A recent Wall Street Journal piece reported something I thought I would never see: oil briefly hit $11.57 a barrel, close to the record low price of $10.42 set back in 1983. The cause of this decline in the world price for oil is easy to discover. First, OPEC — thanks to the American fracking revolution — has all but collapsed, with Saudi Arabia and Russia desperately opening up the spigots to bring in revenues to keep their corrupt oligarchies afloat. Second, the Black Swan — really, the Black Buzzard — event called COVID-19 became a true pandemic that has all but shut down the world economy. With few travelling by car, plane, train, or cruise ship, and with factories closing down, demand for energy has plummeted.
In fact, for a short period of time, the futures contract price of oil actually dropped below $0, meaning (in theory) that oil producers would have to pay buyers to take oil off their hands. As another article notes, the company that handles WTI (“West Texas Intermediate”) futures contracts — the CME Group — has only recently changed its computer modelling to allow WPI futures to trade with negative values. It briefly hit minus $37.63. While CME CEO Terrance Duffy feels that the program is working as planned, fracking guru Harold Hamm has asked the regulatory agency with oversight over the CME (Chicago Mercantile Exchange) to investigate whether there was some programming error or market manipulation behind the quote. And some are suggesting that traders may start shifting to the WTI’s main alternative, the Brent Futures contract, traded on the CME’s main competitor, the Intercontinental Exchange.
OPEC has all but collapsed, with Saudi Arabia and Russia desperately opening up the spigots to bring in revenues to keep their corrupt oligarchies afloat.
Naturally, the oil price collapse is causing pain to the whole energy industry. Offshore oil drillers have started shutting down wells in the US Gulf of Mexico. Only about 15% of America’s oil now comes from offshore drilling, because of its high cost compared to fracking operations. It is unlikely that when the older and more costly offshore platforms get closed, the underlying wells will be reopened any time in the foreseeable future. As Tim Duncan, Talos Energy CEO puts it, “In offshore, we don’t shut in fields, we shutter them. You begin the process of leaving them forever.”
As the article notes, this shuttering of offshore fields is surely hurting the companies that service the wells, companies that include Baker Hughes, Halliburton, and Schlumberger. As yet another piece notes, Baker Hughes, for example, expects to see its oil field projects decline by half during this year alone. The company’s shares have already declined by half this year. And it is cutting capital spending and jobs by 20%.
More generally, even the huge international oils companies — you know, the ones the Michael Moore morons say own the planet — companies such as BP and Royal Dutch Shell, have seen their shares drop dramatically, and energy producers collectively have lost billions of dollars in market value. Rumors are proliferating prodigiously about possible bankruptcies and mergers.
For a short period of time, the futures contract price of oil actually dropped below $0, meaning (in theory) that oil producers would have to pay buyers to take oil off their hands.
And as another article notes, all this sturm und drang in the energy industry is hitting hardest in the states that depend the most on that industry. Of course, one thinks here of Texas. But as the authors of the piece observe, Alaska, Oklahoma, North Dakota, West Virginia, and Wyoming all rely more on energy than Texas does. And Ohio and Pennsylvania rely on it as well. For example, Wyoming generates 16.4% of its gross state product from mining and energy production, Alaska comes in at 15.3%, Oklahoma at 11.7%, and North Dakota at 10.3%. All this, while the energy sector in Texas is responsible for only 7.8% of the gross state product. Wyoming relies on taxes from oil and gas products for half of its general tax revenues, so it is especially vulnerable in this situation.
Of course, it is not surprising that the states whose economies rely disproportionately on the energy sector are now disproportionately feeling pain. As Jesus said, “All they that take the sword shall perish with the sword.”
One last article worth reflecting upon reports that the Trump regime is considering pumping cash into the oil and gas industry, and in exchange taking equity shares in either the companies themselves or their reserves of crude oil. The Boss has already begun by putting oil back in the federal Strategic Oil Reserve. This is a good move: buy oil while it is dirt cheap, keeping our oil industry afloat, and then sell off the reserve in the future when prices rise again, and make a profit.
As Jesus said, “All they that take the sword shall perish with the sword.”
What do I conclude from these ruminations? Two quotations come to mind.
First, as Nietzsche opined, “What does not kill me makes me stronger.” The American energy industry has proven itself to be brilliantly innovative and astoundingly productive. This crisis will induce even further work in lowering production costs. It will eliminate the least productive wells, thus keeping prices down when the economy recovers. For recover it will, be it in months or even years.
As King Solomon — the wisest of all from whom I’ve quoted, including the estimable Harold Hamm — sagely observed:
One generation passeth away, and another generation cometh; but the Earth abideth forever . . . The Sun also ariseth, and the Sun goeth down, and hasteth to the place where he arose . . . The wind goeth toward the south, and turneth about unto the north; it whirleth about continually, and the wind returneth again according to its circuits . . . All the rivers run into the sea; yet the sea is not full; unto the place from whence the rivers come thither they return again.
Thus it is that the massive reserves of oil and natural gas under our vast countryside and under our coastal shelves are not going to diminish one iota. The incomprehensibly huge slabs of shale from which our frackers have produced so much are not going to shrink one particle. The sun that powers our solar industry will not dim one bit, nor will the winds that turn our turbines cease to blow one jot. The rivers from which we derive so much electric power will flow not one whit less. And the virtually endless supply of radioactive elements that lie under our feet and fuel our safe and clean nuclear power plants will not wither away one mite.
It will all abide forever.