How Can Oil Be Worth Less Than Zero?
Dan Dicker traded oil futures for 25 years on the NYSE. He explains how COVID-19 created a perfect storm for oil markets, and why it still doesn't make green energy inevitable.
Dan Dicker traded oil futures for 25 years on the NYSE. He explains how COVID-19 created a perfect storm for oil markets, and why it still doesn't make green energy inevitable.
This is a rush transcript and may contain errors. It will be updated.
Marc Steiner: Welcome to The Real News Network, I’m Marc Steiner. Good to have you all with us. The global price of oil hit below zero on April the 21st. Yes, you heard that right, we all know below zero. It’s gone back up slightly, but the predictions are it will fall again to zero. It’s the lowest it’s ever been traded on the market, and it happened as global consumption of oil has greatly diminished, plummeted, since the onset of the societal restrictions in the wake of the global COVID-19 pandemic. The oil industry research consultancy firm Rystad Energy predicts that hundreds of US oil production companies will go through bankruptcy, and CNN recently reported the fate could actually be worse for some companies, liquidation.
But how did all this happen to the US oil industry, which was recently the top global oil producer? And how in the world can the price of oil go below zero? And what happens to all the people who work in that industry, where do they go? And here to explain all this is Dan Dicker, an oil industry analyst who traded oil, natural gas and gasoline futures on the New York Mercantile Exchange for 25 years. He’s the author of the book Shale Boom, Shale Bust: The Myth of Saudi America, and he also founded the company Energy Word, an interactive webinar company focused on energy markets and trading. And Dan, thanks for joining us. Good to have you with us here on The Real News.
Dan Dicker: Thanks Mark. Thanks.
Marc Steiner: So let’s just start here, with what this means. How does a commodity like oil fall to zero? What does that really mean? And what are the market mechanisms that allow this to happen, in layman terms, as most of us have never worked in the market and never traded the market in that kind of depth? And what might this mean in time, given that people are saying this calls for massive government intervention, maybe not just for companies, but for the workers as well? So what is really happening here?
Dan Dicker: Well, there’s a lot to unpack there, so let’s try and do it in pieces. In terms of oil and the oil markets, what you have is a futures market. Now, understand that a futures market, you don’t trade shares like you would a stock. Instead, you trade contracts, and those contracts have a certain requirement of both buyers and sellers. Ultimately what happens is that the contract requires a buyer to take a certain amount of oil at a certain place. So at the end of the contract, you are required physically to take, if you are a buyer, a certain amount of oil for a certain price at a certain place, and if you are a seller of oil, to deliver that oil.
Now, 98% of those that trade futures contracts wouldn’t know a barrel of oil from a barrel of monkeys. And they are trading it because what they’re really doing is, they don’t give a damn about getting oil or taking or making oil. But what they care about is speculating on the price of oil. And that’s what’s going on for 98% of the people in oil markets. And what was going on here, in this contract, which would be the May 2020 contract of WTI Futures, now circled to the last two days of the contract. In the last two days of the contract, what you had was a number of speculators who are looking to get out of contracts before they have to either make or take delivery. And what you had, of course, is what you described in the opening, an enormous glut of oil that kept sloshing around the global oil market and in the United States, and for physical oil, what had happened is, there’s really no place for it to go anymore. There are no more buyers.
All the storage had filled up. There was really nobody left to actually buy oil. So you get to the last few days of the contract, and you have people who are long oil, who have speculated that oil is actually going to go up and it’s not going up, but they have to get out of these financial instruments before they turn into physical instruments. And so, they have to sell them somewhere, but there’s no buyers. And in fact, there are so few buyers, that in fact, the oil market doesn’t even go to zero, it goes below zero, which is hard to conceive. It’s like you go into a deli and you ask for a roast beef sandwich and the counter man hands you your sandwich and the $5 bill as you walk out the door. But the truth is that this is exactly how this works in the end.
In the end, what you’re doing, you have to pay someone to take something of value away from you, because you simply cannot afford to deal in the physical itself. You just don’t have the capability of… You don’t have a big enough bathtub. There’s nowhere to put it. You must get out in a financial way, and that requires somebody to actually… You have to pay somebody to take it away. Now it’s a construct. It is not usual. But if we’re going to go further on this, it says something about the bankruptcy that has been the US oil market for the past, mostly, of the last 10 years, that a product that has value can, even for a day, have negative $30 a barrel in value.
