Tag Archives: Oil prices

Coronavirus stimulus money will be wasted on fossil fuels

Low gas prices in Old Orchard Beach, Maine, on March 30. Derek Davis/Portland Press Herald via Getty Images

Oil and gas companies were already facing structural problems before Covid-19 and are in long-term decline.

As countries across the world go into lockdown in response to Covid-19, economies are in free fall. Almost every sector is taking a hit, hemorrhaging jobs and value. And almost every sector will be shaped, for years to come, by the speed, amount, and nature of public assistance it receives. There is a finite amount of time, resources, and political will available to get economies going again; not every sector will get what it wants or needs.

In short, the decisions legislators make in response to the coronavirus crisis will have an enormous influence on what kind of economies emerge on the other side.

A few weeks ago, I wrote about what an ideal recovery and stimulus package would look like. And last week I wrote about how shortsighted it is for Republicans (enabled by learned Democratic passivity) to reject aid for the struggling clean energy industry.

In this post, I want to take a look at why it is equally shortsighted for President Trump and congressional Republicans to remain so devoted to the fossil fuel industry.

The dominant narrative is still that fossil fuels are a pillar of the US economy, with giant companies like Exxon Mobil producing revenue and jobs that the US can’t afford to do without. Even among those eager to address climate change by moving past fossil fuels to clean energy — a class that includes a majority of Americans — there is a lingering mythology that US fossil fuels are, to use the familiar phrase, too big to fail.

President Trump, flanked by House Minority Leader Kevin McCarthy, left, and Chevron CEO Mike Wirth, meets with energy sector CEOs at the White House on April 3.  Jim Watson/AFP via Getty Images

But the position of fossil fuels in the US economy is less secure than it might appear. In fact, the fossil fuel industry is facing substantial structural challenges that will be exacerbated by, but will not end with, the Covid-19 crisis. For years, the industry has been shedding value, taking on debt, losing favor among financial institutions and investors, and turning more and more to lobbying governments to survive.

It is, in short, a turkey. CNBC financial analyst Jim Cramer put it best, back in late January, before Covid-19 had even become a crisis in the US: “I’m done with fossil fuels. They’re done. They’re just done.”

“We’re in the death knell phase,” he said “The world has turned on [fossil fuels].”

Cramer’s take is not yet conventional wisdom, but he’s right. Evidence in support appears in a new report from the Center for International Environmental Law (CIEL) called “Pandemic Crisis, Systemic Decline.” Let’s walk through it.

Fossil fuels are furiously lobbying for, and receiving, largesse from the US government

The UK-based think tank InfluenceMap recently did an analysis that tracks corporate lobbying in the face of the Covid-19 crisis. It found that, across the globe, the oil and gas sector has been the most active in lobbying for interventions, seeking, as CIEL summarizes, “direct and indirect support, including bailouts, buyouts, regulatory rollbacks, exemption from measures designed to protect the health of workers and the public, non-enforcement of environmental laws, and criminalization of protest, among others.” In Canada, Australia, and the UK, the industry is arguing that it must be subsidized and deregulated in order to survive.

In the US alone, the industry is seeking access to a range of stimulus funds, relief from a variety of pollution regulations, and use of the strategic petroleum reserve to bolster prices. Journalist Amy Westervelt is tracking at least a dozen other lobbying efforts.

The petrochemical and plastics industry, which is in large part an extension of the oil and gas industry, is exploiting the crisis as well. It has lobbied the federal government to declare an official preference for single-use plastic bags and suggested that more fresh produce should be wrapped in plastic.

The virus has not slowed down the Trump administration’s attempts to assist the industry. It is gutting fuel economy standards, which, by its own estimation, will increase pollution and eliminate 13,500 jobs a year. The EPA has dramatically eased the enforcement of pollution regulations and moved forward with its “secret science” rule, which will make it more difficult to understand and address the health impacts of air pollution — and more difficult to study the coronavirus.

