Of all the ways the world has gone crazy in 2020, Monday’s bizarre scenes from the oil market, with the price of barrels for May delivery falling well below zero, are among the most head-turning. There’s a loopy, end-of-times vibe to the story about oil producers offering you money to take oil nobody has any use for off their hands that’s hard to resist. But what does it all mean?
In the short term, possibly not much. But if low prices persist, the coronavirus could also be remembered as a catalyst for the energy paradigm shift that environmentalists have been seeking for so long.
In the short term, the market high jinks show that the usual metaphors we use to talk about the oil market make no sense. We talk about Saudi Arabia “turning on the tap” to try to drive prices down to Russia’s detriment, or about the Organization of the Petroleum Exporting Countries (OPEC) “shutting off the tap” to raise prices. That makes it sound as though starting and stopping oil production is just as simple as pouring yourself a glass of water, but of course that isn’t actually true at all.
These days, with most of the “easy oil” already pumped out a generation ago, keeping oil wells working has become an increasingly sophisticated, high-tech business. More and more, oil will keep flowing only if a well’s internal temperature and pressure are carefully managed through steam injections. These aren’t really processes you can shut off like a water tap, at least not without the risk of doing lasting damage. In some places, allowing reservoirs to cool and depressurize suddenly can literally turn the hydrocarbons underground into hardened asphalt — a process known as asphaltene deposition — which can destroy them permanently.
These boring facts, alongside the even drearier inner workings of the oil storage business, explain why countries continue to pump oil they have nowhere to store and no way to sell. The question is: How long can this go on?
The 2020 dip into negative territory might well be remembered as a freak occurrence. But while negative prices are unlikely to last, very low (if still positive) oil prices look like a basic feature of a demand-dampened world under covid-19.
In the short term, that will mean what low oil prices have always meant — a redistribution of wealth and geopolitical standing from producers to consumers. It was, after all, the money you pay at the pump that was bankrolling not just the lobbying of the U.S. shale industry, but Vladimir Putin’s military adventurism in Crimea and Syria, and Mohammed bin Salman’s multi-continent crime spree, not to mention the salaries for Nicolás Maduro’s death squads in Venezuela — as well as Norwegian pensions, Scottish primary schools and Canadian nurses.
By the same token, the money France and Singapore and Japan won’t be spending on oil is money they’ll get to keep at home, but you could say the same about the money autocratic governments such as China, Hungary and Zimbabwe will be saving. As it happens, the places on the earth where ancient organic matter congealed into crude petroleum over millions of years don’t really map onto any commonly shared contemporary geography of good guys and bad guys.
Which is perhaps a reason to concentrate on the longer term. While crashing oil prices certainly make renewable energy less competitive in the short run, if the current slump lasts it could wipe out a number of fossil fuel producers that are unable to break even. This could lead to massive disinvestment in the oil industry, as companies throw in the towel on fields that can’t make money. And even if demand and prices do pick up again in the medium term, perceptions of risk in the oil sector might have shifted permanently.
From a climate point of view, this might be remembered as a salutary effect of the pandemic. Renewable energy technology, already competitive with oil, will continue to improve and might soon simply leave fossil fuels behind.
The pandemic price crunch could be remembered as the moment when an industry in long-term decline spiraled out of relevance. When the dust settles, investing once more in oil infrastructure might start to sound about as sensible as reinvesting in cassette tape production facilities: a bizarre anachronism to serve a world that no longer exists.