Turmoil in World Oil Markets Tips Environmental Scales Too

Is the sun setting on Big Oil? The industry is certainly in crisis, its future unclear. But one thing is unmistakable — oil is deeply intertwined with environmental concerns like climate change. Above, an offshore rig near Huntington Beach, Calif. Photo: Pete Markham, Flickr Creative Commons. Click to enlarge.

Issue Backgrounder: Turmoil in World Oil Markets Tips Environmental Scales Too

By Joseph A. Davis

Environmental journalists spend a lot of words on Big Oil, which often plays the role of villain in our journalistic allegories. 

Yet too few journalists fully understand all the real and complicated ways that the oil industry works and affects our lives.

That’s all the more important right now, as the dramatic drop in demand for oil, driven by the shutdown of world economies by coronavirus, has meant a corresponding plummet in prices. 

Veteran oil traders are shaking their heads in disbelief this week as the price of some U.S. oil dropped into negative territory. The unprecedented drop was partly an artifact of market mechanics, but was also a symptom of a profound and longer-term shift in market fundamentals. 

Production is putting too much oil into world supply, the pandemic is shutting down too much demand and storage tanks are overflowing.

Signs are that the price meltdown means a big recalculation of the "energy transition" environmental campaigners have been pushing. Electric cars may sell less briskly. The North American shale and oil sands industries may see small producers go out of business. Ethanol producers may be making hand sanitizer. 

The pricing meltdown is clear evidence that the vaunted OPEC+ oil deal of April 12  (may require subscription) was a failure. And certainly the price advantage of renewables and efficiency may become less dramatic.

But the sun will keep shining and the wind will keep blowing. While the Saudi oil monarchy, the Russian oil oligarchy and the big oil majors may stay in business during years ahead, they may be placing their bets in a game that is changing faster than they imagined.

This moment offers a good chance to step back and look at what is happening — it is very big news with huge environmental consequences.

We are certainly going through an “energy transition,” and the world will not be the same afterwards. It might be an exaggeration to say that the oil industry is on its deathbed. But it has been intubated, at least metaphorically. 

Yes, oil is in crisis. But the end of the tale isn’t written yet — it’s more of a suspense story than a set-piece. So it’s a great time to re-examine the “myths” about oil. 

 

Trouble in the oil patch     

As this Backgrounder is written, worldwide prices of crude oil are at historic lows. Fundamentals explain it: too much supply and too little demand. 

This won’t be the case forever, since crude oil is a fairly free and fungible world market that self-adjusts, homeostatically. 

Worldwide demand dropped dramatically as the coronavirus shut down economies and air travel. Crude production in many places, including the United States, was near record highs, often because of the fracking revolution in shale plays.

When the Organization of Petroleum Exporting Countries, better known as OPEC, and its allies met March 5, Saudi Arabia was pushing cartel members to declare production cuts. Russia, a major producer who had been cooperating with OPEC although not an official member, balked (may require subscription). 

To punish Russia, and force them to cooperate, the Saudis turned their pumps on wide open (may require subscription), flooding the market with extra oil, which had the planned-for effect of pushing world oil prices way down. 

This “price war” went on for a little more than a month, and the price of benchmark West Texas intermediate, or WTI, crude (Texas’ best) was crashing to the lowest levels in two decades. 

 

The oil price plunge signals trouble in

those areas where much petroleum

is produced, but its implications

for the environment are profound.

 

The oil price plunge signals trouble in those areas where much petroleum is produced, but its implications for the environment are profound. 

On the one hand, it creates incentives for burning more oil in, say, gas-guzzling SUVs. On the other hand, it destroys incentives for oil companies to do many things environmentalists oppose — such as drill offshore Arctic waters or build new pipelines. 

 

Pricing and oil’s global identity 

It’s all about the price of oil. And that price is set, to a very large extent, by the world market.

That’s true, even though oil companies, private or government-owned, work hard to fix the “free market” so lionized by conservatives and financiers. It’s a paradox.

OPEC is, after all, a cartel. Or more precisely, it wants very much to be a cartel, but it has trouble imposing cartel discipline on its members. Moreover, many of the large producers in the world are not officially members of the cartel and aren’t so sure they want to play on the team. So its power to control the market is limited. 

OPEC’s power is misunderstood by many in the news media — as magical and mighty — when it isn’t.

Oil is traded globally across borders, by pipeline or tanker, like this one off the coast of Washington state. Photo: Richard Droker, Flickr Creative Commons. Click to enlarge.

Actual market conditions, the amount of oil produced, stored and consumed, are in reality set by a dizzying array of factors that nations can’t wholly control: civil war in Libya, trade sanctions on Iran, inflation in Venezuela, corruption in Nigeria or, for that matter, electoral politics in the United States.

