I was on Twitter a few minutes ago and my feed was full of people talking about the fall in petrol prices, some of them were talking about consequences in the dollar rates and I don’t understand at all. How does the petrol price affect world economy? And how does it affects all of us non billionaire people?
In: Economics
THe current oil price is sort of an anomaly that is caused by how the market works. Each step of the process of turning oil into gasoline is done by someone else: oil wells pulls the oil out of the ground, someone buys that oil and stores it, and refineries buy it from the people that store it to turn it into gasoline.
Right now no one is buying gasoline. That means that refineries aren’t buying oil from the people who store it. This poses a problem for the people who store oil: they buy the oil the minute it comes out of the well but it takes a lot of time to get from the well to the storage facilities.
A lot of wells are shut down now so there isn’t much new oil coming into the system, but everyone had assumed that the lockdown wouldn’t last this long so that shutdown only occured recently. That means that there is a lot of oil that is now in transit to storage facilities that are “full”.
If you’re one of the people who owns in transit oil you need to find someone to put it – you can’t just dump it into the environment without paying huge fines or going to jail. The company that is transporting your oil will store it for you, but they charge you to do that and the longer they store your oil the more you have to pay.
Nobody knows how long the shutdown is going to last now, so some of the owners of that in transit oil are trying to pay anyone with storage capacity to take it. That might cost them money now, but it prevents them from having to pay storage fees to their transport company for indefinite future. Because of this, the price that you pay for oil that will be delivered to you in May is negative – IE, someone will pay you to take their oil in May.
It doesn’t appear as though people think that this will last through June, as the price that you pay for oil that will be delivered to you in June is still normal.
As to how this affects the economy – “it depends’.
The last oil price collapse in 2015 actually had a paradoxically beneficial effect. It resulted in a surge of investment into fracking, which substantially lowered the cost of oil production in the US. This led to an increase in US production, which led to the US flipping from being an oil importing country to an oil exporting country around the end of last year. This has, overall, been quite good for the economy.
Its possible that oil prices remain depressed and you see a similar investment surge. Its also possible that we’ve hit a floor in terms of how much its possible to bring down the cost of production through fracking, in which case the effects depend on the price of US fracked oil vs the price of oil from the rest of the world.
Its difficult to compare the cost of oil produced in the US to that produced elsewhere because oil production in most other countries is nationalized. For example, the cost to produce oil in Saudi Arabia is maybe $1-3 per barrel, compared to the US where the cost is somewhere around $20-25 per barrel.
But that $1-3 per barrel in Saudi Arabia isn’t really Saudi Arabia’s break even point for oil because they need to use the profits that they make from the oil to run the rest of their economy. If the cost of oil drops too low then their economy collapses, even though they may still be making a huge profit on each barrel of oil.
You can see this happening in Venezuela right now – the cost to produce oil in Venezuela is in the high $20s/low 30s per barrel. Oil has been hovering around $45-50 per barrel for the past few years, so Venezuela is making $15-25 per barrel – which is a ludicrous amount of profit. Despite that, its not enough to feed their people and so their economy has been collapsing. That economic collapse has also led to a collapse in Venezuelan oil production, because they don’t have the money to drill new wells or properly maintain existing ones.
So what happens to the US? If US producers can sustained low profits longer than the rest of the world, as they did in 2015, then it ends up being beneficial because the US share of the global oil market grows. If not, then its detrimental because the US share of the oil market shrinks.
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