The Daily - A Glut in Oil

Episode Date: April 27, 2020

Something weird happened last week. It was something that millions of people who have faced years of painful prices at the gas pump never expected: The cost of a barrel of oil dropped into the negatives. Today, we explore why this happened, and what it reveals about the state of the economy. Guest: Clifford Krauss, an energy correspondent for The Times based in Houston. For more information on today’s episode, visit nytimes.com/thedaily. Background reading: The bizarre dip in oil prices was based on a quirk in the way barrels are traded, one that appears only when the market is “undergoing extreme stress.”“I’m just living a nightmare,” one leader of a large petroleum association said. This is a look inside how the pandemic is decimating the oil industry.

From The New York Times, I'm Michael Barbaro. This is The Daily. Today. For decades, the United States has feared the consequences of running out of oil. Because of the pandemic, it now has far too much of it. pandemic, it now has far too much of it. Reporter Cliff Krause on the energy crisis that nobody saw coming. It's Monday, April 27th. Cliff, tell me about this moment when oil prices collapse. when oil prices collapse?

So it was late at night. I'm about to go to bed, but I put on Bloomberg television. And in terms of how far down these moves are going to go, I mean, what are your expectations? Because I'm a wonky guy. Oil really getting hammered today, hitting an 18-year low.

And I see suddenly the oil prices are collapsing. It's at $14 and change. Touched around $10, $10. They've fallen all the way to a penny a barrel. I mean, we just saw crazy historic drops in U.S. crude today. What on earth is going on? And I write a quick note to my editors saying, you're going to see this. It's weird, but this is a technical issue. It's a contract. It's a futures contract that's going to roll over in 24 hours. It may not mean much.

Then I get up in the morning and we're in negative territory. At the top, I talked about the craziness in the oil patch. Today we watched as the price of West Texas Intermediate crude for May delivery went from the high teens to less than zero just in one session. Which had never happened before. Oil falling below zero dollars a barrel for the first time ever. Just a few years ago, we had $147. That's a plus barrel oil. $37, that's a plus, barrel oil. And it's bounced around in recent years between 40 and 60, but negative 37. The week begins with U.S. crude oil trading at minus $37.63 a barrel.

Negative $37. Negative $37. Never happened before. You probably think that couldn't happen. How do we make sense of this? Never. Never happened before. You probably think that couldn't happen. How do we make sense of this? Never. Preposterous. Right. I remember hearing this news the next morning after you had flagged it to your editor's cliff and being genuinely confused by this. I mean, how can oil be worth less than $0, right? Like, not just worthless, but somehow having a negative value.

Well, since this had never happened before in history, everybody was confused. But nobody wanted the oil. So people had to actually pay to get rid of it. I mean, why is it that people would need to pay to get rid of what we regard universally as the most precious commodity on earth. Well, nobody wants the oil. It is not a precious commodity right now because people are not

driving, people are not flying, cruise ships are not cruising, and industry is not burning as much fuel as it was, and yet the world is still producing this oil. What you're saying is that the pandemic basically destroyed the normal demand for oil across the world. That's right. So now the world is roughly producing 30 million barrels a day more than we're consuming. Wow. So the world is awash in oil. We're flooded. An incredible sight at the port of Long Beach. 24 oil tankers are anchored offshore.

That's four times the number normally waiting to unload crude from Mexico or Alaska. This problem, which is an immediate problem, the seeds of it go back many, many years. What do you mean? Well, there have been a series of traumas, perhaps three major ones, that go back to my college days, actually, in the 1970s. Hmm. Good evening. It is an all-out war. In 1973.

That's how Israeli Defense Minister Moshe Dayan describes an invasion of the Golan Heights and the east bank of the Suez by Syria and Egypt. During the Arab-Israeli war, the Yom Kippur War as some still call it. All day today, Israeli reservists have been heading for their units. The streets have been full of military traffic. Arab countries were attacking Israel and almost overran Israel until the Nixon administration. We will, in this crisis, as we have in other crises. At the last minute.