The petrochemical industry has lobbied the federal government to declare an official preference for single-use plastic bags.  Timothy A. Clary/AFP via Getty Images

President Trump delivers a speech on energy sector jobs at the Shell Chemicals Petrochemical Complex in Monaca, Pennsylvania, on August 13, 2019.  Jeff Swensen/Getty Images

During a supply glut driven by historically low prices, the Interior Department is rushing to lease federal land for oil and gas development, despite an anemic response, rock-bottom prices, and calls from conservative and taxpayer groups to suspend leasing in the face of the coronavirus.

The administration seems determined to bail out struggling shale gas companies, despite that overleveraged, debt-ridden sector being long overdue for a shakeout. (For more on that, check out Amy Westervelt’s reporting at Drilled.)

Trump is negotiating with Saudi Arabia and Russia on oil supply cuts, and has the Department of Energy buying up billions of tons of oil for the strategic petroleum reserve, all to try to boost the price of oil to help struggling oil majors. A group of GOP senators is lobbying for fossil fuel companies, including coal companies, to be eligible for the small-business recovery fund.

Last week, EPA Administrator Andrew Wheeler announced that the administration, in defiance of an enormous body of evidence and recommendations from EPA scientists and staff, will not tighten restrictions on soot pollution. And on Friday, Wheeler announced that the EPA will weaken standards on mercury and other toxic metals from fossil-fueled power plants, again in opposition to the scientific consensus, based on rigged cost-benefit analysis that deliberately excluded most benefits.

Across the board, the administration is doing everything it can to help fossil fuels. But it’s a mug’s game. The industry is faltering for reasons that well predate Covid-19.

Fossil fuels were already facing structural problems before the coronavirus

US coal is in terminal decline, for reasons I’ve written about many times before. No amount of stimulus money or weaker pollution regulations can save it.

But on the surface, things look different for oil and gas. Thanks to fracking, production has been booming for the past decade, vaulting the US ahead of Saudi Arabia and Russia to become the the world’s leading oil and gas producer.

And the same goes for petrochemicals and especially plastics, which have been forecast to be the main drivers of rising petroleum demand in coming years. The industry has issued rosy projections of plastics’ growth and invested $200 billion in new petrochemical and plastics infrastructure.

But dig below the surface and things don’t look so good.

First, fracking was a financial wreck long before Covid-19 hit. US fracking operations have been losing money for a decade, to the tune of around $280 billion. Overproduction has produced a supply glut, low prices, and an accumulating surplus in storage.

CIEL reports:

Since 2015, over 200 drillers have gone bankrupt, with 32 declaring bankruptcy in 2019. At the beginning of 2020, the industry continued to struggle as natural gas prices remained low due to sluggish demand growth. By the end of the first quarter, another seven drillers had declared bankruptcy, six additional drillers had their credit outlook downgraded, and several major banks had written down the expected value of many drillers’ reserves. A recent analysis from Rystad Energy indicated that, at prevailing oil and gas prices, almost all new fracking wells drilled would lose money.

Even as its prospects grow dimmer, the enormous debt the industry has taken on over the years is coming back to bite it. Some $40 billion will come due this year alone, and around $200 billion in the next four years. In the hours after this article was first published on April 20, oil futures for May fell to negative prices. Mind-boggling.

Second, both oil and gas prices were persistently low leading into 2019. Due to oversupply and mild winters in the US and Europe, there is a glut of both natural gas and oil, such that the entire world’s spare oil storage is in danger of being filled. Many big oil deals in “frontier countries” with as-yet-unexploited reserves, like Guyana, Argentina, and Mozambique, are falling through as low prices drag on.

Third, renewable energy and electric vehicles are threatening oil and gas’s dominance in both transportation, which represents 70 percent of global demand, and electricity. Natural gas’s status as a “bridge fuel” in the power sector is in increasing doubt; since 2014, orders for new gas turbines (to generate power) have fallen by half. As for transportation, a recent report from the international banking group BNP Paribas concluded that “the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline.”

An electric car at a charging station in Bavaria, Germany, on March 26, 2020.  Sven Hoppe/picture alliance via Getty Images

Fourth, oil and gas majors are revealing their own weakness by writing down assets — effectively conceding that certain reserves cannot be profitably exploited. In 2019, Chevron wrote down $11 billion worth; Spanish oil company Repsol recently wrote down $5 billion worth. Exxon Mobil, after adding Canadian tar sands assets to its books in 2017, reversed course and wrote down 3.2 billion barrels last year.

