With the price of oil sliding, you might expect demand for oil would be rising. Not so much. Demand is rising, but at a rapidly decelerating pace, roughly two-thirds lower than last year. That’s not good news, especially for jobs, which have grown in the U.S. for a record 71 straight months.
That the growth rate for oil consumption is down sharply tells us a lot about the global economy and the likelihood of continued market volatility. Companies and countries with the financial muscle to buy oil cheap and store it until prices rise have been taking the excess supply, but that must end soon because we are running out of places to store oil.
Underground storage, the cheapest way to hold oil once it gets past the wellhead, is pretty much full. The U.S. government’s Strategic Petroleum Reserve, a giant salt dome, can hold about 715 million barrels of oil. It’s at about 695 million barrels right now.
Aboveground oil storage tanks are so close to full that some companies and countries are storing oil at sea. More than 100 million barrels of oil are being stored at sea, sending the price of oil tanker charters soaring. Very large crude carriers have been renting for as much as $111,000 per day, up from a daily average around $20,000 in recent years.
We can expect panic selling once the world runs out of storage, especially expensive storage at sea. Unless some major oil producers shut down a lot of wells, at some point the owners of oil in the most expensive storage will be forced to sell, prompting a brief but dramatic drop in oil prices.
The price for a barrel of West Texas intermediate crude, an industry benchmark, fell below $28 in the spot markets this week. That’s tantalizingly close to the 1986 price of $22 in today’s money. Don’t be surprised if the spot price falls, briefly, under $20. (Wyoming sour crude, so called because it is laced with sulphur, is under $11 a barrel.)
Falling prices are destroying the fortunes of those who borrowed lots of money to cash in on oil prices when they were over $100 a barrel eight years ago. Banks are writing off billions of dollars of imprudent loans — a cost borne not by bankers but by investors in bank stocks. Wells Fargo, for example, has set aside $1.2 billion to cover expected defaults on $17 billion of oil loans. That 7 percent default rate will almost certainly worsen if oil prices fall further.
Oil company investors are getting pummeled too. A troubling sign of what may be coming can be seen in the latest financial report by Anadarko Petroleum. It rang up sales last year of $8.7 billion but lost an astounding $6.7 billion, or $13.18 per share. The stock trades at about $40, down 63 percent from its high in August 2014. CEO Al Walker warned shareholders last week that “for 2016, greater market dislocation appears likely,” so the company is slashing spending even more.
The awful news from Anadarko suggests that many more good-paying oil industry jobs will vaporize, at least until oil prices recover. Expect more announcements like this not just in the oil industry, suggesting that job growth is slowing and may even reverse for a while.
"Even if your job is as far from an oilfield or an oil company’s headquarters as snowfalls are from Florida, pay close attention to the price of oil. As oil jobs go away, so may yours".
Individual producers face a choice between trying to make some money from oil at low prices, which may stave off bankruptcy, or shutting down production until oil prices rise. While some wells have been shut and the number of rigs drilling wells in the United States has fallen about 70 percent since 2008, global production is up. Saudi Arabia has kept production going full tilt, hoping to force out high-cost oil producers such as fracking wells in the U.S. With Iran about to resume large-scale oil exports, the global oversupply may continue for several years.
This downward trend will likely cause disruptions around the world. Countries that depend on oil revenue to fund their budgets — Middle Eastern countries, Mexico, Russia, Venezuela and Norway prominent among them — face hard choices about cutting domestic spending, which runs the risk of social unrest. Some may be forced to sell assets held in their sovereign wealth funds.
Consider the effect of panic selling on the world markets if Norway, with just 5.2 million people, has to convert a significant share of its stocks, bonds and real estate to cash. Norway is tiny by population, but it owns about 1.3 percent of the world’s securities.
Perhaps the most volatile country, as I noted in this column a month ago, is Russia, which counts on oil companies for 98 percent of big company profits. Whether the Kremlin will cut oil production, in the hope that higher prices will make up for the loss of volume, is one of the biggest guessing games in energy markets and diplomatic circles.
In the U.S., residents of states that depend on oil revenues — Alaska, California, Texas and Wyoming — will face either cuts in state spending that will damage the economy or higher taxes. Alaskans get a check from the state each year based on oil royalties, and they should expect their wallets to be much thinner in the years ahead.
If prices at the pump are so low, why aren’t people buying more gasoline? A big reason that abundant supply has not been matched by increased consumption is a core concept of modern economic theory known as elasticity.
Some products are highly responsive to changes in supply. A bumper crop of any vegetable typically results in sharply lower prices. People load up on asparagus and tomatoes when supply is abundant, passing by more expensive Brussels sprouts and zucchini. That’s price elasticity.
Oil and especially gasoline and diesel fuel are not like that. When the price of gasoline is high, people still have to get to work, and goods still have to be moved, so spending is cut back in other areas. Even with gasoline at $1.76 per gallon, the latest national average, people don’t drive more during the workweek and only a bit more on weekends and vacations. That’s inelasticity.
The world, particularly the United States, has become much more efficient in the use of fossil fuels generally and oil specifically since the price shocks of 1973, when the Organization of Petroleum Exporting Countries showed it could drive up the price of oil by restricting supply. The U.S. is one of a handful of countries with fuel economy standards for automobiles, for example. That, too, contributes to the slowing growth of demand for oil.
Because oil remains central to human economic activity, weak demand in a period of gushing supply (even before Iran resumes shipping into the world oil markets) spells pervasive disruption of global economic activity. Even if your job is as far from an oilfield or an oil company’s headquarters as snowfalls are from Florida, pay close attention to the price of oil. As oil jobs go away, so may yours.
February 11, 2016 2:00AM ET
