The oil prices slump last week has given to the crisis resulting from the corona virus outbreak a new dimension. It has weighted on the financial markets which were starting to hope thanks to the reduction of the mortality rate and the announcement of the first measures about the end of lockdown. The quotation with a maturity date of the American petrol (measured by the WTI index) went even into negative territory and the Brent index, which is a representative one for the rest of the world, went below 20 dollars per barrel. It had fluctuated between 50 and 60 dollars during the 1st quarter of the year. Its value had reached 140 dollars at the eve of the 2008 financial crisis and so it found itself back to its lowest level for twenty years.
The crisis word was generally used when a sharp price increase occurred. It was supposed to damage foreign accounts of importing countries and to provoke an inflation increase able to incite central banks to rise their interest rates and so to generate a recession in the affected countries. Oil shocks in the Seventies are still in all our memories. It is why, when prices were falling, we were used to consider that it was rather good news. So to alarm today is excessive because oil markets reaction is by itself excessive and because in the current context, the reduction of production and transport costs which is going to result from it will reduce the charges in several activities which have been severely harmed and may offer to States new resources.
There was first an exceptional event on the American market with the quotation of contracts carrying a negative value. But it was not the oil price which fell below zero but the “oil-paper” one. Speculators had bought oil contracts with a maturity coming at end in April but they were not able to get it because they didn’t have the capacity to store it. They had to pay dealers who had these capacities to get rid of it. As soon as the day after, rates rebounded and the deliveries with a maturity in May and in June got rates consistent with the real situation of the American oil market which is oversupplied due to the conjunction of three phenomenon, the overproduction in the country, the lack of enough transportation and storage capacities and the deep fall of gasoline consumption provoked by the outbreak and the lockdown measures adopted to stop it.
Above the particular circumstances which have provoked it, the oil prices fall is bringing an abrupt denial to a paradigm which is shared for many years, according to which the natural resources shortfall is inescapable and which denounces the irresponsibility of people who are everyday consuming more. The American overproduction was originated by a major technological innovation nobody had forecasted and which occurred during these last ten years. The hydraulic fracking has permitted to extract oil and natural gas from fields in shale basins, and the name of these new resources, shale oil and gas, derived from that. So the American oil and gas production doubled in a few years and oil one passed from 5,5 to 10 billion barrels per day, putting in trouble the oil world market and caused, in reality, the end of OPEC which had been successful, until that, in maintaining prices above 60 dollars per barrel. That technology can be applied everywhere and China is starting to use it. The available resource increase is not near to stop and it invalidates all those who had pretended that production was near to reach a peak. At a time, it had been evocated a consumption maximum level of 85 billion barrels per day. In 2019, we have been around 100 billion barrels per day.
That new abundance has allowed, by large, to offset production and export slumps of Libya, Iran and Venezuela. It is strengthened by the discovery of new traditional fields which are starting to produce in Brazil and in Africa. It is coming at a time when political tensions between the U.S., Russia and Saudi Arabia are making impossible to reach a substantial production reduction agreement. Only such an agreement could be able to arrest the price fall because OPEC members alone have not anymore enough weight, as it was during the previous decades, to exercise a determining influence on oil barrel price. Oil and natural gas prices will durably remain and by large lower than it was observed during the previous decade.
So greenhouse gas emission objectives will be, in the future, more difficult to reach. Electric vehicles, which are already penalized by their cost and by preoccupations regarding autonomy and recharging constraints, will be even less attractive. It is not possible to exclude that the shock the car industry is enduring incites European authorities to soften penalties it had been decided to inflict to manufacturers if their clients are continuing to choose cars with gasoline and diesel engines. For the same reasons, home isolation investments will be less and less profitable and it is dubious that, due to purchasing power reductions and the foreseeable unemployment increase, we see a rebound of works dedicated to energy saving in homes.
The cumulated effects of the sanitary crisis and of the oil prices fall make largely unlikely the fulfillment of European commitments regarding environment and the promise of a carbon neutrality at mid and even long term. The only positive point, regarding environment, of that double crisis is the abundance and the price fall of natural gas. This fossil fuel is much less polluting than coal. The United States and China at a smaller extend, have increased its share in their power mix. In Europe, to protect their coal miners, Poland and Germany are reluctant to follow that way which is the only one which has quick and indisputable impact on the CO2 emissions and which, atop of it, allows to reduce the small particles rejections which pollute the whole Europe when the wind send them toward the Western zones of the Mainland. It is the duty to the European institutions to take the opportunity of this crisis to impose more penalizing measures against coal.
The States, and France in particular, which will have to face an unprecedented increase of their public deficits must not stay without reactions regarding the gasoline prices diminution which will result from the situation on oil markets. To the condition to show pedagogy and moderation, a share of that fall can be temporarily frozen through the institution of a “solidarity tax” which would abound different funds dedicated to cope with the crisis consequences, regarding for instance health and part time employment.
It is always difficult to purse several objectives in the same time. The new oil crisis, which will last for all the reasons developed previously, allows getting some new resources to finance expenditures generated by the sanitary crisis and to maintain the efforts regarding the fight against climate warming. It would be damaging to go without.