Oil industry: The perfect desert storm

For the global oil industry, it has been a double whammy. First a foolish price war between two of the world’s three biggest producers, Russia and Saudi Arabia, drove the price per barrel down from almost US$70 in early January to under US$50 in early March.

They were fighting each other for market share and they were also hoping that lower prices would kill off US shale oil, whose production costs are higher.

Then the second whammy: the Covid-19 lockdowns that started spreading across the world in early

March cut total demand for oil by 30 per cent in the next six weeks.

By last weekend a barrel of Brent crude was selling for only about US$20 – there are two oil prices: West Texas Intermediate mainly for US oil and Brent, always a few dollars higher, for the rest of the world.

Actually, on Monday the US oil price briefly dropped another US$60, to US-$40, because demand has dropped so far below supply that the world is running out of places to store the excess oil. The producers can’t just pour it on the ground and it’s expensive to shut down wells, so they’ll pay somebody who still has storage capacity to take it away.

This is a problem mainly for inland producers in the US, Canada and Russia, because they are far from the ports where you can still hire supertankers for up to $350,000 a day to store the oil offshore.

But that cannot be a long-term solution anywhere, so we are starting to see productive wells being ‘‘shut in’’ (closed down), because that’s cheaper than paying for long-term storage of unwanted oil.

This solution has two drawbacks. One is even if the smaller oil producers don’t go bankrupt, their leases will cancel quickly if they stop producing oil. The other is that it will be too expensive to reopen many of the shut-in wells unless much higher prices return – and if they stay inactive for years, the production flow may be permanently impaired.

Last week’s agreement between all the major oil producers to cut oil production by 20 per cent by the end of June does not begin to deal with the glut of oil.

Global production, at 100 million barrels per day last month, will fall to 80m bpd in the next two months, but global demand is already down about 70 million bpd. Nor is there much hope in sight. Oil demand may drop further and may never return to pre-January levels.

‘‘This is very reminiscent of a time in the mid-1980s when exactly the same situation happened – too much supply, too little demand, and prices of oil stayed low for 17 years,’’ said John Browne, the former head of British Petroleum.

Peak oil ceased to be a subject for debate some time ago. More and more countries are committing to net zero emissions by 2040 or 2050, and everybody knows that a lot of oil, coal and gas will be left in the ground forever.

So the topic of concern for the industry is now peak demand – and some industry analysts think that it is already past.

‘‘The virus will bring forward peak demand for fossil fuels,’’ Kingsmill Bond of Carbon Tracker told three weeks ago. ‘‘Peak emissions was almost certainly 2019 and perhaps peak fossil fuels as well. It will be touch and go if there can be another minipeak in 2022, before the inexorable decline begins.’’

So the stock market valuations of most oil majors have halved since January and the golden dividends of 20 per cent or more are gone forever.

The rate of return on new oil and gas projects is now about the same as on wind or solar power projects, so where is the smart money going to go?

Oil is low return, high risk, high carbon, so don’t touch it.

And the real question is: What does the decline of oil mean for our civilisation’s prospects for dealing with climate change without a global calamity?

That is a subject for another article.

Gwynne Dyer’s new book is ‘‘Growing Pains: The Future of Democracy (and Work)"

‘‘This is very reminiscent of a time in the mid1980s when exactly the same situation happened – too much supply, too little demand, and prices of oil stayed low for 17 years.''