COVID-19

“Suppliers are sexy,” but the real oil collapse story is demand

Scott Tong Apr 3, 2020
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There's a lack of demand for oil as people stay home during the COVID-19 pandemic. Above, a woman wearing gloves gases up her car in Los Angeles on March 18. Chris Delmas/AFP via Getty Images
COVID-19

“Suppliers are sexy,” but the real oil collapse story is demand

Scott Tong Apr 3, 2020
There's a lack of demand for oil as people stay home during the COVID-19 pandemic. Above, a woman wearing gloves gases up her car in Los Angeles on March 18. Chris Delmas/AFP via Getty Images
HTML EMBED:
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Oil prices spiked this week on news that key producers — Saudi Arabia, Russia and perhaps the state of Texas — could arrange a coordinated cut in supply. But the defining story of oil in the age of global coronavirus is not supply, analysts say. It’s a historic plunge in demand that has pushed U.S. average gasoline prices to $1.91 a gallon.

Source: GasBuddy.com

Except in China, where virus-related travel restrictions are being lifted, most people in the world are not moving. Oil, of course, is for moving. Many analysts project that world demand for crude in April could plummet by 30%. That would be the worst dive ever — almost.

“We saw an equivalent drop from 1929 to 1934,” Philip Verleger, longtime energy economist and senior energy adviser in the Carter administration, said. “Crude prices went from $2 a barrel to 25 cents. A 90% drop.”

To avoid a repeat of that, oil producers are trying to respond. American oil and gas executives met at the White House Friday to discuss policy responses. And Monday, representatives of OPEC and Russia are expected to meet by video to consider joint supply cuts. But to many, discussions of oil supply are a sideshow.

“You know, the suppliers are sexy and the demand is boring,” Sarah Ladislaw, energy fellow and vice president at the Center for Strategic and International Studies. “But the reality is that there’s probably not a lot suppliers can do in terms of supply cuts, because the demand destruction is just so large.”

There’s probably not a lot suppliers can do … demand destruction is just so large.

Sarah Ladislaw, Center for Strategic and International Studies

Because demand has plunged spectacularly, the world’s oil is projected to run out of storage space in the next few months. Crude oil would physically have no place to go, forcing producers to stop pumping abruptly. Prices could collapse further. To avoid that scenario, the world’s largest oil suppliers are mulling unheard of supply cuts to match the historic destruction in demand.

“Russia, Saudi Arabia and the U.S. are producing something like 35 million barrels” per day, Per Magnus Nysveen, lead analyst and senior partner of Rystad Energy, said. “If they are cutting up to 15 million barrels [daily], they are cutting up to half their production. Extremely dramatic.”

They are trying to survive until a possible recovery in demand next year. Ladislaw, however, warns that would only happen if the virus is contained and people are and driving and flying again.

COVID-19 Economy FAQs

Millions of Americans are unemployed, but businesses say they are having trouble hiring. Why?

This economic crisis is unusual compared to traditional recessions, according to Daniel Zhao, senior economist with Glassdoor. “Many workers are still sitting out of the labor force because of health concerns or child care needs, and that makes it tough to find workers regardless of what you’re doing with wages or benefits,” Zhao said. “An extra dollar an hour isn’t going to make a cashier with preexisting conditions feel that it’s safe to return to work.” This can be seen in the restaurant industry: Some workers have quit or are reluctant to apply because of COVID-19 concerns, low pay, meager benefits and the stress that comes with a fast-paced, demanding job. Restaurants have been willing to offer signing bonuses and temporary wage increases. One McDonald’s is even paying people $50 just to interview.

Could waiving patents increase the global supply of COVID-19 vaccines?

India and South Africa have introduced a proposal to temporarily suspend patents on COVID-19 vaccines. Backers of the plan say it would increase the supply of vaccines around the world by allowing more countries to produce them. Skeptics say it’s not that simple. There’s now enough supply in the U.S that any adult who wants a shot should be able to get one soon. That reality is years away for most other countries. More than 100 countries have backed the proposal to temporarily waive COVID-19 vaccine patents. The U.S isn’t one of them, but the White House has said it’s considering the idea.

Can businesses deny you entry if you don’t have a vaccine passport?

As more Americans get vaccinated against COVID-19 and the economy begins reopening, some businesses are requiring proof of vaccination to enter their premises. The concept of a vaccine passport has raised ethical questions about data privacy and potential discrimination against the unvaccinated. However, legal experts say businesses have the right to deny entrance to those who can’t show proof.

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