Marc Steiner: That would be stunning if that happens. When you look at this, and you think about how the price of oil gets set, and the fluctuation among traders, most of us don’t know this. I’ve spent a little bit of time on the exchange, just because I covered it here and there. But to get a sense of what that’s like, and what is actually going on in terms of the capital that’s invested in this, and people who are trading on floor, can you just describe for us what’s actually going on for people at this moment?
Dan Dicker: Well, there’s lots of different pieces to this puzzle. There are a lot of different players who are playing around in oil futures. So for individual investors, they are obviously on the hook for whatever oil prices do, whether they even do go negative for a time. And one of the problems that some people were looking at were in fact defaults on energy contracts destroying exchanges. Because when you have prices that go beyond the limits of what anybody could even conceive of, what you might have is like a jingle mail, like people throwing back their keys to their houses on mortgages when the prices of those houses are worth less than the mortgage was, we saw in 2008.
Here you have oil contracts that are worth a negative price and nobody expects that, so you might have traders who are saying to the clearing house or to the exchange itself, “Hey, I’m not paying this. I’m walking away. Sue me if you want the money.” This is beyond what any exchange can possibly deliver. So there were issues about default. It only happened for a day, so you didn’t get a default. The number of repercussions inside the oil industry are few. ETFs, for example, that had tried to represent oil futures like a stock, did not have the capability of representing oil futures in the negative. And so, they were applying for a whole bunch of protections from the federal government, from investors who had bought or sold these, who were not getting their money’s worth, because obviously they had gone further than what any ETF could have expected, and they couldn’t pay off. So there was a problem with default there.
And then you have a whole number of contracts inside the physical market, where people can’t literally take delivery because there’s no place to put it, and then you have a physical default problem that’s going on there. And that’s only inside this very small place of futures. But when you push outward to the entire energy world now, and you’re looking at prices that are $15, $10, $5, $0, the implications of that become even greater obviously, because you have a whole bunch of oil companies who obviously don’t stay alive, and the entire structure of US oil falls apart if these prices stay this way for a long period.
Marc Steiner: So let me take the last part of what you said in two parts. And one part you didn’t say directly, but I’m going to start there and then go to what happens to these companies if they do fall apart, and what happens to this country if they do fall apart. Part of it, when I’ve been running conversations and really looking at the question of a new green economy, and people talk about the transition to a new green economy, one of the things I always posit to people is, you have millions of men and women who work in various aspects of the fossil fuel industry, whether it’s directly pulling it out of the ground, or working in refineries, or working in offices, or distributing it across country in trucks, whatever that is, you have millions of people who are directly involved.
So what happens to those people and their jobs? What happens to them in this transition? And can you guarantee them the money they’re making in fossil fuels when they’re putting in solar panels? That’s an important question to wrestle with. But the question now, in regards to that, is what happens to the workers here? What happens to the men and women who are actually doing the day to day work to build this industry? We talk about building up major industry, but what about the people who work there? That that seems, to me, to be a critical piece of this people are not talking about.
Dan Dicker: Yeah. Every time you talk about this, there’s so many layers to digest. So yes, there is the feeling among those who were in the green space, which many of us are, or at least understand the green space, that this is great, that low energy prices are great, that oil companies going bankrupt is great. But it’s not great. 17% of the US economy relies upon fossil fuel production, and there is a whole bunch of side industries that rely upon it as well. Again, the estimate is around 10 million jobs that are involved in oil and gas. All of these things get affected by companies that go bankrupt. That being said, I don’t think there’s been a more sclerotic, bloated, and mismanaged sector of the US economy over the course of the last 10 years than US oil.
So in a lot of ways, what’s going on… Let’s put it this way. They were the most vulnerable to get absolutely annihilated by something like a coronavirus because they were already in a place where they were over leveraged, where they had overproduced compared to what the market needed, where they had gotten the benefit of tax breaks from administration after administration, of course, the Trump administration had added to that over the last three or four years, where they had been flaring natural gas, where they have gotten specialty lease provisions going forward. In a lot of ways, the industry had already run through a lot of their leftover margins for error.
And therefore, when the coronavirus hit, it was clear that they were going to take a tremendous bath, as opposed to some others. And when we look at some others, for example, the airlines or the hotels, you could look at them and say nothing that’s happening to them is really their fault. This is something that they couldn’t have planned for, and their problems in some way make an argument for a big bail out, to help them and their employees stay alive. But in the oil industry, I would come the other side and say this is an industry that’s least deserving of a bailout of any that’s been affected in a major way by the coronavirus, in that they’ve already used up, in many ways, eight of their nine lives.
