Market prophets love inflection points. That’s when a price curve suddenly goes vertical – up or down – allegedly signalling an end of one era and the start of a new one, allowing them to insist that whatever we knew about a certain asset class no longer applies.
So it is with oil. To be sure, this week did mark an astonishing moment in oil history.
The unprecedented coronavirus-related plunge in demand, coupled with the surge of oil into overflowing storage tanks in Cushing, Okla., where a dozen pipelines converge, pushed West Texas Intermediate crude into negative territory. That meant the producer was paying the buyer to take away the unwanted oil. At one point, the May contract for WTI was worth minus US$37.
Cue the endless headlines, such as “The End of the Oil Era” or the somewhat less adventurous “Is This the End of the Oil Era?”
Oil’s collapse sent Alexandria Ocasio-Cortez, a U.S. Congress representative from New York, into rapture. “You absolutely love to see it,” she tweeted. “This along with record low-interest rates means it’s the right time for a worker-led, mass investment in green infrastructure to save the planet.”
She later deleted the tweet when it was pointed out that giveaway oil means that renewable energy would be less competitive, not more. But never mind; we have apparently reached another inflection point and nothing in the energy markets will ever be the same again.
Or will it? Turning points replace one economic and political narrative with another. Problem is, each new narrative has invariably been off the mark, sometimes way off the mark. Oil gives us lots of examples.
In late 1973 OPEC – the Saudi-led Organization of Petroleum Exporting Countries – launched an embargo against the countries that supported Israel in the Yom Kippur War, among them United States, Canada, Britain, the Netherlands and South Africa. Within half a year, oil prices had quadrupled. The new narrative was that OPEC had turned oil into a “weapon” and that the West would be forever beholden to its dark, formidable power. It could close the oil spigot any time and force us to ride donkeys to work.
That story line didn’t age well. The West rapidly went into fuel economy mode. Cars became smaller and four-cylinder engines replaced V8s. Non-OPEC countries lunged into the oil game and vast reservoirs in the North Sea and Alaska’s Prudhoe Bay were hustled into production. By the early 1980s, non-OPEC production exceeded OPEC’s. In the last half of 1980s, there was so much oil around that the price collapsed.
In March, 1999, the Economist magazine published its now-infamous “Drowning in Oil” cover. At the time, oil had plummeted to US$10 a barrel and, sure enough, it was time for another story line. Oil, it said, could go to US$5 – the fear of scarcity had evaporated, meaning OPEC had turned into a paper tiger.
A few years later, the story line changed again. Oil prices had climbed, though were still relatively low, but technology had taken off, meaning that oil would fade away as one of our primary sources of energy. “End of the Oil Age,” blared an Economist cover in October, 2003.
Oil managed to escape its death warrant. That decade saw surging oil demand as global growth took off, especially in China, which was bidding up the price of every barrel it could get its hands on. By 2008, the price had reached almost US$150 and Goldman Sachs, allegedly the smartest guys in the room, said it might go to US$200.
The new story line? Peak oil. The planet was running out of oil – all the big discoveries had been made and all the prolific old reservoirs were running out of puff – even as demand for it remained relentless. The eye-watering price of oil would wreck economies and cause mass hunger, since oil’s rise was lifting the price of all other commodities, including wheat and rice.
The 2008 financial crisis and subsequent deep recessions duly knocked the price down, then came the shale oil “revolution,” which really was a revolution. Goodbye Saudi Arabia – the United States had displaced it as the world’s top oil producer. Drowning in its own oil, America exported its surplus and global prices renewed their fall in 2018. The COVID-19 crisis briefly turned oil into a worse-than-valueless commodity in the United States this week. Brent crude, the global benchmark, has lost 70 per cent of its value in the last year.
Which brings us to the new story line, that we’re in for a long era of low prices, all the more so since electric cars and renewable energy are, finally, taking off as global warming becomes a mainstream worry. So sell your oil shares because they are not going to pay for your retirement even if oil prices should climb somewhat when the quarantines are lifted.
It’s a compelling argument but don’t bank on it. Every long-term prediction of a “new era” in the oil markets has been pretty much dead wrong. Oil has been the greater leveller – it has made chumps of us all.