Fifth, financial institutions — “institutional and retail investors, banks, insurers, and credit rating agencies” — are catching wind of fossil fuels’ weakness and beginning to back away. Many, like Wells Fargo, BlackRock, the European Investment Bank, and the World Bank Group, are restricting investments in carbon-intensive projects. As of March 2020, asset investors worth $12 trillion had declared that they would divest from fossil fuels.

As financial institutions divest, the ones still invested in carbon-intensive projects face increasing vulnerability to lawsuits charging them with ignoring material risks. “As the risks of investing in the oil and gas sector become ever more apparent,” CIEL writes, “more and more investors subject to fiduciary duties will likely choose to steer clear of these companies.”

Like these other dismal trends, the financial turn from fossil fuels was underway well before Covid-19. Over the past decade, companies in the sector have spent more on stock buybacks and dividends than they have brought in through revenue, leading to a greater and greater debt burden. Declining confidence in the sector has made it the worst-performing sector on the S&P Index.

The Dow Jones Index (black line) vs. the Dow Jones Oil & Gas Index (blue line), as of April 17, 2020.  S&P Dow Jones Indices

Finally, plastics, the great hope of the oil and gas sector, do not appear to be growing fast enough to justify the industry’s optimistic projections. Much of the US plastics industry is geared for export, but countries across the world (127 and counting) are adopting restrictions on single-use plastics. The most recent such restrictions were adopted by China, the world’s largest plastic producer and consumer. Plastics, like oil and gas, are suffering from the dual malady of overexpansion and underconsumption.

As an example that encompasses all these structural problems, CIEL cites Exxon Mobil. The company’s plan for growth involves growth in its petrochemical operations, which is now in doubt; fracking in the Permian Basin, which is now in doubt; and expanding oil production in Guyana, which is now (owing to political instability) in doubt.

All these doubts are converging as Moody’s recently revised the company’s outlook to negative. It fell out of the S&P’s top 10 for the first time, its stock hit its lowest price in a decade, the rapid rise of renewables and electric vehicles rendered billions (and perhaps soon trillions) of dollars of its assets worthless, and it is keeping shareholders happy with debt-financed dividends. The Institute for Energy Economics and Financial Analysis found that over the past decade, Exxon Mobil has spent $64.5 billion more on payouts to stockholders than it earned in free cash flow. That can’t go on much longer.

Again: All of these structural trends predate Covid-19. But the global lockdown in response to the virus has accelerated all of them.

Oil and gas are caught in a historic downturn

Into this already dismal situation for fossil fuels came the virus and the subsequent lockdown. The vertiginous plunge in consumer demand has hit every sector of the economy, but oil and gas, already facing oversupply and persistent low prices, were particularly vulnerable.

“Oil, gas, and petrochemical stocks have been affected more rapidly and much more deeply than almost any other sector,” CIEL writes. “The oil and gas sector lost more than 45% of its total value from the beginning of January to early April 2020.”

The already declining stocks of Exxon Mobil, Royal Dutch Shell, and Occidental Petroleum were sent tumbling even faster. In July 2014, Exxon stock hit a high of $107; as of early April 2020, it was at $42, its lowest level in decades.

Transportation represents 70 percent of petroleum consumption, but no one is moving. Rystad Energy estimates that as of March 2020, global traffic is down 40 percent. As lockdowns remain, that number will likely drop further.

Air travel has been the fastest-growing source of demand for transport fuels, but no one is flying. “In the final week of March 2020,” CIEL writes, “commercial air traffic was almost 63% lower than in 2019.”

Christina Animashaun/Vox

Public health officials warn that there could be periodic outbreaks for months or even years. Meanwhile, there are rapid advances being made everywhere in the infrastructure, technology, and practices of working remotely, from home. It’s entirely possible that auto and air travel won’t reach their pre-virus levels in the US for years, if ever.

Travel by ship is also taking a hit. Cruise ships, beset by a series of viral horror stories, have suspended operations and many analysts doubt they will ever fully recover.

