Issues & Insights

Rx For Plunging Oil Prices? Take Economy Out Of Quarantine, ASAP

Global oil prices crash through the floor, imperiling a major industry and millions of jobs. Time for government action to fix the problem with a bundle of cash and handouts? Nope. We have a better idea. Restart the U.S. economy and put an end to the quarantine economy as soon as possible.

Monday’s oil news that near-term oil contracts had fallen below zero was frightening. Essentially, the markets told those holding short-term oil contracts they would have to pay someone to take their oil. It’s not even worth transportation and storage costs.

It’s what oil traders call “contango.” That’s a fancy term for when a good’s near-term price is lower than the market price expected down the road.

As of Tuesday, the May contract price for a barrel of oil on the New York Mercantile Exchange was $9.06, after briefly going negative on Monday. But the picture changes when flashing forward to look at monthly futures prices: investors expect the price to rise to $13.12 a barrel in June, $20.15 in July, $23.15 in August, and $24.87 in September.,

Right now, contango is a serious problem. No oil company, with its enormous capital and labor costs, can make money with oil prices in the low double digits. Many small- and mid-sized firms will just go under.

It’s tempting, given the current bailout environment, to add the oil industry to the list of those getting aid. But apart from extending help to oil workers who may lose jobs and hit hard times, it would be unwise and economically unsound to bail out big producers.

No, we’re not anti-oil. Far from it. Oil producers, by creating the basic energy source for the industrial revolution to today’s information economy, and by heating our homes and fueling our cars, have given the West the greatest standard of living in history.

But more bailouts with the economy closed will do nothing but add to our already enormous $24 trillion national debt. That only puts a patch on a very bald tire. And no amount of government bailouts, loans or other financial palliatives will raise oil prices. It was government error that got us into this mess. The current plunge in demand is entirely self-inflicted.

As we saw Monday, the “deal” between Russia and Saudi-led OPEC to slash crude output is not a solution either, at least in the long run. Once both see other OPEC members cheating on their quotas, they will too. That’s how OPEC works.

Besides, Monday’s deal to cut output, brokered by President Donald Trump, does so only for a few months. In the meantime, while lower prices are great for U.S. consumers, they’ll hit U.S. producers hard. That includes the 10 million American workers whose jobs depend on the oil industry. There’s a lot at stake.

“The United States has become the world’s largest crude oil and natural gas producer,” noted Merrill Matthews of the Institute for Policy Innovation in The Hill. “Thanks to the fracking boom, oil production increased from about 5 million barrels a day in the mid-2000s to more than 13 million barrels a day last January.”

Understandably, that’s why Trump on Monday moved fast to express his support for the troubled oil industry.

“We will never let the great U.S. Oil & Gas Industry down,” Trump tweeted. “I have instructed the secretary of Energy and secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!”

Fine words. But the real crisis isn’t too much oil, or even low prices; it’s that global economic demand has plunged with the onset of the COVID-19 crisis around the world.

Energy is the lifeblood of a thriving economy. Instead of subsidizing and propping up the industry for a short time at a cost of billions, it would be better just to eliminate the cause of the problem: The shutdown. We need to reopen the economy.

It was government error that got us into this mess. Now we need to return control to the private sector and market-based price-setting.

“The U.S. government’s ability to fundamentally change this situation are minimal,” noted Raymond James oil analyst Pavel Molchanov in an interview with Politico. “The real problem is the fact that upwards of 20% of global oil demand is currently offline, mainly due to the Covid-related lockdowns.”

Rather than shoveling more money into our giant bailout bonfire, or paying oil producers not to pump oil, which will leave a legacy of debt and little else, we need to boost demand.

How do you do that? End the lockdown. Hook the economy back up. Send people back to their jobs.

With people going back to work and businesses opening again, our demand-side problems go away. Despite the oil industry’s current problems, it will again thrive and prices will rise to levels that will let well-run oil companies stay in business.

There’s a word for that: It’s called “normal.”

Trump seems to be leaning in that direction. Not only is he prodding state governors to start re-opening their economies, he’s also pushing hard to roll back burdensome regulations to put some wind in the economy’s sails as we resume speed. He’ll never get credit for it, but it’s smart policy.

The longer we stay closed, the more damage is done. St. Louis Fed President James Bullard recently suggested that unemployment could hit Depression-era levels of 30% if the shutdown stays in place.

Is that really what we want?

The nation’s 30 million small businesses are struggling. Responsible, mid-range estimates put losses from a two-month shutdown at 6% to 9% of GDP, annualized. That’s losses in the trillions in just two months. Some estimates are even higher.

It isn’t just about GDP. All the destroyed capital, lost industrial output and diminished crops will cost us dearly. We’ll have production bottlenecks. The longer we wait to open, the more probable an inflation surge later becomes.

Once again, our advice: Get the economy moving, stat. Reopen. We should stop twiddling our thumbs and let the economy return to normal. The sooner we open back up, the sooner we’ll be back on the road to recovery.

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5 comments

  • If getting things rolling again means wearing a mask for a period of time… so be it. Washing ones hands or sanitizing several times a day … nothing wrong with that at all.

  • Social Changes with COVID-19 are a prelude to life with less fossil fuels. With COVID-19 we’ve seen extensive self-imposed social adjustments to transportation that are very similar to what will be required to live with less fossil fuels in the future. As we weed ourselves from unrestrained use of oil, we’ll need to lower our demands from the transportation infrastructures and the leisure and entertainment industries to the best of their abilities to conserve oil for where its most needed for society, to make the thousands of products that support lifestyles as well as worldwide sustainable economic development. But as you’ve seen, the world needs those crude oil chemicals and by-products that account for everything in our society and supports the militaries, aviation, merchant ships, and all the transportation infrastructure needed by commerce around the world. Without transportation, there is no commerce. https://www.cfact.org/2020/03/11/social-changes-with-covid-19-are-a-prelude-to-life-with-less-fossil-fuels/

  • Not a single word about the cause of all this, other than “government error”. Tens of thousands dead, and tens of thousands more to die. Not a word. Incredible.

  • SAM’s CLUB 27300 Wixom Rd, Novi, MI., just filled up @ 88 cents at gal…..like WOW.

  • [print-me target="#post-%ID%"]

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