Russia refused to go along with OPEC’s proposal to rescue the coronavirus-battered oil market by further cutting production at a meeting in Vienna on Friday. The standoff left the oil industry shell-shocked and sparked a 10% plunge in oil prices Friday. Crude oil was already stuck in a bear market because of a sharp drop in demand linked to the coronavirus outbreak…
— from CNN.com, March 9. 2020
I was chatting with John Daugherty, one day back in 1976. We were both working for the US Post Office — one of the better paying jobs for a kid without a college degree in Juneau, Alaska, although John was not a kid, not by a long shot. In fact, he had retired from the State of Alaska a few years back, and I suppose he was in his early 60s. He was working as a substitute mail carrier for a couple of weeks, as a favor for a friend.
A lot of people worked for the State of Alaska, there in Juneau — it being the state capital and all. A lot of people.
John had actually been one of the top administrators in Juneau — if I remember correctly, for the Department of Labor — and he told me a slightly unbelievable story. One day in 1968, he said, he had been writing pink slips for everyone in his department. They were all scheduled for layoffs.
Everyone.
As John explained it, the State of Alaska was preparing to declare bankruptcy.
But he didn’t deliver the pink slips. That day happened to be March 13, 1968 — the day the Atlantic Richfield Company and Humble Oil and Refining Company announced the discovery of oil at Prudhoe Bay. The state government was saved.
Since that oil discovery in 1968, the residents of Alaska have been largely dependent upon the oil industry to keep their government afloat. But times have been tough, lately. The price of crude oil has remained well south of its 2008 high point ($165 per barrel) since November 2014. The trading price for West Texas Intermediate crude yesterday was $33.
From this week’s Anchorage Daily News:
Alaska legislators watched with concern Monday as plunging oil prices and a developing price war threatened to gouge hundreds of millions of dollars from the state’s revenue forecast.
The state’s dwindling savings accounts contain enough money to cover a short-term decline. But a long-term plunge would create a deficit so large that the state’s Constitutional Budget Reserve would run out of money next year…
All this turmoil in the oil industry would be frightening enough, without a global COVID-19 pandemic taking place at the same exact moment. As we watch entire nations close their highways, their offices, their retail outlets, their schools — and urge everyone to stay home — the demand for gasoline has naturally fallen off. Yes, the price of gasoline at the pump may drop — and continue to drop — but who will be buying it?
One of the industries hardest hit by the COVID-19 pandemic thus far — and yes, it’s been officially declared a ‘pandemic” — has been the tourism industry.
To quote Dr. Ghebreyesus, the World Health Organization Director-General:
“…We’re deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction. We have therefore made the assessment that COVID-19 can be characterized as a pandemic.
“‘Pandemic’ is not a word to use lightly, or carelessly. It’s a word that — if misused — can cause unreasonable fear, or unjustified acceptance that the fight is over, leading to unnecessary suffering and death…”
It appears likely that many smaller American oil companies will face bankruptcy if the OPEC-Russia price war goes on for more than a few weeks. Thousands of US oil workers may be receiving pink slips in the coming weeks.
We’ve all heard the success story: the US is now exporting more oil than it imports. Some have pointed to this fact as evidence that we’ve, quite simply, achieved ‘energy independence’. The situation, however, seems a bit more complex. The oil that we continue to import from the Middle East comes from vast reserves of liquid petroleum. The “new” oil that American drillers are obtaining is coming largely from shale deposits, and requires an expensive process commonly known as “fracking.”
The production costs from conventional oil wells varies, with Saudi Arabia able to produce oil the most cheaply — in some cases for less than $10 a barrel. The rest of the Middle East and North Africa are also very efficient, producing oil as cheaply as $20 per barrel. Worldwide, conventional oil production typically costs between $30 to $40 a barrel.
The difference with shale oil is that, instead of simply drilling down into a target deposit, the wells must take a 90-degree turn in the deposit and run alongside it horizontally. These wells typically go thousands of feet down to reach the shale deposit, but they also run thousands of feet horizontally. This type of well takes more time to drill, which means higher labor and equipment costs. It also means a new well must be drilled for each fracking event.
Many sources put the average break-even point for a fracked horizontal well at more than $60 a barrel… with higher-cost wells coming in at over $90 a barrel. A global market where a barrel sells for $35 poses an existential threat to US shale oil.
Meanwhile, President Trump grasped at the silver lining in a tweet last Monday. “Good for consumer, gasoline prices coming down!”
Daniel Yergin, energy historian and author of The Prize: The Epic Quest for Oil, Money and Power, took a more somber view of the situation, according to The New York Times.
“This is a clash of oil, geopolitics and the virus that together have sent the markets spiraling down. The decline in demand for oil will march across the globe as the virus advances… Low gasoline prices don’t do much for you, if schools are closed, you cancel your trip, or you’re working from home because of the virus.”
Does any of this news relate directly to life in small-town Pagosa Springs?
Well, I suppose it does…