In a recent article on the COVID-19 pandemic and the effects of climate change, it was mentioned that the price of gas dropped below zero on April 20th.
The cause and consequences of this event are complex, however, and warrant greater analysis. How did this begin, will it affect the price of gas, and what will be the long-term economic effects of it?
In early March, OPEC met to discuss how to compensate for the effects on the market of a COVID-19-related lack of demand for oil. Saudi Arabia agreed to decrease production by 1 million barrels per day if non-members decreased by 500,000 per day, with the burden largely seen to fall on Russia, as one of the largest oil producers in the world.
Russia declined, and Saudi Arabia cut oil prices and began increasing oil production to pressure the global market with lower oil prices, leading to a plummet in the stock values of several major US oil companies the following week.
The price of oil for major companies like U.S. West Texas Intermediate and Brent reached a low not seen since 1991 and the increase in production portended a vast excess in supply, all amidst the onset of a global pandemic over a week before any state in the US had issued a formal shelter-in-place order.
By the beginning of April, the amount of oil being imported from Saudi Arabia was seven times as much as the beginning of March, and this excess would manifest into tangible economic damage on April 21st, when trading for May 2020 oil futures was set to close.
Oil futures are contracts to receive a physical shipment of oil at a future date that are traded on the marketplace by investors, who often do not ever receive the physical oil shipments and trade away the futures at a profit before the period closes.
After a record-low tank in price and with an extreme supply excess that threatened world storage capacity, coupled with COVID-19-related market uncertainty, the demand for oil was so low that the value of the May futures dropped 321% below zero as investors paid traders to take the oil off their hands to avoid being responsible for accepting the physical shipments.
Has this affected the price of gas? A decrease in oil price does not mean the price of gas will decrease by an equivalent amount, as the price of crude oil is only one component of the price of gas among others, such as distribution costs. It is nonetheless a significant factor in oil price, and in conjunction with a drop due to reduction in demand after the onset of COVID-19, the oil war has had its effects on the price of gas in the US accordingly.
After the zenith of April 20th, the value of oil experienced a tentative increase with a deal made between Saudi Arabia and Russia to take approximately 10 million barrels of oil off of the market per day set to commence in May.
The effects of all of this have shocked the industry and shattered the perceived stability of oil. Small oil companies are at severe risk and there is even discussion of state regulation on oil production.
“If the Texas Railroad Commission does not regulate long term, we will disappear as an industry, like the coal industry,” Pioneer Natural Resources CEO Scott Sheffield commented to the independent news organization Grist.
With oil prices dropping again on Monday, the world economy continues to brace for impact. What could emerge, however, is a positive outcome in the form of renewable energy investments as a successor to the increasingly volatile market of oil. Hopefully time, rather than future catastrophe, will tell.