I admit that I have never completely understood the futures market in commodities, much less the entire derivatives system. But it was a negligent discharge this week.
It doesn’t make much sense to me as an engineer. I know that farmers use it to stabilize the price of their crop at the time they plant, or the price of their heifers about the time they are being calved, but I do not pretend to understand just how it works. Beyond that, I am at a loss, though I tried to describe it to a friend once. It is like a high-stakes poker game where the faces of the cards are changing, seemingly at random, during the game. And that one of the chips on the table is actually a pistol with five of six chambers loaded, and if you WIN that chip, you have to spin the cylinder, point it at your feet, and pull the trigger.
Well, this time it hammer fell on a loaded chamber. Ouch.
Up until the Panic, the Fifty States were raking in the chips. We were net exporters of oil and fuel products, for the first time in decades. We’ve just found several NEW oil deposits, as have our closest trade partners, Canada and Mexico. Oil and fuel prices were already lower – which is usually but not completely good. (Without sufficiently high (adequate) prices, drillers and producers can’t afford to continue to drill, rehab, and operate the production systems that supply oil to the US (and the world). The current magic number is in the $40-$50 range.)
But with the Lockdown, the demand – kerosene, diesel, and gasoline – has plummeted. Only about 5% of airliners are still flying. Travel is perhaps one-quarter of normal. Trucking is significantly down as well. Construction is off – prohibited by some states: heavy construction (earthmoving and concrete work) use a lot of diesel.
But there is more: the Saudis and OPEC conspired with Moscow to open their spigots wide to drive world oil prices down and kick the Fifty States in the teeth. Even though we are net exporters, geography, demand and history means much still comes in – AND – goes back out as refined products or crude. So domestic oil prices are tied to world prices and production. People shut wells down, stopped drilling, and are trying to get the oil on-hand to refineries to produce products. That aren’t needed and wanted right now. Courtesy of the Lockdown.
In essence, because all these future contracts were due today (Tuesday, 21 APR 2020) and there is a glut of oil on the market, people were saying at the close of business yesterday, “IF you pay me $37.63 I will take a barrel of your oil that is sitting in Oklahoma or in a pipeline or a truck or a ship or in a tank in your oilfield battery outside of Andrews (TX) or Hobbs (NM) or Grover (CO) or Rawlins (WY).” The assumption is that you have someplace else to store it, until it can be hauled to a refinery. And that isn’t necessarily easy to do.
Even the product and crude oil pipelines are all full and basically not actually moving anything. They are hundred- and thousand-mile long storage tanks. With some kinds of oil, that has to be heated to flow properly, the cost and need to maintain the pipelines in working condition is an added headache.
The result? Already on life-support, the economy of hundreds of communities in ten or more States is now sinking into a coma, and may be nearing death. NO, it is not just Texas and North Dakota. (And those State’s economies were already crashing a month ago, before Texas locked down. North Dakota is one of the Axis of Evil and has refused to shut down and make the economic and social disaster even worse.)
It is Oklahoma and Texas, New Mexico, even Kansas and Colorado. It is Wyoming and North Dakota and Montana. It is Louisiana (due to the Gulf, along with Texas). And it is even Pennsylvania with the Marcellus shale. In every one of these, and more, people are being laid off, and in those States with harsh lockdowns (like New Mexico and Colorado) this is on top of the Lockdown job losses. And the losses will echo through every part of those states’ economies: retail and wholesale business, hospitality, services of every type. And taxes. Many of these states depend on taxes from oil and gas production to fund state and local governments. All kinds of taxes, including severance taxes. (Severance taxes are a special kind of tax on minerals, including oil and gas.)
For example, a full quarter, 25%, of Wyoming’s total state and local tax revenue, is from severance taxes. Wyoming has already put a moratorium on paying those taxes and waived late fees until the end of June – because although pumping and shipping oil and refining it is “essential” in many states where these companies have their headquarters and their financial offices, those accountants and bookkeepers and clerks are NOT “essential.” (More insanity of the Lockdown.)
The deal Trump worked out with the Russians and Saudis was a good attempt, but probably far too little and far too late. That is because while Russia (like the Fifty States) can survive (for a while, at least), the Saudi princes cannot survive without enough money to pay off their lower classes and the jihadists and Islamists and the other Islamic countries. Quickly, not in the longterm. And of course, the Saudi princes are pretty near the ultimate hedonists, despite their support of the extreme Islamic fundamentalists: they don’t WANT to live without their gold faucets and toilets and their white and black and brown slaves.
So we see yet another deadly effect of the Lockdown, and the tyranny of most of the American States today. More on that, later.
“The deal Trump worked out with the Russians and Saudis was a good attempt”
In what universe is a politician conspiring with other politicians to get a commodity back up above market price a “good attempt” at anything worthwhile?
Because the “market price” was the result of dumping, for what appears to be the sole purpose of destroying a competitor, and apparently little more. And the attempt was voluntary, and public. But it was just an attempt, and does not distract from the fact that the entire situation was the fault of those very same governments and politicians.
The energy sector is about 9% of our GDP. Some of our largest companies are oil and gas producers and refiners. Overall, oil and gas supports 9.8 million jobs or 5.6% of all US jobs.
Only God knows what this will do to the economy.
This happened entirely because of the lockdown. People are not traveling, planes are not flying, driving is way down, and the consumption of goods made from plastics derived from petroleum is down.
The government shut us down and the oil industry in America died. That has never happened before.