Not hesitate to take a firm stand. Decided to send Israel a massive amount of weapons. Kissinger hinted that the U.S. has begun to resupply Israeli military losses. Which of course made many of the oil producing countries that we were becoming dependent on in the Middle East quite upset. And all they could do in retaliation was... The oil producing countries of the Arab world decided to use their oil as a political weapon. To inflict an embargo, an oil embargo, on the United States and other Western countries

that were aiding Israel. They will reduce oil production by 5% a month until the Israelis withdraw from occupied territory. And this was a trauma for Americans, causing long lines at the gas pump. Our supply of petroleum this winter will be at least 10% short of our anticipated demands, and it could fall short by as much as 17%. Certainly, people of my generation recall this.

I was in college. I had a new, sporty, red Capri. And I loved in college. I had a new, sporty, red Capri. And I loved tooling around. And then suddenly... Gasoline shortages are spreading across the country. Odd-even service, gasoline lines, and closed gas stations are becoming increasingly common. You had to wait online. I was in college in Poughkeepsie, New York, at Vassar.

So they waited three hours, and there was no gas. I remember that I would wait as long as possible till I was almost on empty to fill up the tank. That's it, all out of gas! Tomorrow morning! All out! It was a real bother to do that. Now, after waiting two hours, and we're not sure if I can make it.

You can make it. Well, if there's any gas left. Now, my problem was small compared to people who had to rely on their cars to get to work every day and drive long distances. I heard this morning the commissioner of energy from Washington, and they claim he has gas. I mean, this is ridiculous. So that was a trauma, and it was a political problem and an economic problem for the country. Prices skyrocketed.

The economy was badly damaged. We just lost the war in Vietnam, and now we don't even have a secure supply of energy. And we're dependent on countries such as Saudi Arabia, far away. We barely understand these countries and they're not friendly. We're in trouble. Let me conclude by restating our overall objective. include by restating our overall objective. It can be summed up in one word that best characterizes this nation and its essential nature. That word is independence. And so from that pain comes a dream, energy independence. What I have called Project Independence 1980 is a series of plans and goals set to ensure that by the end of this decade, Americans will not have to rely on any source of energy beyond our own. And the leadership of the country.

With a comprehensive plan to make our country independent of foreign sources of energy by 1985. Basically, Nixon, Ford, Carter. The energy crisis has not yet overwhelmed us, but it will if we do not act quickly. Over those years, made energy independence a basically keystone to all of their policies. The dream is that we can produce our own energy supply so that we don't feel this vulnerability anymore. That was the dream. And what do we start to do to achieve that dream those three administrations did several things it is in that spirit that i have decided to sign the energy bill just passed by the Congress. There was the establishment of a strategic petroleum reserve in 1975.

It will enable us to set up a strategic oil storage system. So we would have a reserve when there would be a war or a natural catastrophe. Starting in 1977, oil will begin flowing through the pipeline across Alaska and then by tanker to the lower 48 states. We built the Trans-Alaska Pipeline. This is a new energy department. The Department of Energy was created. To bring order out of chaos.

We started to use more coal to burn for power. Ready for war, sir. Ready for war. We went to war. Well, at this hour, Iraq remains in firm control of the tiny, oil-rich country of Kuwait. Years later, in the Middle East, over the invasion of Kuwait by Iraq. And now sirens, air raid sirens,

are beginning to sound over Baghdad. In part, not just to liberate oil fields in Kuwait, but to defend our gas station, Saudi Arabia. Much of the world is even more dependent upon imported oil and is even more vulnerable to Iraqi threats. Because suddenly those foreign sources of oil that we still needed because we weren't quite energy independent, they were at risk of

being overtaken by Saddam Hussein. That's right. So all of those things were done, but all that was accomplished, and it was something, was to stem the bleeding. And that brings us to the second trauma, which is the early years of the current century, when suddenly our production is in decline again. China is growing by leaps and bounds. India is starting to grow by leaps and bounds. A middle class is growing around the developing world. A middle class is growing around the developing world. So demand is going up like 5 million barrels a day around the world.

