Apr 13, 2020 - Energy & Environment

A world locked down and drowning in oil

Amy Harder, author of Generate

Illustration: Aïda Amer/Axios

The world is short on many things we need — masks, tests, toilet paper — yet we’re too long on one thing we suddenly don’t need much: oil.

The big picture: This oversupply crisis is, understandably, lost on people. We’re locked down with nowhere to go, not seizing cheap pump prices, struggling to manage our grave new world and mourning loved ones afflicted by the coronavirus.

Why it matters: Even though most of us aren't paying attention, the havoc the pandemic is wreaking on the global oil industry by choking demand will ripple out into the broader economy, and eventually affect many of us.

“The war against the virus is to stop people moving around, but that is also the purpose of oil. Oil is made for people to move around by cars, airlines, ships. So this war hits right on the nerve system of the global oil industry.”
— Per Magnus Nysveen, head of analysis at consultancy Rystad Energy

By the numbers:

  • The decline in global oil consumption this month alone — 25 million barrels a day — will be seven times bigger than the biggest quarterly decline after the 2008 economic crash, according to data by consultancy IHS Markit.
  • That's one quarter of the world's normal daily consumption at just under 100 million barrels.
  • IHS predicts that the decline for the second quarter of 2020 will average 22 million barrels a day.
Data: IHS Markit; Chart: Axios Visuals

What they’re saying: “There’s a glut of oil like no one has ever seen before,” President Trump said in a White House briefing Friday. “It is good in many ways, and depending on who you are, it’s bad.”

Reality check: Once the price of oil reaches around $20 a barrel, low oil prices hurt the global economy more than they help, Nysveen says.

  • The U.S. is a far larger oil producer today than it was in the last recession more than a decade ago, so low oil prices hurt America more.
  • Hundreds of U.S. oil-industry companies could file for bankruptcy over the next year or two if prices remain around $20 a barrel, Rystad Energy said in a recent analysis.
  • Eventually all of us will face higher gasoline prices in coming years as the industry cuts back on new production today, leading to less supply in the future.

Where it stands: Oil prices are hovering right around these benchmarks, with U.S. prices closer to $20 and the Europe-based Brent around $30.

  • OPEC, the mostly Middle Eastern group of oil-producing nations, along with Russia, agreed Sunday to cut production an unprecedented 9.7 million barrels a day.
  • Other nations, including the U.S., Norway and Canada, are also cutting production separate from that.
  • Prior to this historic cut, OPEC’s single largest cut was in December 2008: 2.2 million barrels a day, according to IHS data.
  • “A cut of this size and broad participation is unprecedented,” said Dan Yergin, vice chairman of IHS. “Even on this scale, it only goes part way to deal with the extraordinary fall in consumption.”

The bottom line: These cuts make today's oil-industry’s crisis slightly less bad, but still historically terrible.

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