Meanwhile, oversupply, exacerbated by the drop in demand, is taxing the nation’s storage capacity — the International Energy Agency says global capacity is about 85 percent full. “Nearly all observers have concluded that at projected levels of demand destruction,” CIEL writes, “the total global capacity for storing unneeded oil and gas will soon be exceeded.” At that point, many producers will be forced to simply shut down operations and write-downs will accelerate.

On top of all this has come a price war between Saudi Arabia and Russia, competing for the shrinking supply left over by the US supply glut. Global oil prices were at $69 per barrel in January 2020. The price of a barrel of Canadian tar sands oil appears headed into negative prices, as are Texas oil and natural gas in some parts of the US, for May futures (June prices are higher). The so-called OPEC+ group of oil-producing nations (OPEC + Russia) recently agreed to a 10 million barrel a day cut in production, but analysts agree that it is unlikely to be sufficient to stabilize prices.

Freight trains filled with oil in Krasnodar, Russia, on April 14. As supply exceeds demand and oil prices fall, oil producers find themselves confronted with storage challenges.  Igor Onuchin/TASS via Getty Images

When storage capacity runs out, producers are forced to pay people to take oil off their hands. (Raise your hand if you had “negative oil prices” on your 21st-century bingo card.) Even if storage doesn’t completely run out, it will be close to full, serving to suppress prices, for years. Petrochemicals and plastics don’t have it much better, with major investors delaying or dropping out of projects left and right.

“In the medium term,” CIEL writes, “the prospect of a full recovery for many of these revenue streams is, at best, uncertain, and, in many cases, unlikely.” Fossil fuels and petrochemicals could struggle for years.

And even if they eventually manage to achieve something like their pre-virus trajectory, that trajectory was sloping downward. As CIEL summarizes: “the pandemic exposes and exacerbates fundamental weaknesses throughout the sector that both predate the current crisis and will outlast it.”

Wasting stimulus money on fossil fuels makes no sense, so Trump will probably do it

Slowly but surely, the world is beginning to take global warming seriously, shifting attention and investment to materials and sources of energy that do not produce greenhouse gas emissions. As more and more jurisdictions, institutions, and investors turn away from fossil fuels, explicitly citing climate change, those left holding carbon-intensive assets will become targets of increasingly intense legal and civic activism holding them responsible for the damages.

CIEL concludes with recommendations to investors, frontier countries, and local communities: Take heed of fossil fuels’ long-term weakness when making decisions about the future. CIEL also argues that public officials “should not waste limited response and recovery resources on bailouts, debt relief, or similar supports for oil, gas, and petrochemical companies.”

Given the well-established inclinations of Trump and congressional Republicans, that recommendation is likely to fall on deaf ears, at least in the US. If Democrats do not muster the courage to stop them — and it does not seem they will — the GOP is likely to continue showering the fossil fuel industry with favors while dismissing aid to the clean energy industry as frivolous.

President Trump Signs Coronavirus Stimulus Bill In The Oval Office
President Trump signs the $2 trillion stimulus bill on March 27, 2020. Not a crew likely to turn their backs on fossil fuels.  Erin Schaff-Pool/Getty Images

At best, they can slow down the transition to clean energy a bit. They cannot stop it. Adding stimulus money to fossil fuels’ already subsidy-rich diet will allow a little more pollution and a little more damage to public health for a little longer, but it’s only a delay. Meanwhile, other countries will be establishing a commanding position in some of the biggest growth industries of the 21st century.

It would be a shame to emerge from this crisis still clinging to the past rather than facing, and preparing for, the future.


Update, April 20, 4 pm ET: After this article was first published, oil futures fell to negative prices.

Oil prices dip below zero as producers forced to pay to dispose of excess

US crude has negative value for first time in history as stockpiles overwhelm storage facilities

The Guardian, by Jillian Ambrose and Martin Farrer, April 20, 2020
A record 160m barrels of oil are currently being stored in oil tankers outside the world’s shipping ports. Photograph: US Department of Energy/EPA

US oil prices turned negative for the first time on record on Monday as North America’s oil producers run out of space to store an unprecedented oversupply of crude left by the coronavirus crisis.

