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The Great Oil Shock

By Kenneth Tiven in the US

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Our lives everywhere have taken on the characteristics of countless “End of Civilization“ movies where an unseen enemy stalks the earth causing mayhem and death. Yes, the COVId-19 pandemic is that terrible. It has spawned several unintended consequences, highlighting a geo-political effort by two nations waging economic war against perceived enemies.

The event that made this obvious came this week when the price of a barrel of Texas Intermediate Crude Oil flashed on computer screens trading at -$37 dollars a barrel. Impossible was the reaction. A price war had pushed it to below $30 a barrel as two big oil-producing nations fought for market share and more. However, the pandemic brought global business to a halt, demand for oil disappeared. Empty highways and clean air illustrated the situation. 

My brother called me demanding, “you are the news expert in the family, what does this mean?” I explained it is an illusion caused by the way crude oil is priced and traded in month-long sales contracts. Without demand oil has filled virtually all the storage capacity including super tankers at anchorage. Theoretically, you could get paid $37 a barrel to fill your own tanker truck with the crude. Imagine 12,000 liters of petrol and they pay you!  The problem is unrefined oil is useless, just a thick gooey annoying substance. 

The obvious story is the precipitous decline in manufacturing where crude oil derivatives are a major ingredient. Stay home orders means we’ve been forced to park our cars. Shopping, entertaining and restaurant dining are now a memory. Social distancing also means not visiting relatives for family dinner. So cars are parked. Petrol pumps idle, forecourts vacant.  

In America $2 or less buys a gallon– about 40 rupees a litre. Remember: a mirage is something that appears real or possible but is not in fact so. This is the current fate of cheaper petrol for most people.

The political backstory is serious. Fracking methods for oil and natural gas extraction across America had enabled the USA to become the leading exporter rather than an importer of crude oil. Fracking got its big boost when crude sold for $130 a barrel and looked like it might stay there. It takes about $100 a barrel to make fracking operations profitable. 

Russia and Saudi Arabia have huge reserves and low costs to get crude out of the ground.  If price multiplied by quantity equals revenue (PxQ=R) they had incentives for a price war to cripple the American fracking while gaining market share at the same time. Russia decided to do this, notwithstanding the Putin-Trump relationship. The Saudis were anxious to reduce revenue that Iran was earning. Despite pandemic chaos in America, the Trump Administration relished anything that hurt Venezuela’s Communist regime, desperate for oil revenue to survive.

Until 2015 crude prices were often well above $100 a barrel before starting a steady decline. COVID-19 acted as an accelerant by killing market demand. For oil producers like Nigeria and Iraq whose national budgets depend on petroleum sales this cheap crude oil brought enormous fiscal pain.   

For America lower prices at the petrol pump are irrelevant if you cannot drive anywhere. The pandemic impact on personal freedom and life itself makes the issue of petrol prices almost irrelevant for now. 

Lead Picture: oilprice.com

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