Why global oil prices are going topsy-turvy

April 22, 2020

What is happening to the oil market?

Oil prices have fallen drastically over the past several weeks as a result of the coronavirus pandemic. Disunity among OPEC and other oil-producing nations has added further uncertainty to the market. Moreover, the fact that global storage facilities were full when contracts for oil deliveries were due early this week meant that no — or too few — buyers could physically take possession of oil that had been extracted from the earth. On Monday, all of those factors collided, driving prices for West Texas Intermediate (WTI) crude oil into negative territory.

How are oil prices set?

Oil prices are based on the concept of supply and demand. With the world economy at a standstill due to the ongoing coronavirus pandemic, demand for oil — and thus, the price — has fallen dramatically. Companies are ordering less oil, airlines aren’t buying fuel because their planes are grounded and no one is purchasing gasoline or diesel fuel for their cars because most commuters are stuck at home.

Read more: Energy market upheaval puts LNG buyers in front seat

Which contracts pushed prices over the edge?

Futures for the month of May came due on April 21. Oil futures are contracts that let buyers and sellers coordinate the physical delivery of crude oil at a specific date in the future. That means anyone who owns futures on that date owns the oil, and they have to have some place to store it. That storage space also has to be paid for. At the moment, however, global storage capacity is practically full, leaving very little room to store May deliveries. Prices for precious remaining space have naturally risen. Fearing they would get their fingers burned, investors desperately tried to get out of the contracts. The futures became worthless in an instant, sending prices into free fall.

Did speculators cause the crash?

Yes and no – futures can be attractive for speculators because they are essentially bets on future pricing. And like any bet, you can win, or you can lose. In this instance, speculators gambled and lost big. But many companies also have to insure their commodity market activity, and futures are part of that practice. That goes not only for oil, but also other commodities like corn, wheat, soybeans and coffee. Futures generally offer a reliable and calculable price for a given commodity at some point down the road. But right now, no one wants to take delivery of the oil they own through their futures.

Read more: Where does Russia stand in the oil market turmoil?

Why is WTI the only product affected?

Unlike European North Sea Brent Crude, one of the defining characteristics of WTI is that it is only delivered to one place. That place is Oklahoma, home to the world’s largest oil storage facility. All WTI pipelines lead to massive tanks in the city of Cushing, but most of them are almost full and the little space left in Cushing is selling at $10 (€9) a barrel and rising.

Why don’t oil producers simply slow production?

The physical characteristics of oil production generally make it necessary for a well, once tapped, to keep flowing into world markets until it runs dry. It is difficult to just turn off a well, and that is especially true when it comes to the environmentally controversial technique of hydraulic fracturing, or fracking. That is one of the main reasons oil tankers on the world’s oceans are now being used as floating storage facilities.

What does all of this mean for oil companies?

They may be in dire straits if the market doesn’t correct itself. That could lead to defaults on loans as well as mass layoffs. Right now, the entire US fracking industry is looking into the abyss, as experts estimate companies need prices of at least $50 a barrel for them to turn a profit.

Read more: Oil and gas companies exploit coronavirus to roll back environmental regulations

Why is Trump buying oil now?

The short answer is: to grab headlines. The US president recently announced that he would purchase 75 million barrels of oil to prop up prices and top off US strategic oil reserves. Still, that does nothing to influence overall demand, and the move is a proverbial drop in the bucket, as 75 million barrels more or less equals global demand for oil for just one day. OPEC’s decision — along with other oil-producing nations such as Russia — to cut daily production by 10 million barrels a day will have a much greater effect.

Nevertheless, most experts agree that none of those moves will be nearly enough to make up for drops in demand. Ultimately, that equation puts enormous pressure on countries like Saudi Arabia and Russia, both of which are hugely dependent upon oil revenues to finance themselves.

What does this all mean for the price of gasoline and heating oil in Germany?

Not much unfortunately, because taxes and duties make up more than half the price of both products in Germany. Though prices for Brent Crude also fell dramatically this week, they are still hovering around $21 a barrel. If prices for heating oil and gasoline fall, they will do so later and not by much.

How oil leaks into everyday life

Cleaning products

Containers for cleaning products are made with oil-based plastics. They are fairly stable, light and cheap. Their contents are also by and large oil based. Surfactants are detergent substances that remove grease and water-based stains and are poisonous for aquatic organisms. People with allergies can break out in rashes and acne from them, too.

