Something extraordinary is happening today: the spot price of oil appears to have fallen into negative territory—in other words, some producers and suppliers will pay you to take their oil. (Actually what this really represents are the speculators who have to unwind their imminent futures positions, even at a huge loss, because they don’t have enough backyard swimming pool space to take physical delivery of oil. It probably marks a market bottom, and there are signs that many hedge funds and other large investors are starting to “go long” on oil again.)
With everyone getting three weeks to the gallon right now and air travel reduced by 90 percent, the demand for gasoline and other petroleum-based fuels has collapsed. But the price of oil had been declining well before the virus crisis started, the result of steadily increasing production especially here in the U.S. The number of active rigs in the U.S. has fallen by about one-third over the last two months. It’s going to be a brutal shakeout for the sector.
How long until we see this 1999 cover from The Economist again:*
Of course, it took barely five years for The Economist and other Certified Smart People to tell us we had reached “peak oil.” I predict that cycle will also repeat itself.
* UPDATE: Didn’t have to wait long to find it:
Chaser—Paul Krugman in 2oo8:
Regulating futures markets more tightly isn’t a bad idea, but it won’t bring back the days of cheap oil. Nothing will. Oil prices will fluctuate in the coming years — I wouldn’t be surprised if they slip for a while as consumers drive less, switch to more fuel-efficient cars, and so on — but the long-term trend is surely up.