The world changed this last week – did you notice? The world’s most valuable commodity was momentarily worthless.
No, I don’t mean gold. Gold has been valued for a very long time, mostly because it doesn’t tarnish. But the world could get along reasonably well without gold. Or platinum. Or even diamonds.
I’m referring to oil.
The Industrial Revolution began about 200 years ago, with the discovery of steam power to drive engines that pumped water, wove textiles, moved trains.
But creating steam required heat to boil – indeed, to superheat – the water that formed steam. Initially, that heat came from coal. Then the world discovered that oil burned hotter, and weighed less to transport, than coal did.
Pollution was not an issue. Yet.
From an economic perspective, oil took over. It has been an essential source for our industries ever since.
Except that last week, oil was being given away.
On one crucial day, for the first time ever, West Texas crude, the gold standard for oil, dropped to minus-$37 U.S. a barrel.
That’s right. Negative pricing. They’re paying you to take it away.
This is something like Costco paying you to fill your cart with toilet paper. Grocery stores paying you to take more bananas. The Band of Canada paying you to help yourself to more money.
No, wait, that’s almost happening already. At the end of March, the Bank of Canada lowered its overnight lending rate to one-quarter of one percent, 0.25%, to stimulate the economy, just as the COVID-19 virus shrivelled the economy. That rate doesn’t leave Stephen Poloz, the governor of the Bank of Canada, much room to maneuver. Maybe he will too have to drop into negative rates.
Paying people to borrow, instead of punishing them for going into debt.
As you’ve probably realized already, the price of West Texas crude has little to do with the cost of gasoline at your local gas pump.
And even less to do with the cost of getting oil out of the ground. When Imperial Oil’s Leduc #1 well came through, they didn’t even have to pump the oil out of the ground. It gushed, under pressure.
Today’s oil, by contrast, requires a huge investment in technology. Oil shale has to be fractured, by underground explosions or by pumping high pressure fluids into it, to let oil flow at all. Hence the slang term “fracking.”
Northern Alberta’s sludge sands are even more expensive. The oil has to be physically separated from sand, typically by applying heat. Which has to come from more oil. The cost of producing a barrel of oil may exceed what that barrel will eventually sell for.
At one time, Big Oil estimated that oil had to sell at around $60 a barrel just to recover their production costs.
With the benchmark oil trading at $30-50 for most of the last decade, Tech Resources decision not to proceed with a new plant in Fort McMurray looks smart.
Just to complicate calculations, Canadian crude is typically discounted around $15 a barrel. In recent months, therefore, Canadian crude has traded as low as $10.
Ah, but wait – we’re not actually talking about going and buying a barrel. Because oil prices are based on “futures.” You pay for a contract, setting a price for oil that hasn’t come out of the ground yet. But it will. Next month. Or the month after.
“Futures” let producer and purchaser agree on a price per barrel, in advance. Based on that old standby of economics – supply and demand.
Recently, supply went through the roof as Saudi Arabia and Russia flooded the market. Just as demand fell through the floor. COVID-19 forced people to stop travelling and industries to shut down. Those who had oil couldn’t get rid of it. And they had no way of storing the oil they had already committed themselves to buying.
As traders tried to get rid of contracts they had already agreed to, West Texas crude plunged into negative territory.
Some have argued that dethroning king oil will benefit the environment. I’m not sure. Because one possible consequence of negative values might be that someone could buy a million barrels of oil at $-37, and make $37 million profit by dumping it into the Mississippi, before fleeing to the Bahamas.
I hope that won’t happen. But who knows? We’ve never had negative prices for a commodity like oil before.
Copyright © 2020 by Jim Taylor. Non-profit use in congregations and study groups encouraged; links from other blogs welcomed; all other rights reserved.
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Lots of mail about the commonly held myths that the Covid-19 crisis may – MAY – dispel. Read on!
Laurna Tallman suggested that the Covid-19 situation is not all bad: “I met a young farmer today, 5th generation owners of a dairy farm. As country folk, we were exchanging stories about how the coronavirus shutdown is affecting us. She and her neighbours have noticed that the lack of pollution has brought cooler spring weather. They are putting seed in promptly because they expect the summer to be cooler and the growing period to be shorter. They are laying in firewood for a colder than usual winter. We need to think about similar preparations.
“Social distancing has heightened our appreciation for meeting a friendly stranger. Individuals take on greater stature when you live in relative isolation. I think people are going to return to socializing with a stronger notion of how important we are to one another.
“It feels as though someone has pushed a reboot button, and it definitely is not all bad.”
