Industry Expert: With Destablized Markets And A Glut Of Production, Get Used To Cheap Oil

Reduced demand resulting from the pandemic, and government policies that stifle trade are hitting the petroleum industry hard, but consumers will reap some benefits.

By Joy DiazMay 4, 2020 12:07 pm, , ,

Texas is among the leading producers of oil in the world. But many pump jacks are at a standstill, after the price per barrel of crude reached historic lows in recent weeks. Some fear losses to the industry could be so severe that oil and gas producers won’t recover.

Marianne Kah is a research scholar and advisory board member at the Center on Global Energy Policy at Columbia University. For 25 years, she served as chief economist of ConocoPhillips in Houston. She told Texas Standard host David Brown that oil demand in April was down 30 million barrels, largely because of COVID-19.

“That loss is unprecedented,” Kah said. ’…I think the OPEC price war didn’t really matter that much. The issue was we lost a huge amount of oil, and OPEC had trouble dealing with it.”

Kah said reduction in demand was primarily the result of less car and air travel. Increasing energy demand will require containing the coronavirus, so that people will feel free to travel again, she said.

In the short term, oil storage facilities are filling up fast with excess crude arriving from around the globe. Until that backlog is moved out to customers, there’s no place to store new oil when it arrives.

“I think prices do need to get down to $15, $10 a barrel to get enough production shut-in” Kah said. “because in the U.S., there is no place to put it.”

Outside the U.S., some countries are promoting alternative energy sources – what Kah called “green stimulus.” The chances that the U.S. will incentivize energy sources other than fossil fuels are low, unless Democratic candidate Joe Biden wins the November election, Kah said.

Trade, which is necessary for a vibrant energy industry, also faces threats from governments with nationalist policies, Kah said. And the pandemic has encouraged moves toward more nationalism, exemplified by a desire to manufacture more products at home. And while that could benefit domestic manufacturers, it isn’t good for U.S. oil producers.

“Anything that hurts Chinese oil demand hurts the oil market, because they are the largest source of oil demand growth,” Kah said.

Kah expects West Texas oil production to continue to decline through 2020 and 2021. But the relatively low cost of energy extracted in the Permian Basin means the industry should eventually bounce back.

“Some of the weaker players may leave the industry, but the resource is a good resource, and it will eventually come back,” Kah said.

Web story by Shelly Brisbin.


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