The price of US crude oil collapsed from $18 a barrel to -$38 in a matter of hours, forcing oil producers to pay buyers to take the glut of crude which they cannot store, as rising stockpiles of crude threaten to overwhelm oil storage facilities.

“The problem of the global supply-demand imbalance has started to really manifest itself in prices,” said Bjornar Tonhaugen, head of oil at research firm Rystad Energy. “As production continues relatively unscathed, storages are filling up by the day. The world is using less and less oil and producers now feel how this translates.”

The Guardian reported over the weekend that a record 160m barrels of oil was being stored in “supergiant” oil tankers outside the world’s largest shipping ports, including the US Gulf, following the deepest fall in oil demand in 25 years because of the coronavirus pandemic.

The last time floating storage reached levels close to this was in the depths of the financial crisis in 2009, when traders stored more than 100m barrels at sea before offloading stocks when the economy began to recover.

The price collapse in US oil market – known in the industry as the West Texas Intermediate price – accelerated because it is the last day oil producers can trade barrels that are scheduled for delivery next month, when oil storage is expected to reach capacity.

The US price for oil delivered in June, which will become the default oil price from tomorrow, is also falling due to the economic gloom caused by the coronavirus, but has managed to remain above $20 a barrel. On Monday the price for brent crude, the most widely used benchmark, fell 8% to $25.79.

Concerns over the economy, which directly affect oil demand, have been heightened by the growing standoff between the US president and state governors over whether the US can begin to lift restrictions on movement and businesses.

Global oil prices are expected to begin recovering over the second half of the year as tight restrictions on travel to help curb the spread of the virus are lifted, raising demand for fuels and oil.

The world’s largest oil-producing nations have agreed a deal to hold back between 10m to 20m barrels of oil a day from the global market from May, and many oil companies are likely to shut their wells as financial pressures mount.

Cailin Birch, global economist at the Economist Intelligence Unit, said: “US crude oil production has begun to fall in the last two weeks, and will continue to fall in the coming months as already heavily indebted shale firms scale back activity or are forced into bankruptcy or consolidation.”

Despite the historic production cuts, most analysts believe that oil prices will fail to reach the same price levels recorded at the beginning of the year before the outbreak. The global oil price, under the brent crude measure, reached highs of almost $69 a barrel in January before plummeting to less than $23 a barrel at the end of March.

Bay Area gas prices: great for consumers, a threat to independent frackers

Haven’t filled up lately? Here’s how cheap Bay Area gas is

Vallejo Times-Herald, April 13, 2020

The price of gasoline continues to tumble because of the lack of demand worldwide, bringing Bay Area prices below $2.30 a gallon.

The average price nationwide is now $1.87 a gallon, according to AAA. That’s down from $2.30 a month ago and almost a dollar below the year-ago level of $2.82.

A handful of stations in Oklahoma and Wisconsin were charging below 80 cents a gallon last week.

In the Bay Area, the cheapest prices are in the East Bay: $2.29 at some Costcos and independent stations in Concord, Oakland and Union City, according to GasBuddy. The South Bay’s lows are around $2.35, and the Peninsula’s about 5 cents more.

Farther afield, $2.19 has been seen in Sacramento and Modesto, and prices below $2 were noted near Oroville and Folsom. Across the line in Reno, you can find $1.85.

In Hawaii, which has the nation’s most expensive gas, $2.35 is available in Honolulu but Kauai stations are still charging $3.60.

Of course, few drivers can take advantage of cheap gas because of the shelter-in-place orders. Cheap crude will continue to pose a serious threat to U.S. oil companies, especially independent frackers that piled on too much debt. Rystad Energy recently estimated that 140 US oil producers could file for bankruptcy this year if oil stays at $20 a barrel, followed by another 400 in 2021.