And the Middle East is suddenly more unstable. And so prices skyrocket between the years of about 2004 and 2007. And when you say skyrocketing, what do you mean? I mean prices skyrocket to as high as $147 a barrel. Correct me if I'm wrong. This is the point where U.S. gasoline prices at the pump reach $5 a gallon. Yes. And I remember how upsetting that was to consumers and to voters. Yes, it was very, very upsetting. And for those of a certain age, it was a reminder of the 1970s. We were right back in the same problem, dependent on foreign oil, which was very expensive. But then something big happened.

There was a Texas oil man named George Mitchell. And for years and years, he had been experimenting with hydraulic fracturing, which is basically splitting up shale, hard shale rock, which had been useless when drilled vertically. George Mitchell came up with the idea of drilling horizontally through these layers of rock and unleashing the oil in the rock by basically exploding the rock and then introducing sand and water to keep the cracks open, releasing the oil. Fracking. Fracking. Consider this a eureka moment for the rest of the world. The biggest energy innovation of the decade. Suddenly, they were able to release enormous amounts of oil in fields that big companies had given up on years before.

The so-called shale revolution has spawned boom towns in the Dakotas. That's a lot of money. It's life-changing money. It's a dream. We were able to do it in North Dakota, Texas, Colorado, Oklahoma, a few other places. Thanks to fracking technology, the U.S. now producing about nine and a half million barrels a day, a 70 percent jump from just five years ago. And it's occurring because the price of oil was so high. That incentivized innovation. oil was so high. That incentivized innovation. And Cliff, what does fracking for oil mean for this still quite unfinished American dream of energy independence? Well, it means that we actually, at least momentarily, seem to almost reach that independence because American oil production more than doubled in about five years. Wow.

Last year, we relied less on foreign oil than in any of the last 16 years. It's changed the whole world and the economy of the whole world. It's changed our dependence on foreign oil. It's changed our alliances in terms of their value to us. The United States became an exporter of oil for the first time in many years. And last year actually leapfrogged over Russia and Saudi Arabia as the biggest oil producer in the world. So this seems like a pretty good problem to have, right? I mean, too much American oil

for the first time, basically, in our history. Economically speaking, no question about it. By 2014, we were bringing down gasoline prices for consumers. It was part of our recovery from the recession. And all of this American production puts the United States in an extremely powerful position economically, employing millions of people and producing revenues for state and local governments across much of the country, also giving the United States the freedom to act in foreign policy in ways that would have been unheard of years before, such as putting pressure on Iran without endangering our energy supply. It was basically the culmination of the dream from the 1970s. And it was hard to imagine just a few months ago what could happen that could undercut that dream. Like a pandemic.

Like a pandemic that would suddenly destroy the demand for oil and kneecap the American oil industry that had produced all of this oil in the first place. We'll be right back. So Cliff, when this third trauma arrives, the pandemic, the world at this point, and the United States in particular, is awash in oil. And from what you're saying, demand for that oil has instantly plunged. So what's actually happening to all of this overproduced oil? world. Refineries are running out of space to put the oil. And so the inventories are building to a point where there'll be no physical space to put the oil. You now have tankers, which, you know, used to ship oil from place to place, just storing the oil and sitting out off of the shores of Los Angeles, for instance, and other places. And these are the people who are making a lot of money. They're getting paid to just hold the oil. So this explains those negative oil prices, right? They're producing

so much oil that they have nowhere to store it. So they end up having to pay people to take it. Exactly. Cliff, maybe this is a bit of a stupid question, but why don't oil producers, knowing that there's just way too much oil and that if they keep producing it, they're going to hurt their own ability to command meaningful prices, just stop pumping or fracking oil? Just leave it in the ground. pumping or fracking oil. Just leave it in the ground. Well, that's beginning to happen, but it's a cumbersome, complex process. First of all, you have thousands of producers in the United States. We don't have a national oil company which is taking orders from the government,

such as in Saudi Arabia. And then there are complications that go along with shutting in wells. It's an expensive process. You can actually damage the resource to the point where when you restart the oil, you'll actually pump less oil out. And then you have all of these companies that even when they're losing money, they need cash flow. They need cash flow to meet their payroll, to meet their debt responsibilities. So what oil companies prefer to do, you let the well basically slowly decline. So if we can't easily turn off the pumps and we can't suddenly overnight create enough storage for all this oil, what can and I guess what is the U.S. doing about this glut of oil?

