economic shutdowns and rock-bottom oil prices have created a perfect storm around the world that has left even the usual beneficiaries of plummeting energy markets — major importers, developing nations, energy-using industries, the travel industry and consumers — struggling to reap any rewards.
Although big oil importing countries such as China and India in theory should benefit from historically low prices sparked by the COVID-19 pandemic, specialists say the reality is that their stockpiles already are largely full, leaving them with limited ability to buy cheap energy and keep it in reserve. The same holds true for the travel industry, which usually can cut costs and increase profits when fuel is inexpensive but this time finds itself with empty planes, canceled cruises and few customers.
Even everyday consumers, who typically can take advantage of sagging oil markets by saving money at the pump, are mostly staying at home, either by choice or by government edict.
Energy producers — a group that includes the U.S., allies such as Canada and Iraq, and adversaries such as Russia, Venezuela and Iran — are taking major hits to sales and government revenue as a recent deal to cut production has yet to move the markets.
For a second straight day, falling global oil prices dragged down stocks on Wall Street and around the world. Traders fearful that the energy shock has yet to crest set the Dow Jones Index down 2.67% to 23,018.88 and the broader S&P 500 index down 3% to 2,736.56.
Energy analysts say an even larger disruption could lie ahead. If key oil prices — including the U.S. benchmark WTI Crude futures, which dipped into negative territory for the first time ever Monday — stay around their current levels, America’s storage depots will soon be overwhelmed, potentially leading to shutdowns of wells and mass layoffs of workers while sending the energy market into dark, uncharted waters.
“With prices at this level, everyone loses,” said Ben Cahill, a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies. “There are no winners with $20 oil. You could say consumers win because gasoline prices, diesel prices, jet fuel, would be cheaper. But that’s almost irrelevant now because no one is driving or flying.”
Even after Russia and the Saudi-led OPEC struck a historic deal this month to slash output, brokered in large part by President Trump, analysts say the gap between global oil production and consumer demand will stay around 10 million barrels per day for the foreseeable future. Market-driven reductions by the U.S. shale sector also have done little to change that broader equation.
The massive disconnect, specialists say, is leading to a dangerous scenario in which storage facilities in the U.S. and around the world are pushed to the breaking point. That doomsday scenario led to a remarkable moment Monday when the price of WTI Crude dropped below zero — oil sellers in effect were paying storage firms to warehouse their unmarketable stock.
Prices rebounded slightly Tuesday, with WTI settling around $13.50. Brent Crude prices, the most common international oil benchmark, closed just under $20 per barrel.
Faced with the reality that the U.S. oil and gas sector — arguably the nation’s biggest economic success story over the past decade — is in deep danger, Mr. Trump said Tuesday that his administration will take dramatic action.
“We will never let the great U.S. Oil & Gas Industry down,” Mr. Trump said in a post on Twitter. He said he had asked Energy Secretary Dan Brouillette and Treasury Secretary Steven T. Mnuchin to “formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!”
The president offered little detail on the plan, though it presumably would include using government money to buy more fuel to place in the nation’s Strategic Petroleum Reserve, which does have some spare capacity.
Many U.S. states and many countries around the globe are finding their 2020 budgets shredded as expected oil tax revenue disappears. The Russian ruble lost 3% of its value Monday, and French Finance Minister Bruno Le Maire told lawmakers Tuesday that the oil price collapse is “a danger for the global economy,” particularly lower-income African states that rely on oil export revenue.
In Algeria, a major economic and spending reform program pushed by the new government was premised on oil prices being more than twice what they are today.
“We will soon start to feel a big crisis unless oil prices go back up,” Halim Cherifi, a banker in Algiers, told the Al-Jazeera news website.
Problems for importers
Other nations also have scrambled to stockpile oil while the price remains low. In a world without a COVID-19 pandemic, countries that typically import much of their fuel could see a huge economic windfall. Their consumers would enjoy lower gas prices, and companies would benefit from dramatically lower production costs.
Some specialists have said the market conditions in China could be good news for reopening factories, which are able to buy energy at rock-bottom prices.
But even in those circumstances, the benefits will be limited at best.
Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, told the state-controlled Global Times newspaper this week that China’s “window” to take advantage of low-priced fuel is incredibly narrow and that the country is quickly exhausting its storage capacity.
“The collapse this time is related to sluggish demand caused by the COVID-19 pandemic. Once that is brought under control, the oil price will recover, but it will be hard to return to the previous level of $40 per barrel,” he said.
Mr. Trump and many of his allies in Congress have placed much of the blame for the global energy glut on Russia and OPEC, which refused to cut production and launched an oil price war during the early days of the coronavirus outbreak.
But specialists say the truth is more complex. The unique circumstances of COVID-19 and the economic shutdowns it has inspired around the world, they say, were impossible to predict or prepare for.
“Much to the chagrin of angry U.S. senators, no one country or producer is causing the current market turmoil, and no producer could have accurately predicted the combined effects of the COVID-19 lockdowns and oil price wars,” Karen Young, a resident scholar at the American Enterprise Institute who studies the oil industry and OPEC countries, wrote Tuesday in a piece for Al-Monitor.
Still, some key U.S. lawmakers argue that Russia and OPEC continue to oversupply the market with oil despite their agreement to cut production. In a letter to Commerce Secretary Wilbur Ross on Monday, Sen. James M. Inhofe, Oklahoma Republican, urged the president to put tariffs on fuel imports in an effort to save U.S. producers.
“I believe the administration should utilize all of its tariff authorities, including those used to solve other trade imbalances like the Chinese steel and aluminum imports,” Mr. Inhofe wrote. “Tariffs on imports of Russian and Saudi oil would place significant pressure on those governments to act to better stem the global flow of crude which would create stability for the oil market.”
U.S. energy sector leaders have cautioned against such tariffs, arguing that their implementation could raise the costs of raw materials used in oil and gas fields, thereby increasing the cost of domestic production.
U.S. producers could hardly afford such increases right now. Specialists say the industry is already is looking at a future in which it must undertake the costly and sometimes dangerous process of shutting down production and, in the process, laying off workers.
“If we have this huge decline … what is going to happen to the oil field services sector?” said Mr. Cahill. “It’s not that easy to turn back on. People leave the shale patch, and they go home.”
