Oil shock makes hillbillies out of millionaires
Crude went crazy last week. Crude oil that is, black gold, Texas tea . . . the stuff that bubbles up from the ground and puts hillbillies in Hollywood mansions.
Whether it’s 1960s TV shows like The Beverly Hillbillies or the dreams of those prospecting in the Southern seas, the idea that striking oil meant striking it rich has been part of the popular consciousness for more than a century now.
But for a brief period last week poor old Jed Clampett would have had to pay someone to take the stuff off his land so he could get back to hunting possums and making moonshine.
Oil prices fell below zero.
Just don’t hold your breath for free petrol. It should get cheaper but probably not by that much.
The costs of storing, shipping and processing the oil, not to mention the taxes on it, aren’t going anywhere.
In fact, the surplus of oil is actually pushing storage and shipping costs up.
Technically it was May-dated futures contracts for West Texas Crude that went into negative territory.
West Texas is the benchmark grade for US oil markets. In our part of the world — in fact in most of the world — Brent Crude is more important.
But that is still crazy stuff. It still means owning oil became a liability not an asset, however briefly and however specific the variety.
America literally ran out of places to store the stuff, for the next month at least.
The global lockdown has destroyed demand.
Meanwhile, Saudi Arabia and Russia — two of the world’s biggest producers — are in the middle of an epic price war that has seen crude oil production actually rise.
They did cut a deal to dial it back last weekend but it came too late.
There are dozens of full oil tankers floating off the coast of California with nowhere to unload and more on their way.
For the complexity and technicalities that took oil futures below zero, it was still one hell of a crash, pulling the whole industry with it.
It was the second big plunge this year.
The first big price crash happened back on March 9 after the Saudis and
Russians blew up their supply agreement.
Oil prices plunged as much as 30 per cent — the biggest one-day fall since the start of the first Iraq war in 1991.
Under any normal circumstances that would be world-changing stuff — the kind of thing that shifts geopolitical allegiances, topples rulers and starts wars.
It may still be all of that, it’s just overshadowed (as well as driven by) even bigger events around the Covid19 pandemic.
Even after a bounce back late in
the week, Brent Crude was still trading (as of Friday) at less than US$22 a barrel.
That’s a fall of 68 per cent since Covid-19 started to emerge as a threat in early January.
Pump prices have fallen by nothing like that amount.
The AA, in its January Petrol Watch blog, had 91 octane averaging (allowing for regional differences) about $2.29 a litre.
In its latest report the AA has it at about $1.94 a litre — a fall of just 15 per cent.
That calculation doesn’t factor in last week’s big crash.
So we should expect to see pump prices fall further — hopefully in time for us to fill up as we come out of alert level 4.
But the correlation between the oil slump and pump price has not been as large as many motorists would like to see and further falls will likely be even less so.
Basically the portion of our petrol pump price that is made up of crude oil cost has fallen dramatically.
Now there are diminishing returns on how much a fall in crude oil prices can flow through to petrol.
Despite this, AA analyst Mark Stockdale says fuel companies have seen their margins rise.
The commodity cost of the petrol as it lands in New Zealand has fallen by 52.5 cent per litre while pump prices are off just 46 cent per litre.
He also argues that the GST take on the petrol has fallen and that hasn’t been fully passed through.
So there are still grounds for keeping pressure on petrol companies to pass through lower prices.
Overall, New Zealand businesses and consumers should be net beneficiaries of the great oil crash. But there are still big downsides. It adds deflationary pressure to the economy.
We are at risk of the kind of falling price and wage cycle which trapped economies in the great depression and which nearly got us after the global financial crisis. There’s also the damage low oil prices do to those energyproducing countries that are markets for our food exports.
Global trade will be hurt.
And finally, there’s that epic historic stuff.
Political and economic instability in the Middle East, Russia and even the US is bad news.
Trade wars, social breakdown and real wars are the last thing the world needs to deal with on top of the enormous pandemic challenge it is already facing.