The ongoing COVID-19 pandemic has given quite the kick in the teeth to the global economy, and a wide range of shutdowns have hammered automakers across the industry. As stay-at-home orders keep millions off the roads, demand for oil has fallen off a cliff. In fact, there’s so much oversupply that oil companies are running out of places to put it, leading to a recent crash in the market, actually leading to crude prices falling into negative territory.
What exactly does that mean? MarketWatch explains that “negative prices means someone with a long position in oil would have to pay someone to take that oil off their hands. Why would they do that? The main reason is a fear that if forced to take a delivery of crude on the expiration of the May oil contract [for West Texas Intermediate crude on the New York Mercantile Exchange], there would be nowhere to put it as a glut of crude fills up available storage.”
It’s expensive for oil companies to completely shut down a producing well. On that basis, some are willing to continue pumping crude, even if they’re running at a loss. Saudi Arabia and other OPEC countries are also producing more oil than the market’s consuming right now, hoping the others will blink first and cut production. Excess product has been going into storage, but as those tanks fill up there’s no place left to store the crude.
Earlier this month, OPEC agreed to cut its production by 10 million barrels per day, or 10 percent of the global output. However, as evidenced in part by today’s crash, analysts believe the cuts didn’t go far enough to curb current crude oil oversupply.
How will this hit gas prices?
One positive effect for consumers as crude oil has fallen has been less expensive gas at the pump. The average price per gallon across the U.S. fell to $1.49 a gallon or less. That’s down more than $1 from a year ago, so on the surface it sounds like prices falling farther will be even more of a bonus.
However, this time around consumers aren’t able to reap the full advantage. Despite the massive oversupply, it’s unlikely gas prices will fall much farther in the short term. That’s because people are driving significantly less in the wake of coronavirus-related stay-at-home orders. So even if gas is insanely cheap — there are stations here in the Mountain West region selling regular unleaded under $1 per gallon — no one is driving (or filling up). Jim Burkhard, vice president of IHS Markit, told the Associated Press that there’s “no winner in this situation today”.
Economically, that is an astute assessment of yesterday’s oil crash. However, given the circumstances, the profound drop in oil consumption has drastically lowered emissions, especially in congested areas. As people aren’t driving as much, air quality has also reportedly improved, which is also important as a highly infectious respiratory illness grips the U.S.