The International Energy Agency (IEA) forecast that the global demand for oil would decline more this year than ever. Faith Birol, head of the Paris-based IEA, said: “We may see it was the worst year in the history of global oil markets.” For April the IEA projected a drop in demand of 29 million barrels, some 30% below 2019 levels. Billions of people around the world in lockdown created this abyss.
The oil situation is so dire that the Department of Energy is even considering paying domestic oil producers to keep crude in the ground.
Even after Russia and Saudi Arabia led a historic pact of 23 countries to withhold 9.7 million barrels, the price of oil continued to drop from roughly $60 at the beginning of the year, closing near negative $38 on Monday. Foreseeing that possibility, CME Group, the world’s largest exchange for trading futures, had already begun reprogramming its software to process a scenario of negative prices for energy-related financial instruments.
President Donald Trump played an important role in reducing the diplomatic standoff between Saudi Arabia and Russia. Christi Craddick, a regulator with the Texas Railroad Commission, said: “Mr. Trump’s aggressive actions to bring Saudi Arabia and Russia to the table to reduce global oil production was crucial to defending America’s domestic energy industry and avoiding a downward spiral in oil prices.” The Railroad Commission regulates oil in Texas, the U.S.’s largest oil-producing state.
Trump surprised many because for decades he has been a vociferous opponent of the OPEC cartel. In 2012 Trump tweeted: “OPEC is a monopoly that must be broken up. They are robbing us blind.” His 180-degree about face was intended to save the U.S. oil industry. In 2019 our oil industry produced a record 12 million barrels daily, the world’s highest. Buddy Clark, co-chair of a leading Houston Law firm, Haynes and Boone, told CNN, “Nearly 100 US oil and gas producers could file for Chapter 11 over the next year.” Trump’s reversal underscores the importance of Texas, the second biggest electoral prize after California. Texas pumps more oil than every OPEC nation with the exception of Saudi Arabia.
The Group of 20, which represents the world’s largest economies, will hold back an additional four to five million barrels a day.
Currently, refineries, pipelines, and storage facilities are filling up. Daniel Yergin, author of “The Prize: The Epic Quest for Oil, Money & Power,” wrote: “Without the deal, the global oil industry would have run out of storage over the next few weeks, and prices would have crashed and hit financial markets. According to the IEA, the amount of oil being stored on vessels at sea rose 27% to 103.1 million barrels in March.”
Oil is currently the lifeblood of industrialized nations. Its products supply energy to the utility industry, factories, homes and provide fuel for vehicles and airplanes.
I cannot forget that the OPEC nations imposed an embargo against the United States similar to their 1973 and 1979 policies. In both cases America had insufficient oil to drive their automobiles and heat their homes. As a consequence, I support our country returning to its status as the world’s number one oil producer.
On the flip side, I recognize that from an economic perspective the intervention by the political leaders of Saudi Arabia, Russia and the United States undermines our historic reliance upon supply and demand principles to establish prices. We need to explicitly recognize that the consumer benefits tremendously from low oil prices.
The intervention in the oil markets reflects another example of our government’s vastly expanded involvement in our economy that has transpired recently. Such steps are necessary to prevent our current malaise from lasting a prolonged period.
Originally published in the Sarasota Herald-Tribune
