As a refresher from the lesson on What is Energy?, let’s recall that oil and gas are chemical energy sources valued for their energy or heat content. We can generate burn oil and gas to convert its chemical energy into heat energy. Think about the furnace that warms your home during the winter months, the energy that is used to heat your home may rely on natural gas!
The Business Case for Oil and Gas
We have previously discussed that much of the world relies heavily on fossil fuels for power generation, which includes oil and gas. Oil and gas are a reliable energy source, found in abundant amounts in varying areas of the world, and supplied to the consumer by a large, international oil and gas industry. Let’s examine the supply of oil and gas to the world from a business perspective. The oil and gas industry is essentially a service provider, working to satisfy the demands of its customers for a wide variety of services, for example, power generation, cooking, vehicle transportation, and heating. The industry also makes feedstock for a variety of products, such as plastics and solvents. The profit made from selling these services and products depends on market conditions. Let’s see how demand for oil and gas has changed throughout the years, and examine the root causes of these changes.
2020 COVID-19 Pandemic
Demand for oil and gas was brought down to very low levels in the midst of the COVID-19 pandemic. According to the Energy Information Administration, petroleum products fell to the lowest levels in a decade and the International Energy Agency estimated that “global demand for oil was down by almost 30 million barrels per day because of the shutdowns in response to the COVID-19 pandemic.”1U.S. Bureau of Labor Statistics. (2020, October 1). From the barrel to the pump: The impact of the covid-19 pandemic on prices for petroleum products: Monthly Labor Review. U.S. Bureau of Labor Statistics. Retrieved October 4, 2021, from https://www.bls.gov/opub/mlr/2020/article/from-the-barrel-to-the-pump.htm#:~:text=The%20production%20boom%20coincided%20with,to%20the%20COVID%2D19%20pandemic.&text=In%20all%2C%20the%20PPI%20for,percent%20from%20January%20to%20April. Why did this happen? At the start of the pandemic most people stayed at home. The general global population was no longer traveling to work each day, taking vacations, or going on long trips for work or to visit family. According to an article published by the Wall Street Journal, oil prices reached a low of -$37.63 per barrel on April 20, 2020 – the first day in history where oil recorded negative prices.
You might ask, how can the price of oil be a negative number? Three major factors contributed to the negative price in this case:2U.S. Bureau of Labor Statistics. (2020, October 1). From the barrel to the pump: The impact of the covid-19 pandemic on prices for petroleum products: Monthly Labor Review. U.S. Bureau of Labor Statistics. Retrieved October 4, 2021, from https://www.bls.gov/opub/mlr/2020/article/from-the-barrel-to-the-pump.htm#:~:text=The%20production%20boom%20coincided%20with,to%20the%20COVID%2D19%20pandemic.&text=In%20all%2C%20the%20PPI%20for,percent%20from%20January%20to%20April.
- A decrease in demand. Oil demand first began to fall in China because of economy-wide pandemic-related closures. China’s oil consumption plunged by 20% that month. The pandemic continued to spread around the world, and by March, 2020, most regions in the United States were in some form of lockdown. A major decrease in demand for oil across the world ensued.
- An increase in supply. Leading up to April of 2020, as demand and price were falling, Saudi Arabia urged other members of the Organization of Petroleum Exporting Countries (OPEC) and Russia to cut production. The idea here was that cutting supply would boost or support the price of oil. Russia, the world’s third-largest oil producer, resisted the call for further reductions, perhaps seeking to gain market share in anticipation that the U.S. shale industry’s profitability and output would fall in the face of lower prices. In response, OPEC countries that had reduced their production, increased it, and a production boom followed.
- Diminishing storage space. With demand down, the addition of petroleum to an already saturated market led to a near-record level of 535.2 million barrels of crude petroleum stockpiles in the United States by May 1, 2020. That amount of crude is equivalent to about a month of consumption of the commodity at 2019 levels in the United States. With demand falling and storage space approaching maximum capacity, traders and speculators in the futures markets were forced to pay others to take the oil off their hands – rather than take delivery of the commodity.
The combination of falling demand, rising supply, and diminishing storage space resulted in crude petroleum traded at a negative price in the intraday futures market on April 20, 2020.
The pandemic provided a shocking example of what reducing demand for gasoline, jet fuel, and diesel can have on the economics of oil production. However, this condition was temporary and the demand for oil and gas rebounded significantly. A year later, by April of 2021, the price for that same barrel of crude oil had surpassed $60.00.3Wallace, J. (2021, March 3). How the oil market bounced back from a year of crisis. The Wall Street Journal. Retrieved October 4, 2021, from https://www.wsj.com/articles/how-the-oil-market-bounced-back-from-a-year-of-crisis-11614764428.
From January 1st to March 13th, during the height of the first COVID-19 wave, weekly petroleum product supply fell by 31%, exceeding declines among the last several decades.4U.S. Energy Information Administration. (n.d.). U.S. Energy Information Administration independent statistics and analysis. COVID-19 mitigation efforts result in the lowest U.S. petroleum consumption in decades. Today in Energy. U.S. Energy Information Administration (EIA). Retrieved October 4, 2021, from https://www.eia.gov/todayinenergy/detail.php?id=43455.
The demand and supply side of oil and gas economics is not just impacted by short-term events such as the COVID-19 pandemic. Over a number of decades, other factors have affected oil and gas economics, including global political tensions, concerns over climate change, and government mandates. On the next three pages you will explore other impacts to the demand and supply of oil and gas throughout global history.