Why cheap oil is the key to beating climate change

Repost from The Guardian

Why cheap oil is the key to beating climate change

Keeping the price of a barrel of crude at $75 or less will devastate the profitability of fossil fuel extraction – as the shelving of three tar sands projects demonstrates

By Mitchell Anderson, 11 December 2015 11.59 EST
‘If the Canadian tar sands investments that were halted this year stay dead, the world will avoid another 1.6tn tonnes of dangerous carbon emissions.’ Photograph: David Levene for the Guardian

As world leaders enter the home stretch of the Paris climate negotiations they should keep in mind a key measure of success in limiting carbon emissions: cheap oil. The lower the global price of oil, the more it stays in the ground – due to the brutal, if counterintuitive, logic of the petroleum marketplace.

Most of the easily extracted oil deposits are long gone. What’s left are high-cost, high-risk long shots such as the Alberta tar sandsdeep-water reservoirs off Brazil, and drilling the high Arctic. Companies hoping to profit from the last dregs of the petroleum age need to convince their investors to part with massive amounts of capital in hopes of competitive returns often decades down the road.

Billions have already fled the Alberta oil sands in the last year as the global price of oil collapsed from over $100 per barrel to below $40. Shell has just called a halt to its Carmon Creek project in Northern Alberta, writing off $2bn in booked assets and 418 million barrels of bitumen reserves. A barrel of bitumen will release about 480kg of carbon dioxide from extraction, refining, transport and combustion. This head office write-down means that 200m tonnes of carbon will not be released into the atmosphere.

Two other tar sands projects were also shelved this year with reserves of about 3bn barrels. If these investments stay dead the world will avoid another 1.6tn tonnes of dangerous carbon emissions. Together the cancellation of these three projects alone amount to the equivalent of taking more than 14m cars off the road for the next 25 years.

There a simple correlation between future emissions and the price of oil needed to make that profitable. Such a graph has been compiled by Carbon Tracker, a UK-based non-profit organisation set up to educate institutional investors on the increasing financial risks of the fossil fuel sector.

Its message to investors is simple: the world must limit additional emissions to below 900 gigatons to avoid potentially catastrophic climate consequences – and 40% of this future carbon budget – about 360 gigatons – is projected to come from the oil sector. Anything more than that must stay in the ground – the so-called unburnable carbon.

And what’s the price of oil that could save to world? Anything below $75 a barrel of Brent crude means that companies cannot profitably extract more than 360 gigatons of the world’s remaining reserves – no messy policy solutions required.

Just last year the price of Brent crude was about $110 a barrel, a price that would gainfully produce about 500 gigatons of carbon emissions by 2050. Now it is less than $50, which would only produce 180 gigatons over the same period. If prices stay where they are, the world will avoid some 320bn tonnes of carbon emissions by 2050 in precluded production from uneconomic oil fields.

To put this in perspective, that is 25 times larger than reductions the Kyoto protocol was supposed to achieve if it had worked (it didn’t), and 180 gigatons below the oil emissions limit scientists say we need to avoid a world with more than two degrees of warming. Economic turmoil aside, the global commodities market just served up massive progress on an issue in desperate need of some good news.

Carbon Tracker recently revised its calculations to include the turmoil in the oil market, but the basic correlation is the same: lower fossil fuel prices devastate the economics of future extraction.

Seen through this lens, a key measure of our success in controlling carbon emissions should be keeping commodity prices of fossil fuels low. And while the main driver of the current slump in prices is the current glut of supply, it’s important to realise that almost every policy intervention to avert climate disaster is directly or indirectly aimed at lowering the price or profitability of fossil fuels such as oil and coal.

Efficiency and conservation incentives reduce demand, as do vehicle emission standards and investing in public transit. Carbon pricing means that fossil fuel companies can no longer use the atmosphere as a free dumping ground for CO2, so also lowering profitability.

But doesn’t cheap gas mean that people just use more of it? Not really. While there is a weak economic link between declining prices and increasing consumption, key producers like Saudi Arabia are in fact fretting that slowing growth in Asian markets and already peaked demand in developed countries will lead to a long-term decline in the world’s appetite for oil.

I dearly hope that world leaders can somehow negotiate transformative change. But perhaps the best they can do is nudge economic indicators like crude prices in the right direction and get out of the way. The unstoppable forces of the global marketplace will hopefully do the rest.