If the oil market is not strictly “free,” then at least it is largely global. Oil can usually travel freely, whether by tanker or pipeline, from one part of the world to another. A barrel not produced in one corner of the world can be replaced by a barrel produced in another. 

Oil can be, and is, traded very actively by brokers, speculators and middlemen, who encourage the process. In the end, this evens out supply and prices, other things being equal (which they aren’t always).

Politicians, voters and news media are often confused by the notion that oil has a national identity. That’s not always true, and sometimes it is deceptive. 

One perfect case would be a nation like Saudi Arabia, where oil is effectively controlled and owned by the government, an autocratic kingdom. At least that was true until 2019, when Saudi Aramco offered stock to the public. The oil industry is nationalized in many countries, such as Mexico or Venezuela.

 

The myths of the wildcatter and ‘foreign’

Oil in nations like the United States can be privately owned, to some extent. We cherish the myth of the ornery wildcatter getting rich, or the idea of “Beverly Hillbillies” getting rich from the oil under their own land. 

Sometimes it actually has been this way. But for the most part, reality has been different.

Early in the history of the U.S. oil industry, John D. Rockefeller organized and owned the mega-trust Standard Oil and came to control some 90 percent of the U.S. oil market until the courts broke it up some in 1910. He was no Jed Clampett. 

In short: Corporations, sometimes multinational in nature, are often major players in the oil market and they do a lot to shape the very nature of the oil market itself. This epic story, too vast to tell here, has been told by gurus such as Daniel Yergin (author of “The Prize”). 

The problem is that, given the vast amount of money at stake in the oil industry, the story is often told by the corporations themselves, their lobbyists, their PR firms and their trade associations. 

And it’s a story occasionally told by news media, some of whom have lacked independence. Journalists today can still remember Ida Tarbell, one of the inventors of investigative journalism, who wrote about Standard Oil.

Corporate entities are still big players in the oil markets. Some, like Mexico’s Pemex, are controlled by single nations. Others, like BP (British) or Shell (Dutch), have a looser affiliation with certain nations. 

Yet others, like ExxonMobil, mostly transcend nationality, if only by the global scope of their operations and the diverse ownership of their stock. 

It is these companies that own, buy and sell most of the oil that is removed from the ground. Not all have national loyalties. Yet the stereotype persists that a particular barrel is “U.S.” oil or “foreign” oil when it is actually corporate oil. 

This has led to demagogy and acts of violence. Case in point: With the support of a U.S. president, the CIA in 1953 implemented a coup in Iran, removing an elected government that intended to nationalize Iran’s oil. 

As production from aging U.S. oil fields began declining, imports began to loom larger in the U.S. petroleum diet. Then in 1973, in retaliation for U.S. support of Israel in the Yom Kippur War, the Arab members of OPEC slapped an oil embargo on the U.S., creating a significant energy crisis. 

The war ended and the United States recovered, but a political meme had been born. For the next several decades, whenever the U.S. oil industry wanted something from the government, it would invoke the U.S.’s “dangerous dependence on foreign oil.”

 

‘Drill, Baby, Drill’ yields to production cuts

Yet a significant amount of oil still actually does belong to the United States, because it lies in formations beneath federal lands. That includes offshore oil. The Trump administration is still pushing a “drill, baby, drill” policy for leasing federal lands. 

Some ask whether this policy is good for the nation, which will scarcely get its money’s worth. Others may ask whether it is good for the oil industry itself to pump more and more oil into a market already glutted.

 

The oil industry has had a deep and 

special clout (and this has shaped 

environmental policies at the EPA 

and Department of Interior).

 

The United States has long had trouble believing that its own national interests are distinct from those of the oil industry. From the start of the Trump administration, the oil industry has had a deep and special clout (and this has shaped environmental policies at the U.S. Environmental Protection Agency and Department of Interior).

While the U.S. oil industry long fostered an “us vs. them” attitude toward OPEC in national politics, it was a surprise to see, more recently, both President Trump (may require subscription) and some of the smaller industry players seeming to support production cuts even as OPEC+ players were struggling toward them. 

Some companies even pleaded with the Texas Railroad Commission, which regulates oil in that state, to issue rules limiting production.   

The question today is whether many of the standard streams of crude oil are going to remain economically viable, whether short-term or long-term. That matters because it will affect global warming.

Some production channels in use today are only profitable if the price of oil is much higher than it is today. The “break-even” price for profitability is variable and depends on a lot of things. But fracking (horizontal drilling in shale, plus hydraulic fracturing), tar sands, deepwater offshore drilling, Arctic offshore drilling and some other techniques are costly. 

