Virtually no industry has felt the brutal impact of the ongoing COVID-19 pandemic on their business operations quite like the oil industry. As the saying goes, oil is the lifeblood of the modern economy. Despite pushes in recent years to move away from reliance on oil and gas, the industry remains one of the most important players in the national and global economy.
A blow to the economy will inevitably result in losses for the oil market because oil is involved in nearly every aspect of commerce – manufacturing, public transportation, goods delivery, business services like food delivery, and more. What hits the economy also hits the oil market.
The price of oil dipped to record historic lows recently, falling to negative$40 per barrel.
How can a barrel of oil have a negative value of $40? The answer comes from the manner in which oil is produced and distributed across the globe. Oil is purchased in the form of “futures” that are essentially promises to take delivery of a set amount of oil at a specified time in the future at an agreed-upon price.
In normal times, investors make money on futures by buying commodities low and then selling them high once they get them in the future.
However, COVID-19 turned the futures market upside down. Instead of hoping to make a quick buck off of their futures, investors are now scrambling to get rid of future shipments so they don’t have to take the overvalued oil products and further incur the cost of keeping them in storage – hence the negative pricing.
Some are more bullish on the oil industry than others, believing it will make a full recovery along with the rest of the economy and will emerge from the crisis stronger and leaner than ever. Other analysts aren’t so sure that the oil industry can ever regain its prominence.
The oil industry has long been under fire for its role in global warming, with many governments making actionable plans to move their energy sources away from oil and gas in favor of solar, wind, or other forms of “clean” energy that do not emit carbon dioxide into the atmosphere in the same way that fossil fuels do.