How oil leaks into everyday life

‘C’ is for citrus — and clean

Lemons were long used as cleaning agents before the industrial cleaning revolution. Citric acid has similar scrubbing abilities as vinegar and sodium bicarbonate — without the dangerous side affects. Citrus cleans grills and combats germs on cutting boards. The organic solutions are plentiful, biodegradable, affordable and can come free of packaging.

How oil leaks into everyday life

(Literally) tons of plastic

About 380 million tons of plastics are produced every year worldwide, but only 9 percent of that is recycled, according to a University of California study. The rest is burned, dumped or sent to a landfill. Even recycled material gets quickly trashed again. Researchers estimate that 34 billion tons of plastic will have been produced by 2050.

How oil leaks into everyday life

Straws going au naturel

The flood of plastic won’t stop if people don’t change their ways. That’s what the European Commission has concluded, and it wants to ban sales of plastic cutlery and straws. These are items that are quickly produced, used and thrown away, only to then burden the planet for centuries to come. One major packaging producer, Tetra Pak, has since announced it will change over to making paper straws.

How oil leaks into everyday life

Image cleanup

Germany is Europe’s top producer of plastic waste, according to the Federal Environment Agency. Single-family homes purchase items in smaller and individually wrapped quantities. Plastic and styrofoam packaging is generated by online shopping and used for coffee and food on the go. The city of Hanover has taken the lead by introducing a 2-euro ($2.32) deposit scheme for reusable cups.

How oil leaks into everyday life

Desperate fight against plastic buildup

India has a major problem with plastic waste. New Delhi, the capital, has banned single-use plastic, but it is just a drop in the bucket. About 1.5 million Indians earn a living collecting plastic; there is no functioning disposal system. Trash is often burned, which releases poisonous fumes.

How oil leaks into everyday life

Like the good ol’ days

Containers can be more ecologically friendly, too. Before the era of plastic, dairy products came in glass. Packaging for drinks can be made out of renewable materials like wood from sustainable sources. Consumer choices can be decisive in the potential reduction of materials based on fossil fuels.

How oil leaks into everyday life

Oily discs

Every CD and DVD contains about 30 grams of crude oil, and 40 billion discs are produced every year around the world, each one made of polycarbonate, aluminum and lacquer. Many of these get thrown away. Germany’s recycling rate is about 5 percent, according to the Federal Environment Agency, though the waste gets turned into eyeglass frames, computer monitor housings and vehicle bumpers.

How oil leaks into everyday life

Perched on high with liquid wood

Who says high-end consumers don’t care about their ecological footprint? Gucci customers take pumps made from bioplastics in stride. Former researchers from the Fraunhofer Institute took lignin, plant fibers and wax and liquefied the compounds together. Injecting the mixture into molds allows the malleable material to be turned into other products.

How oil leaks into everyday life

Fan and eco-friendly?

This soccer top is made from recycled plastic waste — polyester and polyamide, which are derived from increasingly scarce oil resources. It takes 28 plastic bottles to make one jersey, but that can also be made from natural fibers like cotton, wool, linen, hemp and silk.

How oil leaks into everyday life

Brush well

It’s never too early to learn proper oral hygiene — not just how to brush, but also which brush to use. Common toothbrushes are made of polyamide, a product based on mineral oil. Stabilizers, softening agents and dye are in the mix, too.

How oil leaks into everyday life

Natural oral hygiene

Back to basics: Toothbrushes can be made of beech wood with pigs’ bristles. Tooth powder from sodium bicarbonate, coconut oil, charcoal, and a mix of turmeric, mint, clove, sage, ginger and healing clay can be just as effective as traditional toothpaste, making use of microorganisms, chalk and fennel oil. Yet much of the packaging is still plastic. Some toothpastes contain small, plastic beads.

How oil leaks into everyday life

A clean night’s sleep

In the market for a new mattress? Sleeping habits, orthopedic conditions, weight, allergies and material preference (spring, latex, natural rubber or foam) all play a role. Most mattresses are made from oil-based products. Eco-mattresses contain bioplastics made from sunflower oil and castor oil.

How oil leaks into everyday life

The natural toilet

Interior designers say that the bathroom is the new living room. Many people are after something special: Toilet covers that lower automatically to reduce noise, automatic toilet seat cleaning, integrated music systems. Most bathroom items contain plastic. The eco-toilet is instead made of wood. No plastic bin required.

How oil leaks into everyday life

Oil-free cars: just a fantasy?

Biodiesel from canola oil only works with old, smelly diesel motors. Biogas only works as a small component in fuel. The auto industry is looking for energy alternatives to oil, but we are still a ways off from going completely without black gold. Even batteries need oil in their production. One bright spot: hydrogen. Regardless, the car itself contains a lot of crude oil.