Furthermore, the pipelines that carry this oil to market need a consistently higher oil price to keep them viable. Some people think, for example, that the breakeven price for U.S. shale is in the range of $48 to $54 per barrel. Many think it’s higher. On April 15, a few days after the grand OPEC+ deal, West Texas Intermediate dipped below $20 per barrel.

What does the breakeven depend on? How remote (or deep) the oil is, how much technology is needed to extract it, how harsh the geographic conditions are and how high the costs of transporting it are, among other things. 

 

From OPEC to OPEC+

It was once thought that Saudi’s massive Ghawar field was easy to produce from. But Saudi oil data are a state secret, and the field has aged over decades. Even the Saudis may need a higher price to break even.

Saudi Arabia’s strength as a producer once was considered a source of strength for OPEC, and it still is, but the world has grown more complicated since the ’70s. The cartel’s strength, to the degree it has any, stems largely from a disciplined collective ability to control supply well enough to control prices — with supply cuts bringing price rises. 

OPEC'S strength stems largely from a disciplined collective ability to control supply well enough to control prices. Above, a gas pump in Connecticut in 2014. Photo: Mike Mozart, Flickr Creative Commons. Click to enlarge.

Over the years, however, some OPEC members have become less reliable as producers, and new oil producers have emerged. Russia became an exporter during the post-Soviet era. The United States is the world’s largest producer today (or early this year, to be precise). 

OPEC has only propped up its power to set prices by collaborating with non-member nations like Russia (making “OPEC+”). But the further afield it goes, the harder cartel consensus is to come by.

So when OPEC+ on April 12 agreed to cut production, it just was not enough. The oil markets looked at the deal and reacted by not moving the needle much. In fact the market was so unimpressed that the price of oil in some places went down. 

OPEC+’s declared cuts were 9.7 million barrels per day, or bpd, but the amount of demand drop caused by the pandemic was actually much larger. The International Energy Agency estimated world demand in April was about 29 million bpd below what it had been in April 2019.

 

Future of the U.S. oil industry

Could the U.S. oil industry go bust? Maybe. 

What even is the U.S. oil industry? One working definition is that it’s the major producers that actually are headquartered in the United States. That would include ExxonMobil, Chevron, ConocoPhillips, Anadarko, Occidental and EOG (once Enron). 

The ownership of these companies’ stock is hardly limited to U.S. citizens, nor are their operations and holdings limited to U.S. territories. Major players include others, such as British BP or French Total. 

On a more practical level, you might consider them the members of the American Petroleum Institute, the collective lobbying group that speaks for Big Oil here. Except that doesn’t include all the smaller companies, the oilfield service industries (the Petroleum Equipment and Services Association), the wildcatters who have their own lobby group (the Independent Petroleum Association of America) or the gas industry (the American Gas Association).

 

Destruction inevitable in boom-bust cycle

Few on the environmental beat have noticed yet that times are really, really bad (may require subscription) for the U.S. oil industry. But they are. 

 

The shale/fracking industry has been

 drowning in a debt hangover from 

the easy credit which made it possible.

 

The price of oil stocks has gone down dramatically in recent months. The shale/fracking industry that largely made the United States the world’s biggest oil producer (“energy dominance”) has been drowning in a debt (may require subscription) hangover from the easy credit which made it possible. 

As the industry contracts, trade groups are shedding lobbyists (may require subscription) and shedding member companies, too, over climate policy. Talk of energy company bankruptcies has become increasingly common. As Forbes writer Christopher Helman put it, “Not every company looks like a survivor.”

Will it blow over? The oil industry has ridden out boom-bust cycles in years past, and may again. But destruction is inevitable, especially for the independents and the little outfits. 

Remember, however, that oil demand is linked fairly tightly to the business cycle and that a years-long global depression (may require subscription), which some economists now predict, would prolong oil industry pain.

The oil majors in the United States may have the resources to ride this one out. Or not. Some, though, may be starting — just starting — to look toward a future that would make renewables and sustainable energy (may require subscription) part of their future … and that of the country. 

EDITOR'S NOTE: See our Reporter's Toolbox on tracking oil prices and data.

Joseph A. Davis is a freelance writer/editor in Washington, D.C. who has been writing about the environment since 1976. He writes SEJournal Online's TipSheet, Reporter's Toolbox and Issue Backgrounder, as well as compiling SEJ's weekday news headlines service EJToday. Davis also directs SEJ's Freedom of Information Project and writes the WatchDog column and WatchDog Alert.

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* From the weekly news magazine SEJournal Online, Vol. 5, No. 16. Content from each new issue of SEJournal Online is available to the public via the SEJournal Online main page. Subscribe to the e-newsletter here. And see past issues of the SEJournal archived here.