The irony of today’s cheap oil

BIZLINKS - Rey Gamboa (The Philippine Star) - April 2, 2020 - 12:00am

In a different time, $10 for a barrel of oil would have been unimaginable. However, the spread of the coronavirus across Western Europe and the United States, the leading economies of the world, is making it believable.

While the average price of crude oil is currently still within the $20 a barrel range, this is already at a significantly low level compared to the average price of $64 per barrel in 2019. In fact, $20 a barrel was the price of oil 18 years ago, something that is barely retained in our memories now.

Ironically, in this period of lockdowns and self-containments, it is difficult to enjoy the deep slash in the price of fuel products at service stations if you can’t bring out your car. It doesn’t matter also for public transportation operators and commuters, since jeepneys and buses have been barred from daily commutes.

At $20 per barrel, airlines would only have been too happy to bring down airfares, which correspondingly would have enabled more people to afford the cost of travel to other countries.

Yes, another welcome rippling effect would have included cheaper products manufactured in the world’s factories fueled by power generators running on oil products.

A different kind of oil crisis

Instead, the world’s oil companies, together with global economic watchers, are warning of an oil crisis that is forcing wellheads in many oil fields to be capped and refineries to cut back on their daily production as storage tanks fill up to maximum levels.

Even if Saudi Arabia and Russia were to end their current price war and stop dumping more oil into the world market than can be processed and consumed, the economic paralysis brought about by the virus contagion has technically beaten them to the draw.

Not even the cranking up of China’s economy, after getting off lockdown, may be able to save the oil industry which is now in the midst of all possible kinds of rescue plans that include capital expenditure and operating cost reductions, deferment of new investments, and even cutting of executive salaries and laying off of workers.

At $20 a barrel, the shale fields in the US are no longer economically viable. The same is true for Canada’s oil sands which now may be unable to secure federal monetary support, with demand for Canadian oil to the US rapidly dwindling.

The Western Canadian Select, used as a benchmark price of Canada’s oil, has now plunged to about $6 per barrel. At the start of the year, it was selling at about $37 per barrel. Oil watchers fear that the current price may even go lower in the coming days.

Royal Dutch Shell is the first super major oil company to announce how bad the virus has affected its business, saying that it expects to write down up to $800 million for the first quarter primarily because of the dismal drop in prices and consumption in March.

We will be seeing more of the same stories in the days ahead which will eventually force bankruptcies and consolidations among the weaker players in the industry which have loans that heavily rely on earnings from production and refining.

It’s going to get worse

Consultancy firm McKinsey & Company has come up with a new report that projects economic recovery in the Eurozone and the US to happen only in 2023 if a resurgence in the virus spread happens despite respectable success in the quarantine and social distancing measures.

This supports the analysis of Goldman Sachs that the oil industry will never be the same again after the health crisis is over. In fact, it wrote, the possibility of some kind of oil shortage given the number of well heads in oil fields that would be capped soon and with refineries shutting down.

If we are to model China’s recovery, it would take the US and Western Europe at least three months to be able to control the virus spread should severe containment measures similar to what was done in Wuhan, the world’s first coronavirus epicenter, are implemented.

The Philippine government is looking at this same scenario — a lockdown until June — when it recently came up with a P200-billion relief package that would dole out financial assistance to low-income households in the next two months.

Meanwhile, the price boards of service stations continue to display lower prices of gasoline and diesel, while your car’s fuel gauge remains relatively unmoved in the last two weeks resulting from non-essential travel curtailments. These are really exasperating times!

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