And for the oil industry to get itself correctly on track, we need to see, in some ways, these 300-500 restructurings, as you spoke about in the first case, of many of these oil companies that have really done a terrible job of managing resources and their bank sheets. The entire industry has taken down, the estimates are somewhere, about one and a half trillion dollars of investor capital over the course of the last five years. This has been a negative production investment for both the US economy, for investors, and environmentally for sure. So in many ways, this is sort of a moment in time where we sort of have to look at and say, “Well maybe this is the time for the coronavirus to do, in an accelerated fashion, what had already been going on prior to the onset of the virus, and that is clean out a lot of the very bad players in the shale industry and in US production, that really don’t deserve to be around, and bring back the disciplined big company structure that we had in the 60s, 70s, 80s, and 90s.
Marc Steiner: So that begs a couple of questions here. One is that you clearly see this divide between the oil majors and independent companies that can fall apart in this, and many of those are on the front line of the fracking boom that took place. So, there’s always been this real skepticism about financing of fracking, and-
Dan Dicker: More over the last few years. Everyone’s sort of seen the voice of God and seen that this has been like a black hole of investment, that’s really kind of sunk a lot of money for nothing. And so yeah, there’s been a lot more reticence to lend to the independents here in the United States.
Marc Steiner: So if these independents actually have to liquidate, if fracking goes down a bit, A, what would that mean, do you think, for the world that you were in for so long? And B, does that leave an opening for the argument around the new green economy? Does that change that discussion?
Dan Dicker: Actually not. And here’s why. It’s the simple reason that the coronavirus has added an enormous glut to an already glutted oil market, and what that means is that prices stay low for a long time. Because not only do you have a restructuring that goes on where gluts keep on building until the economy gets back on track, whenever that is. But even after the economy gets back on track, you have a huge surplus that’s hanging over, and that needs to be cleared before oil prices go up. So you’re staring at low oil prices for the next two years, three years maybe. I don’t know how long.
And the truth is that, and this is the main thesis of my book, and I’ve been working on it for the past year, that you really cannot get to that next level of commitment to renewables and a green economy until you can make those renewables competitive economically with fossil fuels. And if oil is going to stay cheap for the next three years, as much as you want to help the planet, people are going to grab what’s cheapest. And the oil and gas are going to be cheap for a long, long time. And I’m not just talking about here in the United States, but especially in the third world and developing countries. They don’t give a damn about the environment. They don’t have the time to give a damn about the environment.
They’re going to grab at $15-$20 a barrel oil a lot faster than they’re going to build a smart grid and a bunch of wind farms. And that’s just the bottom line. So, my thesis in this book is how do we get oil to be more expensive, not less expensive. That’s the fastest way to get to a renewable future. Not $10 a barrel oil, but $100 a barrel oil, $200 a barrel oil. You want to make solar power ready and affordable and necessary to put on. You want to see $250 a barrel oil, not $20 a barrel oil. I mean, that’s just the financial bottom line of all of this. I think that’s being lost in some ways.
Marc Steiner: So, that’s interesting. Because what you’re saying here is, in some ways, is a bit of a contradiction to what many clean energy activists are saying, which is, as you were alluding to a moment ago, “This is great. Oil is bottoming out.”
Dan Dicker: That’s why I’m writing a book, because I think I’m in contradiction to just about everybody. I’m in contradiction of the right wing about bailing these guys out, and I’m in contradiction on the left, as if you want to see the oil companies go broke. You don’t. You don’t want either. Look, the oil companies have tremendous commitment to energy in any form. They don’t give a damn what they sell it in. And if you don’t bring the energy companies along in this trip towards renewables, you’re going to waste so much time in trying to get there. You have to bring them on. They have to be part of the solution. And being part of the solution means that you make them viable through oil, and through natural gas, and through all the transition fuels that we need in order to get to a renewable future, and allow them to participate in it. And again, I’m alone on this. Like I say, the right hates me, the left hates me, nobody likes me. But this is what I see. This is what’s really necessary if you really want to get to a renewable future.
Marc Steiner: So, a couple of quick points here before we have to conclude. What do you think happens, then, in this contradiction inside the oil industry, between going back to the majors and the independents. The independence could literally go away. Because they would be forced to liquidate in this market, where the Exxon’s of the world, they have enough resources to survive and do whatever comes next. So how does that play out, do you think, in terms of the economy?
