American Consequences - May 2020

Forever is a long time. Offshore companies accounted for a record 15% of U.S. oil production last year. If enough of that production capacity disappears, we could quickly move from massive global oil glut to a shortage... and in turn, from ultra-low prices to much higher ones. Nobody is thinking about that right now, of course. But I promise you... if a barrel of oil can start the year at $61 and drop as low as negative-$40 within four months, it can soar back to $61 or higher just as fast. The shutdowns across the world have destroyed demand, causing a huge global glut of crude oil. We’re running out of storage space... Once things go badly out of whack in one direction, it’s a good bet that they’ll eventually overcorrect in the opposite direction. An interconnected global economy is a delicate balance. We’ve thrown it off-balance with COVID-19, and it’ll take a lot to stabilize it again. Food and fuel are essential businesses exempt from shutdown. So it’s possible to observe the huge gyrations in price and disruptions to the supply chain that we’ve identified. But businesses deemed ‘nonessential’ have been shut down, and they’re teaching us an all-important lesson... There is no such thing as a nonessential business .

If you think I’m being overly dramatic, I hope you’re right. I hope I’m just having trouble seeing around the next corner. I hope and pray every day that we get back to something approaching “normal” soon. I would be happy to be the guy who “cried wolf ” on this one. Our way of life is breaking down to a point beyond which it will be difficult to return... You can see this in the fossil-fuels market, which lies at the heart of the global economy. The shutdowns across the world have destroyed demand, causing a huge global glut of crude oil. We’re running out of storage space... And massive tankers filled with crude oil now line the coasts of every continent. Hey, no problem, right? Once the spread of the coronavirus slows down and we get things going again, we’ll just crank up production and the world will motor along once again. Not so fast... A recent Wall Street Journal article suggests that it’s unrealistic to view crude-oil production like a kitchen faucet that can easily be switched on and off. According to the Journal , offshore producers have begun shutting down wells in the Gulf of Mexico and might not return for years. Low oil prices hit offshore producers harder because they need higher pricing to cover the extra expense of transporting oil to onshore refineries. As Tim Duncan, CEO of offshore producer Talos Energy (TALO), explained to the Journal ... In offshore, we don’t shut in fields, we shutter them. You begin the process of leaving them forever.

American Consequences


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