To say that we’re living through history would be a great understatement of our current situation.
In December, a Chinese doctor noticed a new strand of coronavirus that we later dubbed COVID-19. Due to some containment issues, this virus spread out of Wuhan, China and has taken a foothold in every nation of the world thus far. As I’m writing this, our confirmed case count is nearing the 2.5 million mark, leaving hundreds of thousands dead in its wake. Quarantines and stay-at-home orders are in effect, forcing many to limit their in-person interaction with others outside of their household. As a result, many businesses labeled “nonessential” by local, state, and federal governments have been forced to limit operations or close temporarily, disrupting the economic flow and triggering what many economists are recognizing as a recession that may even make 2008 seem like a piece of cake.
Needless to say, s**t is hitting the fan. Hard.
Today, for the first time in history, oil prices in the United States went negative. What does that mean? Well, let’s illustrate it this way: your typical price for a unit of Good A could be $50. In this case, the consumer is paying the producer of Good A its asking price of $50 in return for the ownership of one unit of Good A. I know that sounds a little complicated, but follow along.
When a price goes negative, it means that it’s usually written as -$50. Now you may be asking “Connor, how can a price be negative? How does that even work?” Let’s go ahead and answer the second part first. A price of -$50 means that the producer is paying the consumer $50 to literally take Good A off their hands.
Let’s say you go to Walgreens and the price of toilet paper has magically dropped to -$30 for a mega pack. That means you could walk out of there with 5 mega packs of toilet paper, PLUS $150 in your pocket.
That’s a smackin’ good deal right there. To put it in the words of Jim Gaffigan, “Well I don’t wanna...lose money on this!”
How does a price even get to be negative? Well, thankfully, I take AP Economics, so I can explain this to the best of my ability.
For a price to go negative, there has to be such a lack of demand that the demand curve actually goes UNDERNEATH the x-axis, where the price level = $0. If we assume for a second that the amount of supply does not change or changes minimally, then we can also take into account the fact that oil companies only have so much volumetric storage capacity. When they run out of space, they’ll have no place to store oil for refining, processing, or even resale to cruise ships and shipping companies. They can’t just put it back where they found it. Some dinosaur got crushed to produce that oil and it’s not like they can go ahead and recreate a fossil out of that oil.
That leaves oil companies with a big uh-oh.
Here are the reasons as to why there might be a surplus of oil during this COVID-19 pandemic:
People are cooped up at home and, generally, not traveling as much as they did before. This means that people aren’t buying as much gasoline and diesel for their vehicles.
Cruise ships and shipping vessels, which use an astounding amount of crude oil, diesel, and other fossil fuels have almost entirely ceased operations.
Airlines, which use oil in the form of jet fuel, aren’t running as many flights as before. This, in turn, means that they can cut costs by not buying as much jet fuel.
From an economic perspective, that’s a MASSIVE decrease in demand. So much so, in fact, that oil companies that find themselves rapidly running out of room for their oil and fuels are trying to incentivize buyers to take barrels of oil off their hands by giving buyers free oil, PLUS CASH.
What does this mean for us car guys?
Well, we can look at this from a few different frames of reference. The economic frame of reference is that this practice of selling oil at a negative price isn’t sustainable at all. In fact, by engaging in this practice, oil companies are actually hemorrhaging money. Why? They’re giving away their product, which costs money to produce, and then giving away money with the product. So they’re losing double the amount of money than they would if they were simply giving oil away for free. With that in mind, one could reasonably assume that oil prices will pop back up within 24 to 48 hours. If they don’t, it’s possible that we could see some oil companies fold, merge, or get bought out of bankruptcy fairly soon.
What will this do to our fuel prices?
Like I said, these prices aren’t sustainable for any long, or frankly, even short-term economic growth. Fuel prices depend on a lot of different things - the price of drilling the oil, the price of transportation and storage, the price of refining that oil, the price of transportation and storage (again), and the price of keeping the pumps alive. That’s a really long line of things that all have their own values to them, so chances are, even though dreams of 65-cent-per-gallon gas are widespread and powerful, we won’t see a huge difference in the prices of gas and diesel.
Will our $1.85/gal price for 87-octane go down any more?
There’s a chance that it may go down ten or twenty cents. However, the amount of time for all of those different variables to correct is a significant quantity. A change due to this may take a few days or even weeks, so we can’t just assume that you could go get 30 gallons of 87-octane tomorrow and expect to pay less than $30 for your fill-up.
But a man can dream, right?
I just read this whole article looking for a reason for a car guy like me to be excited. You’ve given me nothing.
Actually, I have. Read on.
From the car guy frame of reference, we can look at this as both a source of hilarity and theoretical income. Why hilarity? Because we’ve all got that friend with a Tesla or some electric car who brags about not having to pay for gas. Meanwhile, you’re standing there at the gas pump every weekend asking yourself “Goddammit, didn’t I just fill up last weekend?” Yep, you did. And the weekend before. And the weekend before that.
But now, if you’ve got a big storage facility, you could stack barrels of oil to the ceiling. Or, even better for the economy, go get a bigass loan from the bank and buy or lease a warehouse in which you can stack barrels to the ceiling. Why’s that awesome? First, that bigass loan is likely gonna get granted to you because the economy is driven by spending. And if there’s one thing that has taken a dive, it’s our economy. Hey, you’re helping the world out. Kudos to you.
Second, that price of oil isn’t gonna stay down for long. That buddy’s gonna bounce right back up as soon as supply goes down and scarcity is no longer a thing of the past. In theory, you could go ahead and sell those barrels of oil right back to the company from which you bought them and make PILES of money.
Go buy that turbo kit you’ve been drooling over for the past four months. After all, you are your own Halliburton.
-Connor Sahs
Thank you!
ReplyDeleteOriginal Editor here: you probably couldn't actually get oil sent to your own storage facility. Market investments, such as in stocks, ETFs, mutual funds, gold, oil, etc., are usually intangible transactions. I didn't major in Economics, but I'm older now...and smart enough to know that 18-year-old me should have left his pipe dream in his head. Still, the price of oil went negative and it affected gas prices for months, maybe even a year afterward. I remember filling up a 30-gallon tank of diesel for $60. That was pretty crazy.
ReplyDeleteAlso, even if you did have a storage facility full of barrels of crude oil, it's not like you can use them for anything. They'd need to get to a refinery and then be processed into, say, gasoline or diesel. That, plus the transportation to and from this particular refinery, would certainly cost you something. Oh well.