In theory, lower oil prices should be good news as they would reduce production costs by increasing the purchasing power of wages. And yet, stock exchanges are trashing oil companies after the May contract deals ended in negative prices, i.e. money was paid to whoever took over previously bought oil, something that had never happened before.
The reference price of crude oil in the United States fell to -$37.63. That means that if you had been willing and able to acquire 1,000 barrels of oil [=5 tankers], the minimum amount in the futures contract, in Cushing, Oklahoma, during the month of May, you could have been paid $37,630 for doing so.
Why does oil fall so low that one is paid to take care of it?
First of all, it is obvious that Trump’s initiative to achieve consensus on a reduction in world production with Russia and Saudi Arabia has fallen short. Today, oil companies are extracting below their production costs, enduring only to avoid the cost of decommissioning the wells. Oil producing countries, from Saudi Arabia to Russia, see their public accounts drastically unbalanced as their revenues have been reduced to less than a quarter. National reserves are full so states can hardly increase purchases and supertankers have become floating macro-deposits in which to store production while demand recovers. Industry, not just the extraction sector, which has long been fragile due to financialization, is now facing its first major bankruptcies.
In the background, of course, there is a standstill in activity. Inventories, and not only of oil, are accumulating, storage costs are rising and companies are lowering their prices. But even at a lower price they cannot find a market, so companies start to lay off… and demand further falls, not only because the unemployed have nothing to consume but also because those who keep on working are cutting back on spending as much as they can in case things get worse. So companies lower prices even further, setting in motion a spiral in which unemployment grows and prices fall while unsold stocks accumulate. This is the typical deflationary development of any crisis. Of course, overproduction is only apparent: social needs are still there, but market mechanisms cannot satisfy them. What the fall in futures market prices is saying is that speculators do not believe that demand will be rebuilt enough in the coming months to absorb all those stocks waiting in a warehouse today. Because it’s not just oil, U.S. corn futures prices have fallen 19 percent since early February.
Why has the crisis been more noticeable in the oil sector?
The transition from the 20th to the 21st century increased the level of imperialist conflict. The main production areas became the focus of all the tensions between world and regional powers. Sometimes in so-called “everlasting” wars. The gas pipeline map marked the spreading path of war and brought it to Ukraine, at the very gates of Germany. The major powers began to realize that their national capitals were being drastically weakened by their dependence on oil. The main European bourgeoisies started dreaming of alternatives and shaping the “green deal”, a complex solution since it required difficult international agreements and, if implemented, an even greater temporary dependence on Russia but which also promised a massive transfer of income to capital.
In the United States, although the perspective of the “green new deal” was very much present as a vision of the future until the arrival of Trump, the oil industry, which has been merged for more than a century with banks and investment funds, forms a very relevant part of the heart of national capital. Since the Bush years, the US commitment has been to help the industry multiply its productivity in order to make the US energetically independent. These were the years in which the extraction of bituminous and shale oil, the fracking technique, the Alaskan oil pipelines were developed… With such success that the United States became a net exporter. The oil sector was politically strengthened by employing more workers. And the US became one of the most reluctant powers in the “green deal”.
The point is that US extraction capacities are profitable in a price range which, although lower than that of renewable energies, is much higher and restricted than that of light oil in the producing areas. As long as global demand was sufficient to keep prices in a certain range everything went well. As it fell, the negative result for the capital invested in the US oil industry was amplified exponentially to all the extra investment received to produce fossil fuels where it was most expensive and difficult to do so.
The fall in prices from confinement has made evident the irrationality and inefficiency of an international division of labor conditioned to the extreme by imperialism, magnifying the industrial impact of the deflationary shock on an industry as gigantic as it is fragile.