Oil Below $20 Is Worse Than A VirusOpinion
OPINION — With oil futures going negative yesterday, the markets have shown us all a severe reaction to the energy industry no longer having the massive demand for their petroleum products as they did just forty-five days ago.
On the surface one might believe that such a low price on crude oil benefits everyone with this commodity being the foundational building block of nearly every economy globally. Petroleum fuels make the system move. Natural Gas powers the electrical grid. But little is moving, and the markets for petroleum fuels base oil collapsed yesterday, the first time to this degree that it has ever happened.
How can this happen? How can a producer be forced to pay up to $38 per barrel of West Texas Intermediate Crude to take it off their hands when they paid at minimum $20 to bring it to the surface? The answer lies in storage, how much of daily demand can be stored.
Since inception, the energy business has been heavily regulated by governments such that the governments have required them to be price sensitive; that is they are only allowed to react to the public’s demand for the product based upon the price charged. The Energy Companies are not allowed, by regulation, to turn valves and reduce the flow, or slow pumps to reduce the flow of the oil being brought to the surface thereby reducing Supply.
The drillers mission, once committed, is to get the oil to the surface and then to the refinery as quickly as possible and they are not allowed to use methods that would slow that production down. In this method with the demand being well known, basically how many gallons per day of gasoline of all grades, and diesel fuel of all grades, is burned in engines globally, there is a very tight formula as to how much in tankage is available in reserve.
You will hear different numbers but I will use the number of five days reserves in tankage. Such that if global production were to instantly cease, then within five days ALL fuels of all types would be exhausted from tankage globally. Tankage would be from tank farms of all sizes, maritime tankers and in-earth tankage such as the US Strategic Petroleum Reserves. In-ground tankage is normally collapsed salt-domes that are surveyed as stable and crude oil is basically pumped down into those and later retrieved.
The challenge becomes that the producers basically run their production at maximum capacity, and if the price rises, they go and grab some investors and drill a new hole in a surveyed "find" and start adding more supply. This is much like what many companies such as Apple have gone to many years ago. It is called Inventory Minimization. Apple was a forerunner of the products being produced in China, shipped to the dock in Los Angeles and next trucked to the Apple Store where they went straight into consumer’s hands in a very short time, maybe three days maximum shelf-time at the Apple Store.
Owning and maintaining inventory is a very expensive proposition and every business would have zero inventory if they could keep their customers by meeting demand adequately with daily deliveries. It is interesting that the oil companies have been managing this formula by regulation since the early 1900’s.
So today, under the rules that have worked for 120 continuous years, the oil markets have collapsed because governments have taken away their consumers and demand for their products. But governments did not change their well-established rules of pumping every well to the maximum. So the oil coming from the ground has nowhere to go. Every bucket globally is topped-off and beginning to overflow.
You may think, well it’s easy, just reduce gasoline to five cents US per gallon and get rid of the excess. When people are not allowed to work, when cruise ships are not allowed to ply their trade, when airliners are grounded, Five Cents US per gallon will not nearly get rid of the oversupply. And the massive losses the US and global producers will incur will shut them down and bankrupt many of them. Such that when we all start driving, flying, cruising again, many of the producers in business to efficiently meet to the demand for global gallons burned will not be available to meet the demand. Out of work Roughnecks, Tool Pushers and Drilling Superintendents will have either retired or moved on to other careers, no longer willing to deal with the volatility in their quite dangerous livelihood. Restarting the Energy Production sector will be slow and tedious.
This brings the discussion to the Virus, which I choose not to drill into… in this piece for it is not the focus of this discussion. Yet one can’t help but notice that this truly brutal crushing of a very finely-tuned global energy business is currently being applauded by US and Global Leftists as meeting one of the goals of their failed Kyoto Protocol and Treaty as well the Green New Deal, and that is to get rid of the Energy Companies and move to ‘Renewable’ energy. That has been proven mathematically, and physically (physics) impossible for probably fifty or more years. Yet the oil futures have collapsed as never before seen.
This sudden, and one might say catastrophic, loss of demand is not manageable by the energy industry. Tankage is very expensive, economically fraught with dangerous possibilities and determined over one hundred years ago that the oil is better off in the ground, or being in the fuel tank of an end user, not in massive storage tanks due to product liabilities. This leads to the the push for more pipelines, direct from the well head to the pipeline to the refinery with minimum buffering tankage such that the product comes from the ground, into the pipeline and maybe spends one day in a buffering tank at the refiner's end and then gets refined, on a on-the-road tanker back out to the gas station and into your car. Maybe five days total turn around from in the ground to pushing you down the road.
There is no easy way out of this. Socialists will push to Nationalize the oil companies, as was unsuccessful elsewhere. PEMEX in Mexico is a text-book case of fabulous mismanagement such that the Mexican government after many years of nationalization has now begun to sell PEMEX to private enterprise groups to reduce massive waste.
The Mexico experience argues that nationalization of very-well run American and Global Energy companies is not the solution.
The only real solution is to consider if stopping this economy based upon capitalism for a contagion is the best course of action. As this crush of the energy companies continues, the normal mergers and acquisitions will occur to the point that the price on the barrel of WTI crude rises to a profitable level. But we can expect there to be far fewer producers on the backside of this shutdown of capitalism. Also, we can anticipate shortages, thus driving and possibly spiking the price of the end product. Consider that ten cents a gallon when you’re not driving much is not nearly as impactful as six dollars a gallon when you need to drive a lot. And this is precisely the scenario we could very easily face.
In summary, the economy needs to be reopened fully as soon as possible. Energy is the foundational building block of the US and World economies and the energy companies have provided us the end product as efficiently as possible. If we break this system, all our life-styles will suffer greatly in coming years. Not doing so will increase the push for socialism in America. And socialism is much more dangerous than all the viruses roaming the globe combined.
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