On April 20th, prices for a barrel of US oil dropped so low that traders would actually pay you to take the asset off their hands. At its lowest point, it was priced at -$37.63. The problem that caused such a sharp drop in prices in this instance was storage capacity. As the BBC helpfully explains, “oil is traded on its future price and May futures contracts are due to expire on Tuesday [April 21st]. Traders were keen to offload those holdings to avoid having to take delivery of the oil and incur storage costs.”
The financialisation of the economy is predicated on real world assets that are used for real world things, like oil for providing energy, being traded on financial markets for speculative investors to make a profit. Usually, this passing around happens on a computer with the owner of however many barrels of oil never having to deal with them as physical entities. This dramatic oil price drop happened because traders realised that the collapse in demand meant they may actually have to receive and store the asset. I suspect that trading companies like Barclays and Citigroup don’t have abundant oil barrel storage space in the basement of their headquarters.
Just as the Great Recession of 2008 was instigated by financial markets being impacted by pesky real world events – in that case, people defaulting on their mortgages – here we see that shocks to the real economy will be passed on to the financial sector. The Covid-19 pandemic has forced large sections of the economy to grind to a halt such that we need less oil than usual due to reduced transport and production.
But this crisis isn’t just a momentary blip. Goldman Sachs have said that the oil market remains “massively oversupplied” and that will continue to push prices down. Howie Lee at the OCBC Bank in Singapore suggested that the lack of storage for oil won’t improve based on current conditions. Both agree with ING Economics’ analysis that a further fall in prices can only be avoided either with a reduction in supply (if the US cuts oil production) or a boost in demand (getting the economy running again). In practice, this means a planned contraction of the oil industry in line with the wider economy.
The real question is, what happens after this contraction? As a consequence of fossil fuels, the impacts of climate breakdown are already becoming more frequent, severe and geographically spread to new places. More and more we will see extreme weather events, flooding and drought disrupt business-as-usual around the world. Cyclone Idai destroyed 90% of the city of of Beira when it ripped through Mozambique in 2019. Though the details are different to Covid-19, economies can no longer rely on long stretches of relatively undisturbed ‘normality.’ That’s why crises have to provide us with opportunities to rethink how society operates – and no sector is more urgent in this regard than energy production.
Green New Deal
Calls for a Green New Deal, which over the last year have grown both in policy detail and popular support, were made for moments like this. The Green New Deal is a plan for a government-led programme of investment and regulation to transform the economy to eliminate inequality, guarantee good and secure jobs, and bring emissions down to zero.
The plan is the practical articulation of a long overdue politics which brings together climate and workers’ justice as united in the need to confront capitalism and build a new democratic economy. Amid this drop in oil price, Deirdre Michie, the CEO of Oil & Gas UK, makes clear that although the US market operates differently to the UK’s, the impact will be felt: “Ours is not just a trading market; every penny lost spells more uncertainty over jobs.”
The oil industry is an increasingly unreliable source of secure employment for workers. Crises like these will persist and jobs will become at even greater risk as the industry is forced to ratchet down output. Workers can be sure that when the management of this contradiction is left to CEOs and shareholders looking primarily to protect their profits, guaranteeing jobs won’t be a priority. That’s why we can’t allow a conflict between protecting good jobs and saving the climate to emerge.
We are yet to understand the full extent of the looming unemployment crisis we will face in the recovery from the COVID-19 pandemic. In the US, a record 3.3 million people filed for unemployment during one week in March alone. Whether businesses can survive the current economic stagnation will influence how structural mass unemployment becomes, but there will surely be lots of people chasing not very many jobs quite soon.
This is the moment when the principles of a Green New Deal can be put into action. Governments can themselves lead the recovery by investing to create new public industries that address the unemployment crisis and climate crisis at the same time. We need a massively expanded renewables sector to supplant oil, gas and coal. The initial construction of that industry and infrastructure will provide a medium-term boost to employment while laying the groundwork for the sustainable economy of the future.