Dan Dicker: Well, what’s interesting, what’s been happening in the last couple of days has been, again, disheartening for me, because it seems like Trump and Steve Mnuchin are building quite a big base to bail out these independents, and not allow this natural, what we call, creative destruction, to use any economy speak word, to happen inside the oil patch. And we see numbers that every small fracker has taken out a PPP loan and gotten it. We’ve seen the, I can get the numbers, there’s $250 billion leftover that Trump wants to target specifically for small bailouts. The fed is opening up a huge $850 billion facility to buy bonds, low grade bonds that are triple-B or worse. And a lot of that is oil bonds. That’s what they are. That’s what they are.
And they wanted them to be rated triple-B or better, some time in the middle of March. And then you’ve got a whole number of senators from oil rich states who are saying, “No, no, no. Don’t rate them in March, rate them in January, before this stuff started to fall off the cliff.” And that means that more of these zombies that I call them are going to be able to participate. So, in a lot of ways, they buy oil for the SPR, and Trump has already threatened to do that. There’s a lot of things that they can do to keep these guys floated for even longer. And again, the longer you keep these guys floated, the longer oil prices stay cheap. And the longer oil prices stay cheap, the longer it’s going to take us to get to a green future. That’s my thesis. And that’s what I’ve been trying to tell people. And I know it’s difficult for them to grok. But I’ve been doing this for 35 years now, that’s what I see.
Marc Steiner: This is fascinating. So, we can conclude with this. As you were talking about Donald Trump, we’ve seen that he’s already negotiated this global production cut. For me, what’s worrisome, and to many, what’s worrisome, is they deregulate the entire industry and start using the strategic petroleum reserve to buy more oil. So none of it really stopped the bleeding. And as you’re talking about the federal program to lend money-
Dan Dicker: By the way, Marc, I should say, even with all of this, there will probably be 300 bankruptcies. That’s how bad the industry is in shape right now. Even with all this money thrown at them, they’ll still be 300 bankruptcies. But I’m sorry. I didn’t mean to interrupt.
Marc Steiner: No, no. That’s cool. That’s fine. So, I’m just curious, in all of that, where do you think the federal government should be going with this? I don’t want to give a boon to Donald Trump, but where should the federal government go with all this, and what should be happening instead?
Dan Dicker: I wish that he could turn his back on the oil industry and try and concentrate on those that we all feel are taking it very deeply on the chin through no fault of their own. Airlines, hotels, the recreation industry, arenas, music, schools, small businesses, restaurants. How much can you float in this economy? Who’s really deserving of a bailout here? And who is not deserving of a bailout here? And unfortunately, when it comes time, when the worst player has shown himself to be on the bust cycle fastest. So, everybody is kind of looking at the oil industry right now, because the oil industry went bust first in this. But they’re not going to be the last to go bust. There’s a whole group of industries in the United States that are going to be applying for help and are going to need it and probably deserve it more than oil.
So my hope would be that he would somehow find a way to turn his back on the oil industry and say, “You guys got to find your own way, because this is actually good for you and good for America. And we’ve been pursuing this energy independence myth for long enough now, and it’s really dumb, and we should stop doing that.” And I know that they won’t, but this is what I would like to see happen. But it’s not what I’m going to see happen. I’m going to see them throw more money at oil. And then when the next group goes bust, the airlines or whatever, they’ll throw money at them. And I don’t know where it ends. In many ways, I think this entire coronavirus thing is an economic buzzsaw, and I don’t think Trump has any idea what he’s walking into. He’s Hoover on steroids. This is really going to be bad, and I don’t think people have a general sense how bad economically it’s going to get from here. Because I think it’s going to get a lot worse than it is now.
Marc Steiner: So Dan, when I think of Trump, I do think he’s like the 21st century redux of Buchanan and Hoover combined, but worse.
Dan Dicker: I agree completely. I don’t think he knows it, which makes it even more interesting.
Marc Steiner: He has no idea.
Dan Dicker: Right.
Marc Steiner: But you’ve given us a lot of ideas. This has been a great discussion. I really appreciate you taking the time. We look forward to the new version of your book coming out, and we will stay in touch. Thank you so much for taking your time here on The Real News. We really appreciate it.
Dan Dicker: Thank you, Marc. Thanks.
Marc Steiner: I’ve been with Dan Dicker, and I’m Marc Steiner here with The Real News Network. Good to have you all with us as well today. And please, let me remind you once again. Stay safe. Stay home. Stay healthy. Wear masks. Wear gloves. Don’t do anything foolish. Again, I’m Marc Steiner here for The Real News. Take care.