Today, Explained - Oil is broke. Green New Deal with it?

Episode Date: April 27, 2020

Oil just went negative for the first time in history. Vox's David Roberts says that creates an opportunity to make more history. (Transcript here.) Learn more about your ad choices. Visit podcastchoices.com/adchoices

It's Monday, April 27th, and Boris Johnson is back at work. I'm Sean Ramos-Firman. This is your coronavirus update from Today Explained. Bojo has fully resumed his post as Prime Minister of the United Kingdom. First up for Boris, dealing with the lockdown, a bunch of MPs want to reopen. Boris is saying, hold your horses horses speaking outside 10 Downing Street. He said today I know it is tough and I want to get this economy moving as fast as I can but I refuse to throw away all the effort and the sacrifice of the British people and to risk a second major outbreak and

huge loss of life and the overwhelming of the NHS. Way down under in New Zealand, they're saying they've managed to stop community transmission of COVID-19 with new cases in the single digits. Prime Minister Jacinda Ardern said the virus was currently eliminated. Starting Tuesday, some non-essential business will resume in the country, but most people will still be required to remain at home and avoid social gatherings. We are opening up the economy, but we're not opening up people's social lives,

Ardern said at her daily briefing. Meanwhile, in the United States of America, states are easing lockdown restrictions, even though we have the most confirmed cases and deaths of any country in the world, and by all accounts, nowhere near enough. Testing the right, Honorable Dr. Deborah Birx, coordinator of the White House's Coronavirus Task Force, says it's going to be a lonely summer. Social distancing must continue even as the weather turns. In the Golden State, where the weather has already turned,

Governor Gavin Newsom reminded Californians to stay at home and practice social distancing after a weekend of packed beaches in Southern California. He said this virus doesn't go home because it's a beautiful sunny day around our coasts. And not even an hour after the federal government started accepting new loan applications from small businesses today, the website crashed. You can get in touch with Today Explained, email todayexplained at vox.com or tweet at us. We're at today underscore explained. I'm at Ramespur, and we also have a listener voicemail line. The math is 202-688-5944. We'll be right back. or your style. There's something every NBA fan will love about BetMGM.

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Please play responsibly. If you have any questions or concerns about your gambling or someone close to you, please contact Connex Ontario at 1-866-531-2600 to speak to an advisor free of charge. BetMGM operates pursuant to an operating agreement with iGaming Ontario. David Roberts, you cover climate and energy for Vox. And last week, a lot of our listeners were hitting us up and saying they had a question about one particular aspect of energy and how it works in this country. And that question was, how does oil work? How does it work, David? How much time do you have, Sean? We're like a 20-minute show, usually. Well, dinosaurs die. The main thing to know about oil is it's traded on a global

market. So global prices are our prices. Our prices are global prices. And it is traded on a global market through two kinds of markets. One is called a spot market, which is what you get on if you want actual oil, like if you want physical oil delivered to you quickly. And then there are several what are called futures markets, which are familiar to anybody who sort of follows commodities, commodities trading, which is just kind of you're making a bet on what the future price of oil will be. And what happened last week is people started concluding that the future price of oil was extremely low. So these futures contracts you buy, especially on a short term,

on a day-to-day market, which is what people were following last week, you buy and sell these futures contracts throughout the month. And then at the end of the month, they come due, which means if you're holding some of these, you get the oil delivered to you. And most of the people participating in these futures markets don't want actual oil and don't have the capacity to store a bunch of oil. They're just kind of speculators and traders that are common in every market. So what happens is at the end of a month, when these contracts are going to come due, all these people who have bought futures have to sell them and get rid of them, lest they find themselves the recipient of thousands of barrels of oil.

What a system. The problem is, last week, everybody had concluded that the future price of oil was basically zero, so no one wanted to buy a bunch of futures, but the contracts were coming up. And so what you had is a whole bunch of oil traders who were in dire threat of getting stuck with actual oil, which they don't want, right? So they're all at the end of the month trying to get rid of their futures. They're trying to sell these oil futures. And all of a sudden, everybody who had any of them was trying to sell them.

So the price went down and down and down, below zero. The most extraordinary development that took place today, when the U.S. main blend, West Texas Intermediate, fell more than 306%. You see it on the screen. It is negative $37.63 a barrel. In other words, there were a lot of oil traders who were saying, listen, I can't accept delivery of a bunch of oil. Someone's got to buy these.

