Blog post

Pay me to take my oil, please

Energy Blog, 21 April 2020

Green Giraffe’s Managing Director Jérôme Guillet considers the impact of negative oil prices on the renewable energy industry.

Something pretty extraordinary happened last night on the energy markets, with the main US oil price index, WTI, closing at minus 37 dollars per barrel, yes *minus*, meaning that people had to pay to have someone agree to take their oil.

This happened because this is a physical delivery contract – i.e. if you own the contract you have to take actual delivery of the volumes, so you want to sell if you don’t have storage space or capacity through pipelines to a user (like a refinery) – and the deadline is this week. And in Cushing, Oklahoma where the WTI is traded, storage is close to full already, so the market is breaking down. Thus the negative prices.

Not all oil prices are negative (Brent is still around 25 USD/bbl) but this is still a pretty amazing signal that something very unusual is happening in the oil markets.

And with demand currently estimated to be 30% below normal (so 30 million barrels per day lower) the announcements by OPEC+ (Saudi Arabia and Russia) with moral support from the US of a cut in production of 10-20 Mb/d are not going to be sufficient, even at the top of the range (widely considered unrealistic at this point). So we could head for a long period of oil prices close to zero this year, until there are enough production cuts (which means production irreversibly stopped, as for many fields it’s not usually something you can tap on and off easily) – with the risk of future price jumps later on if and when demand picks up. So a volatile period to be expected.

What this means for renewables is not obvious. Oil is not used much for power generation anymore, and it is unlikely that oil-fired plants will be built. Natural gas price dynamics are not very linked to oil prices. And investments in power generation are based on long term price estimates, not short term variations. But this could still have a huge impact.

The most obvious is that this creates such a crisis for the oil sector that it screams for – and obtains – a massive bail-out (together with the oil burning sectors of aviation and the car industry, both of which are also being battered right now). Given the size of the sector, this would likely means hundreds of billions of dollars used to prop up these sectors. Naturally, this would mean that there would be less money for other things, and environmental concerns would be thrown overboard in the face of a supposed emergency. This could throw back the necessary transformation of the energy sector by a long period.

Conversely, the bailout of these usually proud sectors could be an opportunity to ask for trade-offs – more electric cars from car manufacturers, a tax on kerosene, or a serious carbon tax (low prices would be the ideal moment to put one in place, as it will not be noticed by consumers and governments are going to be needing serious new sources of revenues given how they need to spend right now to keep our economies afloat). But that obviously depends on who prevails politically.

So, interesting times!

Jérôme Guillet co-founded Green Giraffe in 2010 and was a Managing Director until 2021.