Cliff Boldt doesn’t see a “new normal” coming along: “Trump is leading the charge back to the old normal. Most of the bailouts in Canada and USA are going to corporations in the form of long-term tax cuts. $1.7 billion for cleaning up Alberta’s orphan oil wells is s a subsidy to the Oil and Gas Industry.
“I wish your myth bashing was real. Especially the ‘human effect’ myth.”
Sandy Warren agreed: “There has always been plenty of reason to see the fallacy of these myths but they live on nonetheless. I fear that we will emerge from the pandemic and attitudes will gravitate back.”
Lois Hollstedt: “Let us hope that those three myths are dead so that our leaders can continue to be creative and develop new theories based on the mantra of Dr. Henry -- Be Calm. Be Kind. Be Safe. Imagine a world that continued to be slowed down – that put people first instead of money – that wanted everyone to be safe.
“We would invest much, much more in prevention for people, the environment and systems that support the goals of Calm, Kind & Safe. We would ensure kids get early life supports, that all jobs are valued & paid liveable wages, that work places are safe, that families & individuals have time to nurture each other, that elders are not warehoused, that everyone has a place to call home.
“But our systems are built on short-term payback and gratification. Maybe this year will help educate us all and start us on a new way of seeing the world.
Isabel Gibson wondered, “Maybe we'll [also] debunk the myth that government is the answer to every problem.”
Rod MacIntosh offered both praise and caution: “Your column last Saturday was one of your most accurate and best thought-out pieces I've read. However, I suggest you're out by one myth. Advocates of separation, both in Quebec and Alberta, have been insisting to the point of arrogance that they can make it on their own. These same characters have been very quiet during the present pandemic while the feds have been handing out financial relief wholesale. I would have thought that the PQ, BQ, and so-called ‘Wexit’ advocates would be protesting, saying they don't need federal aid.”
Tom Watson asked, “May I add one more myth to your list? Recent news about the lack of security in Zoom video conferencing should put an additional nail in [the Internet security] coffin. Zoom would seem so beneficial in this time when people can't be together in person. Service clubs, church boards, even our United Church Regional Council meets via Zoom. And then the warnings started. CBC had a lead article about its security flaws. The FBI issued a warning. Yesterday I read an article from NBC News -- hundreds of thousands of Zoom users' usernames and passwords are for sale on the dark net. And even if you cancel your account your information still stays in the cloud.”
Marilyn Stone wrote from Florida: “The virus [doesn’t] show any preference, BUT there is discrimination in where it has the opportunity to attack. Those of us who can afford to ‘shelter in place’ and avoid going out into the highways and byways of life, are certainly less likely to be caught in its path. We've noticed on our infrequent trips to the grocery, that there are few people of means and privilege out and about, while there are still quite a few lower income and even homeless folks who either have to be out working at day labor jobs, or literally have no place to shelter! They are often people of color and most certainly without social privilege, and are thus more likely to be caught in the path of the virus.”
I had said that, in this crisis time, “no one in their right mind” still supported the Horatio Alger myth that anyone can hoist themselves by their bootstraps. Ted Spencer disagreed: “There are significant portions of the world populace who are, apparently, NOT in their right mind. The right-wing fomenting seems, when stripped of BS, to be a genuine fear of helping someone who needs help. It defies comprehension by those of us who stridently espouse the opposite: that help is necessary, while knowing that too much help is debilitating. There has been comfort that The Right in Canada is somewhere to the left of The Left in the US, but one need not look too far to find the underpinnings of this washing away in Canada.”
David Edwards: “Like you, I am tired of hearing nothing but Covid-19 on the news. Nevertheless I have been thinking about what the pandemic shows us about ourselves. We can be selfish and uncaring, like hoarders or those who ignore the call to stay in isolation; or filled with hate, like those in a number of countries who insist that the disease was deliberately introduced by someone from another country.
“We can also be courageous and self-giving, like the staff in grocery stores and pharmacies, who do their jobs in much greater peril than I face. We can be heroic and self-sacrificing, like the cleaners and aides, nurses and doctors in our hospitals and care homes. And we can be generous and loving, like those who bring groceries to the house-bound or help out at the food bank. I had a flat tire last week; it had been so long since I had that problem that I couldn't even remember where the spare tire and jack were hidden. A man passing by offered to change the tire for me; he found the spare and the jack and quickly got me mobile again. And told me he was glad to help.
Because this is a pandemic, affecting everyone, everywhere, it helps me remember, even as it saddens me in these circumstances, that ‘it's a small world after all.’ We are one human family, called to love one another.”
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ALVA WOOD ARCHIVE
The late Alva Wood’s collection of satiric and sometimes wildly funny columns about a mythical village’s misadventures now have an archive (don’t ask how this happened) on my website: http://quixotic.ca/Alva-Wood-Archive. Feel free to browse all 550 columns.