Well, there are a number of things that are being considered, such as stopping imports from coming in, particularly imports from Saudi Arabia that are on their way in tankers. 40 million barrels of Saudi oil is already on its way to the United States. But they're probably American refiners who have already paid for it. President Trump is facing pressure to stop Saudi crude oil imports in an effort to save the American oil industry. And so you would be hurting American refiners. That's not something that the administration would like to do, I'm sure. So they don't have a lot of options. But meanwhile, small oil producers are in dire straits and on the verge of bankruptcy. And that could be the future,

especially if our demand is going to be depressed for a long time. So Cliff, how is this new reality of the glut and the small producers struggling within that glut, how is that starting to look on the ground in America's biggest oil towns, including, in America's biggest oil towns, including, I'm sure, yours, which is in Texas. Well, thousands of people are losing their jobs. Others are being furloughed. Probably it's only going to get worse. You have oil states that rely on what's called severance taxes, which is dependent on the price of oil. So that will have an impact on state and local services. And it'll have an impact on people who actually earn money because oil is coming out of fields on their private property. So there's going to be

a big macroeconomic impact in these oil-producing states. overly focused in this discussion of energy independence on old line forms of energy, on oil, rather than on newer, greener forms of energy. What do you say to that? So there are definitely going to be a lot of people who will celebrate the demise of the American oil industry. And there is a strong argument to be made that we need to diversify our energy supply. And we have done that successfully when it comes to power. We are now using wind and solar, but not for our cars. The electrical age, the electric cars, they're coming. There's no question about it. But it's going to take decades because the average car today is on the road for 10 years.

So it takes a long time to change the transportation fleet. And our transportation fleet is overwhelmingly dependent on gasoline and diesel. Right, which comes, of course, from oil. Exactly. Cliff, what's so interesting about the history that you have described here is that it feels like every decision the United States has made about oil was about avoiding a single scenario,

which is that we would run out of oil and we would be beholden to our adversaries to get that oil. And it feels like we never really prepared for the opposite scenario, which is the situation we're in now. That's right. Nobody anticipated a pandemic that would destroy demand. And no one is to blame for this, but we are now facing an entirely new set of problems. And of course, if we had anticipated this problem, we would not have solved the problem that we had

being dependent on producers in the Middle East and other unfriendly powers. So my big takeaway, and it may be obvious to everyone, is the idea of energy security is simply an illusion. We are not energy secure when we have little oil, and we're not energy secure when we have a lot of oil. It's hard to get it just right. of oil, it's hard to get it just right. Thank you, Cliff. Thank you. We'll be right back. Here's what else you need to know today.

On Sunday, the head of the White House Task Force on the Coronavirus, Dr. Deborah Birx, said that social distancing rules would likely remain in place throughout the summer, even as some states begin reopening their economies. During an interview on NBC's Meet the Press, Birx was asked about President Trump's unproven claim made last week that an injection of a disinfectant like bleach could combat the virus. Dr. Birx, help me understand what happened with the suggestion that the president made that the task force study disinfectant injection. Do you have any more information?

And are you concerned that people might take bleach because of what the president said? I think I made it very clear and how I interpreted that. I also made it very clear and so has Dr. Fauci and everyone associated with the task force and their clarity around this is not a treatment. The president's statement was widely condemned and prompted local health officials and the makers of cleaning supplies to warn Americans not to ingest or inject their products. As of Sunday night, the coronavirus had infected more than 938,000 Americans and has killed at least 50,000 of them. That's it for The Daily. I'm Michael Barbaro.

See you tomorrow.