What’s the opposite of Peak Oil? Trough Oil? Abyss Oil? Nothing exactly rolls off the tongue. Yet the phenomenon, if not the cliche, is here, with oil following some global interest rates down into negative territory, or as Reuters put it, “when oil became waste”.
The commodity that was once so critical as to choke the world in 1973 is now too valueless to keep around. Even if that extreme value dip was a one-off, there is no end in sight to the underlying trends that created it.
The politics of oil, key to managing its price and demand levels, look in disarray. OPEC’s commitments to record production cuts did nothing to hold up prices. Saudi Arabian and Russian efforts to carve out market share in an oil price war now look like costly self-sabotage.
US President Donald Trump’s threat of a ban on Saudi oil imports rang very hollow when the domestic industry already can’t store the oil it has. Bloomberg called the oil price dip into negative territory a warning, not an anomaly, and warned that the industry may shut down.
Concerned environmentalists and proponents of environmental, social and governance (ESG) investing may worry that record low oil prices could diminish the urgency of measures to combat climate change, and push the world back into fossil fuel dependency. But that implies a structural rebound in demand that is nowhere in sight.
Rather, economies and societies may simply be weaned off a commodity they were already learning to loathe. Reuters quotes estimates of demand loss between 20 million-30 million barrels per day. The planet is going to be looking somewhat better thanks to that.
Something that literally nobody wants today, that you can’t pay people to take off your hands right now, doesn’t seem about to go back to being the one thing they can’t do without tomorrow. What about cost of capital for the industry? What about investing in it? Who would chance it?
CNBC pointed out that the energy sector is now the second smallest segment in the entire S&P 500 Index, with its weighting down 80% from a decade ago. It also quoted one oil executive saying that “no one wants to give us capital because we have all destroyed capital and created economic waste,” and another stating that “we will disappear as an industry”.
Last week, I was seeking comment from ESG investors on the critical factors needed for financial performance through the coronavirus crisis and beyond. All harped on one word: resilience.
The oil industry has demonstrated that it has zero resilience to the present demand crash, and probably precious little stored up for the future. Russian and Saudi push for market share may matter little when there’s no significant market left to have a share of.
Out of all the industries to suffer a terminal extinction shock from the crisis, the chief casualty may be oil.