something has happened here in the middle of April 2020 that has never happened before and
that is the price of a barrel of crude oil has dropped below zero what that means is that oil
producers today are actually willing to pay someone to take their oil and as crazy as
that sounds it's not that hard to imagine when you consider that most people are sheltering in
place and working from home and our entire lives have been pretty disrupted of late but the bigger
question is what does this mean going forward sure the month of May is gonna be problematic but how
does oil recover going forward and that's what we're talking about today a futures contract is
a promise to buy a commodity at a certain point in time there's a whole industry of speculators
whom buy and sell these contracts trying to make small short-term profits to get the prices to
where they ought to be but only the people holding the contract at the time of closing are liable to
take delivery so currently near the end of the term for the May deliveries of crude oil prices
are below zero that sounds crazy and it kind of is this is unprecedented in the last 70 years
this has never happened if you're old enough to remember what happened during the oil embargos of
the 1970s you know that the price of gasoline shot through the roof prices for a barrel of crude oil
jump from the mid 20s to the 50s in a very small period of time and there were people waiting a gas
station because they couldn't get any gasoline for their cars what we're experiencing now is
the exact opposite earlier this year a lot of the OPEC countries Russia Saudi Arabia Venezuela all
decided to really increase their production and this is because they kind of had an agreement
in the past to control supply to better boost up prices and keep the economy more stable but that
pact has kind of seized and all these different countries are back at it full force full speed
ahead with full raked oil production as a result our supply is huge and no one could have seen this
coming that in March and April we would all be sheltering in place people would not be driving
their cars and as a result the demand would fall out of the market so now we have extra supply and
almost no demand and that has caused the futures market to completely crash for oil so it is not
an exaggeration to say that people are willing to pay you to take crude oil at this point you might
be thinking that sounds utterly absurd why would anybody pay somebody else to take their product
off their hands but in this case oil the crude oil market and business is incredibly complicated you
can imagine this pyramid of all these different pieces and players that have to play their role
for the gasoline that you use to actually get there first and foremost a lot of the oil wells
whether onshore or offshore can't easily be turned on and off or regulated and in some cases you just
have to let them run because we try to shut down production on a well you could potentially risk
damaging the well and future extraction efforts might not be possible so as a result what most
people do is continue to extract the crude oil and they are willing to pay to have it removed
that way they can continue to keep the well operational because they figure in a month's time
things will go back to normal demand will increase and we'll be back in business but here's the thing
the places we have to hold reserves of crude oil are filling up around the world and as a result
there isn't that many places left where we can stockpile crude until the time when demand returns
and that's going to be a problem because now we'll be selling features in crude oil for June and how
will that look it's hard to predict but we might still be in this situation because the shelter in
place orders for most places are going to be in effect until May 15th at that point we'll begin
to go back to work but you can imagine it's not gonna just be night and day there are going to
be people who are apprehensive maybe they'll talk to their boss and work from home part time so it's
really hard to predict how the demand is going to rise now to get an idea of what happened here in
the month of April and the end of March that has led to this unprecedented drop in crude oil demand
let's look at two factors the first is airline travel the second is the amount of driving that
average people are doing in the case of airline travel here's a graph of the number of passengers
coming in and out of airports in the United States for march through April of 2019 and 2020 you'll
notice the numbers were pretty similar in the beginning of March before a lot of this stuff
really took effect but quickly as a news broke and the number of cases went up things changed by the
end of March the number of travelers in 2019 was 2.3 million and 2020 just a hundred and fifty four
thousand to put this into context let's assume all flights happened on a Boeing 737 the 737 can go 76
miles per gallon per passenger factoring that some travel would be long-haul international some will
be short puddle jumps let's assume the average trip was 2,500 miles based on the averages for
the reduction in travelers in April of 2020 we see that there's about 70 million gallons less
of aviation fuel burnt per day which translates to 2.1 billion gallons for the entire month now
switching gears and talking about the automotive industry gasoline consumption as a function of
number of travelers and traveling to work we can do a similar calculation if we assume the
average driver dropped a thousand miles a month and the national average in the United States
for the reduction in travel was 40 percent some states like New York and California had 48 50 %
others had much lower but the average was 40 percent that means that there was a reduction
of 3.2 billion gallons burnt in the automotive industry 3.2 for the automotive 2.1 billion for
the aviation industry so 5.3 billion gallons of gasoline were not burnt in the month of April that
they would have been the month before or this time last year or any other period that is staggering
and that is why we're in the predicament that we're in most people aren't as worried about
June futures because they believe that the demand for oil will return by then but even crude prices
for June are down 16 percent down to about $21 per barrel which is also a problem and we're
still a ways off those prices can still fluctuate quite a bit but I have a different outlook I kind
of see this as one of the most momentous periods in our history where I believe the transformation
from a fossil fuel driven economy and industry will shift to more renewables and sustainable
forms of energy because I don't think this is going to be a one-time blip it's not realistic
