The price of a barrel of Western Texas Intermediate crude oil, a global benchmark for oil prices, cost less than zero dollars on Monday.
Stay-at-home orders and travel restrictions designed to limit the spread of the novel coronavirus have reduced travel, which in turn caused worldwide demand for oil to drop. On Monday afternoon, the plummeting price crossed a new threshold and became negative, with a barrel valued at -$38.76 USD.
Western Canadian Select, Alberta’s main oil export, hit a low of $3.96 — making it just one cent more expensive than a Big Mac on Uber Eats.
“These kinds of scenarios only happen when you’re in a depression,” said Greg Poelzer, a University of Saskatchewan political scientist.
“The impact of this will carry on for a number of months — months, not weeks.”
The price of oil began dropping in March when global restrictions were implemented. The situation was exacerbated by a price war between OPEC, the Organization of Petroleum Exporting Countries, which is led by Saudi Arabia, and Russia.
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An agreement last week between the parties and the G20 brought the price war to an end. A few days later, the Saskatchewan government announced administrative restrictions were being lifted, and on Friday, the federal government announced a $2.4-billion support package for the oil industry.
On Sunday night, Alberta premier Jason Kenney tweeted that the federal government must do more to help the industry and “hundreds of thousands” of jobs are at stake.
The following day, Saskatchewan energy minister Bronwyn Eyre said the same.
“The plunge of oil prices today into actual negative territory was not immediately anticipated, and further underlines the urgent need for an immediate and substantial support package for Canada’s energy industry from the federal government,” she said in a statement.
Poelzer said the government can’t do anything because any supports a government could offer can’t change the market.
Oil price is determined by the contract for the delivery of a barrel in a given month.
In effect, the worth a barrel of oil is determined by how much a party would pay to have that oil delivered in a few days or weeks.
A price is above zero when there is a demand for the product — when purchasers are expecting to sell the oil and make money because consumers will want oil.
The negative prices seen on Monday means purchasers in the market do not think they will be able to sell oil because no one would buy it (and refine it for use as fuel), not that a seller of oil necessarily had to pay a buyer to purchase a literal barrel of oil.
Poelzer said a business can operate with negative prices for a time because suffering some lost income is still cheaper than shutting down production.
“You’ve got investments already made in infrastructure. So it prevents hemorrhaging and complete shutdown on things, everything from refineries to upgraders to actual extraction in the ground,” he said.
On Monday morning, before oil prices went negative, Husky Energy and Crescent Point Energy, two of the largest producers in Saskatchewan, both announced they would be severely reducing their expenditures.
“We have taken immediate action to preserve our balance sheet and core business in this commodity price environment,” Husky CEO Rob Peabody said, in a statement.
The company is cutting its 2020 expenditures by roughly 50 per cent of what it planned to spend in December 2019. It previously announced a revision on March 12.
Crescent Point announced it is lowering capital expenditures by $75 million and reducing the salaries of its executive team and board of directors.
Poelzer said, regardless of what companies do, there will be job losses in the oil and gas industry and in the many industries it supports — from restaurants to transportation companies that move oil.
He said there is only one cure for the low demand and crashing oil prices — a COVID-19 vaccine.