Ensuring these new industries are made up of public companies means governments can guarantee that jobs are well-paid, secure and unionised. As well as renewables, governments should be looking to use this moment to invest in securing society and the economy against future shocks precipitated by climate breakdown. Emergency services require investment to be beefed up to respond to the growing threats of climate impacts.
This pandemic has exposed the fragility of public services like healthcare when dealing with new crises (as if they weren’t put under enough strain in normal times). Much of our physical infrastructure like buildings, homes and roads will not survive extreme weather events and must be upgraded. All of this requires government investment which will immediately guarantee jobs where the oil industry cannot, and begin adapting our economy to the climate chaos that is certain to come.
Demand the Inevitable
The oil industry has already agreed reductions in output of around 10% amid collapsing demand, but this is being managed by the industry itself and has caused infighting among producers. If there’s one thing the last four decades has shown us, we cannot trust this industry to manage itself. It was companies like Exxon and Shell which knew first that their extractive industries were causing climate change. Not only did they not tell the public, they went on to fund climate change denial and lobby against the most modest climate policies.
Significantly contracting oil output is now inevitable. Looking at both the crisis of demand exemplified by this price drop and worsening climate breakdown driven by extracting and burning oil and other fossil fuels, it is a question of when rather than if. Oil producers will manage that reduction reluctantly, safeguarding their profits as much as possible along the way. They won’t be close to quick enough if we are to bring emissions down on the timescale needed to avoid catastrophic climate change that develops beyond human control.
At this juncture, governments must be prepared to step in and introduce strict regulations to manage the contraction of the oil industry through the state. We need a managed wind-up of fossil fuel production and just transition guarantees for all affected workers globally. Where governments continue to subsidise the fossil fuel industry (through tax breaks, trade restrictions or direct transfers), these must end immediately. There is no sense in a government continuing to inflate an industry that must be quickly contracted.
Exploration for new fossil fuels must end immediately, too. Investing to discover new reserves locks the industry into extracting and then burning them to generate sufficient returns to cover those costs. Finally, governments should end the construction of all new fossil fuel infrastructure such as oil pipelines. These continue to pop up around the world with the active support of leaders like Donald Trump, Justin Trudeau and the European Commission. As they build this infrastructure, they expand capacity for transporting oil. By expanding capacity, you lock the economy into increased production so there is oil to flow through those pipelines.
As with exploration, production must be increased to make the initial investment worthwhile. If it is inevitable that production will be contracted, why is there so much investment in expanding it? Even with the end in sight, the fossil fuel industry is squeezing every last drop of profit from the planet. If we care about maintaining a liveable climate, we must demand the inevitable happen now.
Nationalise the Oil Industry
In responding to the Covid-19 pandemic, climate crisis and the oil price drop, our priorities as a society should be people and planet, not the profits of fossil capital. President Trump has already said his government will buy oil for national reserves in response to the price drop, but we need a different kind of government intervention. This industry has had too many last chances. It does not deserve to be resuscitated again. Governments should plan to nationalise it – to avoid further short-term shocks and manage its decline in the medium-term.
The collapse in the price of oil is an opportune moment for governments committed to an energy transition to buy it up and set a sustainable course for the future. Oil stocks still haven’t recovered from a slump at the end of March which took prices to new lows – and it’s likely to latest crisis will push them lower still. With fossil fuel company shares just as volatile as oil prices, governments should get ready to take advantage of further slumps to buy up controlling shares in the companies.
There is only so far investment in competitive renewable industries and regulation will go. If we are to wind down the fossil fuel industry and guarantee justice for affected workers and communities, we will have to bring the industry into public ownership to manage its contraction as part of a planned transition. Liberating the industry from its current drive towards profit is the only way to ensure it does not throw all its remaining resources at undermining a just transition and a Green New Deal.
This strategy is the only way to ensure that energy is clean, treated as public good, and universally provided as a basic right by public companies. As we recover from the Covid-19 pandemic, we cannot go back to normal. There should be no place for the rogue oil industry in the future we build for ourselves.