to imagine that what's happening today will rise and fall and then we'll be past it what's more
likely is we'll have a second wave historically a lot of the pandemics that we've faced have had
in waves for example the h1n1 flu outbreak in 2009 had their first wave in May and June and
a second around October with the Spanish flu pandemic in 1918 the first wave happened in
the spring of 1918 and the second more intense wave hit in the fall followed by a third wave in
the winter and what we're seeing today even if the shelter-in-place orders are lifted and we kind of
go back to work and live our lives is this might happen again some experts believe that this will
have a second wave in August or September of 2020 but dr. fowey and others have said that we'll be
better equipped to handle it then we have more testing in place we'll have better procedures
of how to handle it and I think we're gonna be ok but I do believe there might be a secondary
wave where people are told or recommended to stay at home to work from home and to socially
distance themselves as a result we'll be able to flatten the curve and get through this entirely so
what does that mean for the crude oil prices well they're probably to crash again because if people
aren't fully returning back to work the prices aren't going to go up and the second wave when
it does hit is going to further suppress prices and cause problems the really tricky part about
this is oil companies people who produce crude oil can't really operate at lower levels it's
not very easy to say you used to make a thousand barrels a day why not just make a hundred that
will be more in line with demand and you live your life because what happens is there's fixed costs
that don't go down just because you're making less oil a lot of the cost to run the rig and
to maintain the operations pay your employees and staff those don't exactly decrease when you
lower the production so as a result they can't be profitable at a certain level you have to make so
much oil per day to be profitable and as a result scaling down operations to a more sustainable
level isn't a knob that they can really easily twist this is going to be the biggest challenge
going forward oil companies are huge multinational billion-dollar juggernauts these are not small
and for them to operate they have to have some stability in the market and I don't think that
there's going to be very much stability in the following year so there is probably a little
cause for concern on their part now if you own a gasoline car you've probably seen gas prices
cheaper than you've ever seen maybe in 20 years but the long-term effect to the markets is harder
to understand if there's one thing the industries and markets don't like its uncertainty and the
future of oil in the coming year is anything but certain the demand is going to be really
unpredictable but something else has happened to for a lot of people around the world working from
home has become a thing that they've never done before people have created home offices learned
how to have teleconferences and work from home and suddenly not having to commute maybe your day is
a little bit more productive so as a result even if we do go back to business as usual I wouldn't
be surprised if people work from home a couple days a week if you're not feeling well I think
you go home and you don't come back for a week so there's going to be long-term changes to us
as a society that again is going to decrease the demand for oil and then factor in the rise
of electric car and that will be yet another nail in the coffin for big oil with an Eevee you just
go in your garage and charge it at night every five or six days or whatever you need to and
if you're not using it it just sits there there isn't this huge pyramid of things that have to
go right in order for your gasoline to be there with an Eevee it's the power grid it's largely
automated and it's already in place because we use it for everything else we just have one source of
power whether it's for your house or your car it all comes from one place with gasoline is
just not like that but in the future we could just have one highly controlled easy to store
and manage power source which would be the grid and that I think ultimately will be the final
nail in the coffin oil has been a huge part of our industrialization in the last hundred years
but I can't help but feel that the times that we're in right now is just the start of a much
larger trend I don't believe that a lot of oil companies be able to get through this especially
as demands have fallen and there's not really an easy way to understand how they'll recover
Big Oil is a huge industry and nobody really thought they'd go down without a fight but I
don't think anybody could have predicted this and it really is an unprecedented time right now but
I think this is the beginning of the end like all transitions like all technologies we as a people
have always evolved whether it was landlines two cell phones or flip phones to smart phones we've
always evolved very few industries have lasted as long as Big Oil but everybody has their time
of the Sun and eventually have to give way to the next big thing and I can't help but feel but
the next big thing is going to be electrified transportation maybe hydrogen economies for
larger things like shipping vessels so as bad as that might be for the oil companies there's
going to be a whole new sector of energy it'll be around sustainability it'll be cleaner it'll
be better for us the air has never been cleaner probably than it has right now because this great
experiment that has left many people staying at home and not traveling and not commuting has shown
us that a lot of cities are cleaner than ever and burning fossil fuels is not really something we
should strive to do and this is one of those moments that is a watershed moment it's not a
small evolutionary scale but a catastrophic moment where transitions and changes happen
so what do you guys think write to us in the comments and let us know I'm dying to know your
take on this is this temporary and a little blip on the radar is this a harbinger of more to come
I'd love to know if you like this video please consider sharing it on your social media accounts
and everything else and a special thank you to all of our patrons on patreon your support has been
incredible in these times of uncertainty for our channel we really appreciate it and if you want
to be a rock star supporter of this show please consider joining us on patreon so that pretty
much wraps it up for me I'm Ricky this is 2 bit DaVinci and I'll catch you guys on the next one
you