Have you seen the cheap gas prices at the pump? This isn’t good. Gas prices reflect energy demand and per barrel oil prices, and per barrel oil prices tend to reflect the health of the economy. So, those low gas prices are something to be concerned about.
Energy demand is down 30%
Of course, it should be common knowledge that oil prices dropped through the floor as a direct result of worldwide coronavirus lockdowns. The oil price war between Saudia Arabia and Russia coming along at the same time was just a bonus, if you will. These days, hardly anyone one is taking planes, trains or automobiles to and from work. With only essential workers traveling, energy demand is down 30%. Of course, no one guessed lockdowns would continue for as long as they have.
What needs to change to grow oil prices
Before oil prices can begin returning to previous levels, we need to change one thing: remove the global glut of oil. When the world shut down, and energy demand with it, oil production didn’t. There is just too much oil. If the glut is not taken care of, prices will remain at the bottom of the barrel. OPEC and OPEC+ reached an agreement, cutting production by 10 million barrels per day per country beginning in May, but that just isn’t going to be enough.
This is a global problem requiring a global solution, and North American producers are cutting back now as well. According to Reuters, “So far, U.S. and Canadian company announcements put those reductions at a total of roughly 730,000 barrels of oil equivalent per day (boepd).” Of those companies, just three are responsible for more than half of the cuts so far: ConocoPhillips, Chevron and Occidental Petroleum. The Texas Railroad Commission is planning a hearing on May 5 to decide whether or not they will enforce production limits on Texas producers. (Find a summary of what they will be deciding here.)
There is great debate among producers both large and small about whether states should begin implementing production limits. But they all agree production needs to be greatly reduced. What they disagree on is whether or not production should reduce “naturally” through the free market or if states should make that decision.
Oil demand will return and so will oil price per barrel
Energy demand returning is not in question. Goods still need to get where they are needed. Farmers and construction workers still need heavy equipment to get their jobs done. We have yet to come up with an alternative to fossil fuels to keep airplanes in the air and cruise ships and cargo ships crossing oceans. We can reduce the need for single use plastic, but hospitals still need plastic for their equipment; stores still need plastic to keep food safe and fresh. The only thing we need is to reduce production and get rid of this oil glut. How long will it take? I wish I knew. But the day is coming.