Oil worth less than worthless

The world changed this last week — did you notice?

The world’s most valuable commodity was momentarily worthless.

No, I don’t mean gold. Gold has been valued for a very long time, mostly because it doesn’t tarnish.

But the world could get along reasonably well without gold. Or platinum. Or even diamonds.

I’m referring to oil.

The Industrial Revolution began about 200 years ago, with the discovery of steam power. Steam provided the power for engines that pumped water, wove textiles, moved trains.

But creating steam required heat to boil — indeed, to superheat — the water that formed steam. Initially, that heat came from coal. Then the world discovered that oil burned hotter, and weighed less to transport, than coal did.

Pollution was not an issue. Yet. From an economic perspective, oil took over. It has been an essential source for our industries ever since.

Except that last week, oil was being given away.

On one crucial day, for the first time ever, West Texas crude, the gold standard for oil, dropped to minus $37 U.S. a barrel.

That’s right. Negative pricing. They’re paying you to take it away.

This is something like Costco paying you to fill your cart with toilet paper. Grocery stores paying you to take more bananas. The Bank of Canada paying you to help yourself to more money.

No, wait, that’s almost happening already. At the end of March, the Bank of Canada lowered its overnight lending rate to onequarter of one per cent, 0.25%, to stimulate the economy, just as the COVID-19 virus shrivelled the economy.

That rate doesn’t leave Stephen Poloz, the governor of the Bank of Canada, much room to manoeuvre. Maybe he will too have to drop into negative rates.

Paying people to borrow, instead of punishing them for going into debt.

As you’ve probably realized already, the price of West Texas crude has little to do with the cost of gasoline at your local gas pump.

And even less to do with the cost of getting oil out of the ground.

When Imperial Oil’s Leduc No. 1 well came through, they didn’t even have to pump the oil out of the ground. It gushed, under pressure.

Today’s oil, by contrast, requires a huge investment in technology. Oil shale has to be fractured, by underground explosions or by pumping high pressure fluids into it, to let oil flow at all. Hence the slang term “fracking.”

Northern Alberta’s sludge sands are even more expensive. The oil has to be physically separated from sand, typically by applying heat. Which has to come from more oil. The cost of producing a barrel of oil may exceed what that barrel will eventually sell for.

At one time, Big Oil estimated that oil had to sell at around $60 a barrel just to recover their production costs.

With the benchmark oil trading at $30-50 for most of the last decade, Tech Resources decision not to proceed with a new plant in Fort McMurray looks a lot smarter than Justin Trudeau’s purchase of a pipeline.

Just to complicate calculations, Canadian crude is typically discounted around $15 a barrel. In recent months, therefore, Canadian crude has traded as low as $10.

Ah, but wait — we’re not actually talking about going and buying a barrel. Because oil prices are based on “futures.” You pay for a contract, setting a price for oil that hasn’t come out of the ground yet. But it will. Next month. Or the month after.

“Futures” let producer and purchaser agree on a price per barrel, in advance. Based on that old standby of economics — supply and demand.

Recently, supply went through the roof as Saudi Arabia and Russia flooded the market. Just as demand fell through the floor.

COVID-19 forced people to stop travelling and industries to shut down. Those who had oil couldn’t get rid of it. And they had no way of storing the oil they had already committed themselves to buying.

As traders tried to get rid of contracts they had already agreed to, West Texas crude plunged into negative territory.

Some have argued that dethroning king oil will benefit the environment. I’m not sure. Because one possible consequence of negative values might be that someone could buy a million barrels of oil at minus-$37, and make $37 million profit by dumping it into the Mississippi, before fleeing to the Bahamas.

I hope that won’t happen. But who knows? We’ve never had negative prices for a commodity like oil before.

Jim Taylor is an Okanagan Centre author and freelance journalist. He can be reached at rewrite@shaw.ca.