By David E. Hubler
Contributor, In Homeland Security
Anyone who’s old enough will remember the gasoline crisis of 1973. “An oil embargo imposed by members of the Organization of Arab Petroleum Exporting Countries (OAPEC) led to fuel shortages and sky-high prices throughout much of the decade.”
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The shortages resulted in long lines of cars at the pumps and angry consumers. “In the three frenzied months after the embargo was announced, the price of oil shot from $3 per barrel to $12.”
(By convention, the “price of oil” is the going per-barrel price reflected in a futures contract for the following month.)
Just a year ago, USA Today reported that declining oil prices were a good sign for the coming Memorial Day weekend. “While gas remains expensive in certain pockets, including $4-per-gallon in California,“ the national average was falling and was “unlikely to hit $3 per gallon for the fifth straight calendar year.“
A Deflationary Moment that Surpasses Anything Seen in Most People’s Lifetimes
But on Monday, the benchmark price for a barrel of crude oil in the United States fell to negative $37.63. “We’re in a deflationary moment that surpasses anything seen in most people’s lifetimes,” Neil Irwin, a senior economics correspondent for The Upshot, wrote in The New York Times on Tuesday.
The collapse of the May futures contract for West Texas Intermediate crude oil, Irwin wrote, “shows how the shock of the coronavirus crisis is rippling through all sorts of markets and making them behave strangely.”
He added, however, that “the broader takeaway is that the Covid-19 crisis is an extraordinary deflationary shock to the economy, causing the idling of a vast share of the world’s productive resources.”
Over the past six weeks, the demand for oil and oil products has collapsed. Far fewer people are driving, so they need less gasoline, which has driven down gas sales to under $2 a gallon in many places. Also, with airlines having reduced the number of flights because of a dearth of customers, airline companies are buying less jet fuel.
Last month the International Air Transport Association (IATA) predicted that global revenues would suffer losses of between $63 billion and $113 billion, “depending on whether—and how—the virus continues to spread or not.”
“Don’t let shortages of a few goods, like face masks or toilet paper, confuse the matter,” Irwin warned. “The consequences will almost surely persist beyond the period of widespread lockdowns.”
Global Benchmark Crude Fell below $0 for the First Time in History
Global benchmark Brent crude fell nearly 17 percent, one day after the U.S. benchmark fell below zero ($0) for the first time in history, the Washington Post reported Tuesday. “Brent crude was trading at $21.35 a barrel Tuesday after briefly falling below $20 for the first time in nearly two decades. The collapse was weighing on global stock markets, with Wall Street signaling big losses at Tuesday’s open.”
The collapse in oil prices “drives home the stark drop in economic activity around the world due to this virus,” John Kilduff of Again Capital told the Post. “That puts a fine point on what we are staring down here.”
Nearly 40 million Saudi Arabian barrels of crude oil are in route to the U.S. and will add to the tens of millions already in storage here. That delivery “is probably going to be the final dagger in the heart of the U.S. shale oil industry,” Kilduff said.
At the same time, the world’s biggest independent oil storage company reportedly “has all but run out of space for crude and refined oil products as a result of the fast-expanding glut that Covid-19 has created,” the Houston Chronicle reported.
“The available capacity on the oil side is almost completely sold out for our terminals,” Gerard Paulides, chief financial officer of Rotterdam-based Royal Vopak NV, told the Chronicle in an interview. “For Vopak, worldwide available capacity that is not in maintenance is almost all gone and from what I hear elsewhere in the world we’re not the only ones,” Paulides said.
The growing oil glut is likely to result in a further loss of jobs in the U.S. petroleum industry, pushing up already astronomically high unemployment numbers nationally.