COVID-19, Energy and the Economy

The big story today is obviously Chevron’s announcement that it plans to buy Houston-based Noble Energy in a stock exchange valued at just $5 billion.
Coronavirus Impact Influence Oil and Gas Industry, Covid 19 Disease Epidemic Effect to Oil Refinery Industrial and Stock Exchange. Falling Stock Market Risk Investment From Coronavirus Crisis

This past April, just ahead of futures contract expirations, the price of West Texas Intermediate (WTI) crude oil did something it’s never done—it went negative, all the way down to minus $37.63 per barrel. In short, U.S. exploration and production companies overwhelmed storage facilities, which essentially reached capacity.

At the risk of invoking cliché, it was the perfect storm. COVID-19 stay-at-home precautions severely curtailed economic activity and crude oil consumption. Daily automobile commutes and air travel plunged due to telecommuting and cancelled or postponed events, conferences and vacations. The result was falling global oil demand by as much as 20 million barrels per day, representing a 20% drop in worldwide usage. Meanwhile, rising global oil production by OPEC countries, Russia and the U.S. glutted markets. Even now, the world remains awash in crude oil, with little relief in sight.

The ripple effect will continue to be felt all along the energy industry supply chain, with significant impacts to Texas. Manufacturers that supply the oil and gas industry will suffer, as will retail and service businesses deriving income from oilfield workers and support staff personnel. Renewable energy sources will struggle to compete with record low oil and gas prices. 

Exploration and production company bankruptcies will skyrocket, particularly by smaller, independent producers with limited capital reserves. In the meantime, better-capitalized firms will pick up assets on the cheap, hunker down and wait for better days.

Prior to COVID-19 restrictions, Texas Comptroller Glenn Hegar expected to see an increase in the Economic Stabilization (or Rainy Day) Fund. With the collapse of oil prices, a shortfall seems certain, potentially reaching $3 billion for the year. This will pose significant funding challenges for public and higher education, as well as transportation budgets in the upcoming legislative session next year.

Prospective remedies appear limited. The Trump administration may yet consider tariffs on oil imported to the U.S., a move not likely to find favor with refiners who import heavier crudes from OPEC. Topping off the Strategic Petroleum Reserve with 75 million barrels— around a day’s level of current global consumption—will do little to assuage the situation.

In Texas, the Railroad Commission faced something of a quandary as it grappled with the question of proration. The last time limits were placed on oil production in Texas was in 1973, so those with any implementation experience are few and far between. While the commission considered imposing proration in April, happily oil prices have since stabilized somewhat.

Regulating the production of crude oil, or proration as it is known, has always been controversial. In the 1930s, East Texas produced so much oil that prices fell to ten cents per barrel. The governor, state legislature, federal government and the courts all tussled with the issue, going back and forth trying to stabilize prices. Ultimately, growing market demand probably did more to resolve the situation than anything else—as will likely be the case this time around as well.

Despite the relative turmoil in energy markets, it’s not the end of the world—futures markets for crude prices later this year remain near $40 per barrel. Increased economic activity will revive demand, though substantive recovery still looks to be a ways off. In the meantime, long-term behavior has almost certainly been altered as a result of COVID-19. Increased reliance on home delivery of all manner of products will give a boost to providers of such services. Automation of processes and transactions previously requiring people will become more common. Sporting events, movie theaters and festivals may see a falloff in attendance for years to come. Most importantly, sanitization in all forms will become a bigger part of our reality.

As has been the case during periodic epochs of human history, the world once again undertakes a massive, uncontrolled natural experiment. How events play out going forward is anyone’s guess, no doubt with more surprises still yet to come.

 

About the author: Thomas Tunstall, Ph.D. is the senior research director at the Institute for Economic Development at the University of Texas at San Antonio. He is the principal investigator for numerous economic and community development studies and has published extensively. Dr. Tunstall recently completed a novel entitled “The Entropy Model.”

 

Shalemag Oil & Gas Business Magazine