I will literally pay you to take them off my hands. I can't get stuck with oil. So I got to get rid of the futures. So I'll pay you to take my oil futures. That's what a negative price is. It's not that you can just go to the gas station and they'll pay you to take my oil futures. That's what a negative price is. It's not that you can just go to the gas station and they'll pay you to fill up or anything like that. This is just futures, in a sense, an artifact of the futures market that you can go below zero. And that's just, nobody wants to get stuck holding the bag at the end of it. So, everybody was furiously trying to get rid of their oil futures. And that's how you get negative $37 oil prices,

which are unprecedented as far as I know in all of world history. It's never happened. It has never happened. And if you told someone even a month ago that it was even a possibility, you would have been laughed out of the room. It is utterly mind-boggling and unprecedented and novel and crazy. Wow. Okay. That was a pretty good explanation of what happened. We're still going to keep talking though, because something happened the next day where they just kind of came right back, right? They went positive. After a volatile trading session, oil jumped 40% at its high. The U.S. benchmark West Texas intermediate rose 19%

and closed at $13.78 per barrel. It's funny that that's the bar where we've set now. Is it above zero? But what happens is the futures contracts kind of reset at the end of the month. So they kind of started the monthly cycle over again. So they were no longer, you no longer had a bunch of people frantic to get rid of them. So the price rebounded, but let's keep in mind that when we say rebound, what we mean is that it got back up to like $10. And even three or four months ago, oil was trading at roughly $70 a barrel. And even at $70 a barrel, there was constant discussion among oil types about persistent low prices and about how those low prices were putting immense pressure on various producers. So it's not like $70 was great for them, but now it's trading at 10 now, and who knows how it's going to bounce around, but it's definitely not going to bounce back up to 70. And the longer it stays low,

the more pain the industry feels. And the pain is due to the coronavirus? Well, it's kind of a perfect storm situation. going into the coronavirus, like months ago, feels like decades, but months ago before the coronavirus was a big deal. Already, the oil and gas industry was facing several structural problems, one of which was persistent oversupply, which was producing persistent low prices. So, low prices were already a problem going into this. Also, more and more financial institutions have been turning away from oil and gas. So, your big investment banks and investment groups have been making various pledges to decarbonize their investment portfolio. So a lot of them are just pulling completely out of coal plant investments, for instance, or reducing their exposure to oil and gas.

And part of that is because governments and the world is taking climate change seriously. And public pressure is beginning to mount, and political pressure is beginning to mount, and people are beginning to turn away from fossil fuels for climate-related reasons. And even the financial institutions that don't care about climate definitely care that other people care about climate, right? That's a risk. If people are turning against oil and gas? That's a risk. If people are turning against oil and gas, that's a risk. That's a material risk. So financial institutions were turning away from oil and gas, withdrawing their investments. Meanwhile, transportation

is 70% of global petroleum demand. It's the biggest use of oil in the world is getting around in planes and trains and automobiles. And what's been happening is that the price of renewable energy is falling super quickly and electric vehicles are scaling up and getting cheaper super quickly. And so a lot of analysts are saying, look, the economics of using oil to make gas and diesel to run vehicles relative to the economics of using clean electricity to power electric vehicles are just cratering permanently. Like they're on permanent structural decline. Clean power-fueled electric vehicles are on an inexorable rise, and it's happening faster than anybody thought it was. So that's another giant vulnerability for oil and gas that was sort of exploding in its face before the virus

even showed up. And thirdly, a lot of these companies have been paying out more in shareholder distributions and executive packages than they have been making in cashflow, in revenue. And they've been covering that difference with debt, like Exxon, for instance. And that's true, especially in the companies that are focused on shale gas, fracking gas in the U.S., notoriously debt-fueled sector. And now we've got this oversupply, we've got demand declining, we've got your ability to store it somewhere declining.

Prices declining. And now all that debt is coming due to those companies. All that was happening before the virus showed up. So when the virus showed up, it basically shut down global demand, specifically transportation, especially transportation. No one's moving. That just hyper-ac just hyper accelerated all the negative trends that were already bedeviling this industry, like really violently accelerated them.

They were in trouble before this. They just kind of brought it to a head in an extremely sort of dramatic fashion. More with David after a break. Thank you. back in your pocket. Ramp says they give finance teams unprecedented control and insight into company spend. With Ramp, you're able to issue cards to every employee with limits and restrictions and automate expense reporting so you can stop wasting time at the end of every month.

And now you can get $250 when you join Ramp. You can go to ramp.com slash explained, ramp.com slash explained, R-A-M-P dot com slash explained, cards issued by Sutton Bank, member FDIC, terms and conditions apply. So after oil went negative last week, President Trump tweeted, of course, that he will never let the oil and gas industry, the great United States oil and gas industry, suffer.

