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
Share Now on:
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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

Which businesses are allowed to reopen right now? And which businesses are actually doing so?

As a patchwork of states start to reopen, businesses that fall into a gray area are wondering when they can reopen. In many places, salons are still shuttered. Bars are mostly closed, too, although restaurants may be allowed to ramp up, depending on the state. “It’s kind of all over the place,” said Elizabeth Milito of the National Federation of Independent Business.

Will you be able to go on vacation this summer?

There’s no chance that this summer will be a normal season for vacations either in the U.S. or internationally. But that doesn’t mean a trip will be impossible. People will just have to be smart about it. That could mean vacations closer to home, especially with gas prices so low. Air travel will be possible this summer, even if it is a very different experience than usual.

When does the expanded COVID-19 unemployment insurance run out?

The CARES Act, passed by Congress and signed by President Donald Trump in March, authorized extra unemployment payments, increasing the amount of money, and broadening who qualifies. The increased unemployment benefits have an expiration date — an extra $600 per week the act authorized ends on July 31.

You can find answers to more questions here.

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