What's his plan to save it right now? So, I mean, there's a couple of things Trump could do. He can fill up the Strategic Petroleum Reserve, which he's close to doing. He can give them access to this giant small business loan fund that's been created by Congress. He can relax pollution regulations regulations which he is doing at a furious pace relax regulations across the board but all of those in the end are fairly marginal trump does not have a tool no national government has a tool large enough to be more than a rounding error on the scale of the catastrophe that is facing the oil and gas industry. So, I mean, even if the oil and gas industry had a whole coterie of world leaders devoted to serving it, as it in fact does, it's just not clear that they can do much. Like, for instance, Trump organized this deal between Saudi Arabia

and Russia. I just spoke with the president of Russia, Vladimir Putin, and the king of Saudi Arabia, King Salman. And we had a big talk as to oil production and OPEC and making it so that our industry does well and the oil industry does better than it's doing right now. Russia and Saudi Arabia used to be the top oil and gas producers in the world a decade ago. Oil from the U.S., oil and shale gas from the U.S. have made the U.S. number one over the last decade. Even before the coronavirus, Russia and Saudi Arabia were in this price war, each cutting the price of their oil, trying to undercut the other, which of course results in low global prices,

which hurt everyone. There's this terrible cycle that only got accelerated by the virus. So like Trump comes in and organizes this deal between them. President Trump tweeting that the oil markets are going to see a huge cut in output. He says, quote, just spoke to my friend MBS, the crown prince over in Saudi Arabia, who spoke with President Putin of Russia.

And I expect and hope that they will be cutting back approximately 10 million barrels a day and maybe substantially more. Well, I i mean the difference between supply and demand is something like 30 million barrels a day even today so it's just like even that is a drop in the bucket but it's just not clear that he's got the tools or that any government has the tools to substantially affect this what is an enormous title, a force that's across the world now. It's bigger than what governments can do. Sounds like a great opportunity for a Green New Deal, David.

Oh, what an interesting idea, Sean. It's interesting that you would think of that. You know, the broad theme here is the economy is shut down. So why not, when it restarts, fix some of the parts of it that aren't working so well? We should restart the economy in as clean a way as possible. Now that air pollution's down and greenhouse gases are down, and you're seeing all these pictures from all over the world of like, in India, they're like, god we can see the himalayas the himalayas are still there like all these people around the world discovering the joys of clean air and there's been all this new

research over the last decade which i know vox is vox has written a ton about of of how air pollution is so much worse so much more pervasive and so much worse for health than we had even known. So the benefits of reducing air pollution just are getting bigger and bigger. And here we are with like a whole bunch of air pollution gone. Let's try to come back in a way that doesn't just resume all our old polluting activities. Let's try to sort of push electric vehicles. Let's push renewables. Let's push teleworking and working remotely. Let's all these business people now who are figuring out how to do business without flying multiple times a week, let's try to encourage that and cement that in place and incentivize that.

Let's try to, when we bring the economy back, let's bring back a cleaner economy. That, I think, makes sense to people. And it is occurring to governments across the world. And lots of them are doing lots of stuff along those lines. And typically what happens when recessions end, if you look back at history, greenhouse gases and pollution fall during a recession and then tend to roar back even to higher levels than previously when the economy recovers. Presumably, we don't want that to happen. So good policy, right, some foresight

and good policy could prevent that from happening. It's just a golden and very obvious opportunity. But will that happen? Unfortunately, the country today is run by people who are clinging to the past socially, economically, rhetorically, demographically, choose your adverb. And one of the ways they're clinging to the past is clinging to fossil fuels. They're very committed to fossil fuels. So, I mean, the situation you have is a large-scale structural global transition underway from fossil fuels to clean energy. And I think almost every serious analyst will tell you now, the transition is happening. It is inexorable. It is unstoppable. The only question now is, how fast? How fast are we going to do it? How much more pollution are we going to put

out into the air before we do this? How many more people are going to die of respiratory illnesses before we do this? How fast will it happen? And so what Trump and Republicans are doing with their sort of frantic efforts to subsidize fossil fuels and release them and deregulate them is at best slow this transition in the US such that other countries leap ahead of us and capture these industries that we know are going to be the growth industries of the 21st century. We know that renewable energy and clean tech and clean home energy appliances and smart grid technology and smart EVs and smart batteries, just like the whole scheme of clean energy technologies are all poised for enormous growth throughout this century. And some countries are going to be smart enough to use this

big economic pause to grab onto them and to accelerate them and to dominate them. And all we're going to do by delaying that transition is let a few more people die from pollution, let climate change get a little bit worse, slow the transition and fall behind in the dominant industries of the 21st century. There's no long-term plan. The future is going to happen, right? You're either going to walk into it eyes open, or you're going to do what the U.S. is currently doing, which is flail about wildly with a blindfold over your eyes as like events come and smack you upside the head.

Well, when those eyes open, we'll call you up to explain the best path forward. All right. Thanks, Sean. Thank you, David.