[ The White House will reach for a corporate bailout, but now’s
the opportunity to move away from oil extraction and build a rational
system of clean energy. ] [[link removed]]

THE OIL CRASH SHOULD BE OUR CHANCE TO TRANSFORM ENERGY PRODUCTION  
[[link removed]]


 

Hadas Thier and Matt Huber
May 7, 2020
Jacobin
[[link removed]]


*
[[link removed]]
*
[[link removed]]
*
* [[link removed]]

_ The White House will reach for a corporate bailout, but now’s the
opportunity to move away from oil extraction and build a rational
system of clean energy. _

A line handler helps dock the oil tanker, Texas Voyager, as it pulls
into its mooring to offload its crude oil at Port Everglades on April
21, 2020 in Fort Lauderdale, Florida. , Joe Raedle /Getty

 

Two weeks ago, the price of oil collapsed to below zero for the first
time in history. Crude oil’s “Black Monday,” on April 20,
witnessed the so-far lowest point of the crash. In a single day, the
price of West Texas Intermediate oil (the American benchmark) dropped
over 300 percent to _negative _$37.63 a barrel. Facing a glutted
market and jammed up storage capacities, traders literally paid people
to take oil off their hands.

Incredibly, the crash happened just a week after President Trump
brokered a much vaunted deal between Saudi Arabia and Russia, in which
members and allies of the Organization of the Petroleum Exporting
Countries (OPEC) agreed to cut roughly 10 percent of global crude oil
supply in order to prop up prices. It was the biggest such cut in
history, yet it proved wholly insufficient to counter the estimated
loss of a third of the world’s oil consumption.

It is this sudden collapse in demand that makes this crisis distinct.
As a “liquid” commodity, oil’s “just-in-time” supply chain
is meant to flow seamlessly from wellhead to pipeline to refinery —
and then out to consumers. It is extremely expensive and geologically
risky to “shut in” production and stop the flow. Only limited
storage possibilities exist and so, as a consequence, hundreds
[[link removed]] of oil
tankers costing $200,000 a day
[[link removed]]are
simply idling in the sea with nowhere to deliver their oil. Oil is the
dirty commodity that greases life
[[link removed]] under
capitalism. When life as we know grinds to a halt, oil is rendered
redundant.

By the end of last week, prices had rebounded to a still abysmally low
$20 a barrel. We should expect to see wild fluctuations in price in
the coming months, with more Black days and bounces ahead. But it’s
important to keep in mind that even $20 a barrel is only half the
price needed for most US shale producers to recover costs
[[link removed]].
The overall trajectory spells a major crisis for the oil industry, for
US shale in particular, and it has deep implications for the global
economy and geopolitical relations. At the same time, such a crisis
potentially presents an opening for the Left to push for a radical
transformation of our energy systems.

What Caused the Crash?

Breathless commentary
[[link removed]]
on the crisis has rightly called it “unprecedented.” Yet, another
way of thinking about it is just an extreme version of the _normal
_state of oil markets, which are always characterized by volatility.
Consider just the last twelve years, for example. In 2008, oil hit a
record high price of $145/barrel
[[link removed]] — and Malthusian
cries of “peak oil” had their moment in the spotlight. Later that
year, in the wake of the crash of 2008, prices collapsed to $35 and
(like today) oil tankers idled
[[link removed]]
at sea. The crash didn’t last long, and prices returned to
$70–80/barrel and even went above $100 again in 2011. Another crash
hit in 2014–5, leading to an onslaught of layoffs and bankruptcies,
before returning to somewhat higher levels by the summer of 2018. Now
this.

The period of relative high prices spurred a feeding frenzy among
finance capital and US companies employing horizontal drilling and
hydraulic fracturing technologies to extract oil from shale rock —
apparently “economical” in the high price environment. With oil
prices hovering around $100/barrel, and taking advantage of
rock-bottom interest rates, US shale rode a wave of debt-fueled
expansion. As long as profits were being made, and the credit kept
flowing, heavily indebted companies could continue to finance their
debts and invest in more production. Most notable was North Dakota
[[link removed]],
which went from producing 39,000 barrels/day in 2006 to 512,287 in
2019.

The production explosion was accompanied by all the standard social
dysfunction
[[link removed]]
of oil “boom towns” — haphazardly constructed “man camps,”
violence, corruption, and an uptick
[[link removed]]
in industrial accidents and worker death. This crash appears to be the
inevitable “bust” of the cycle, leaving much of these boomtowns
polluted and economically devastated as oil capital pulls out.

Some analysis
[[link removed]]
shows that despite investor enthusiasm, fracking was never
particularly profitable in the first place. “The shale players were
already stretched to their limits, and the virus has just broken every
thread they were holding on by,” Ed Hirs, an energy economics
lecturer told the _New York Times_
[[link removed]].

Many producers will need to continue to produce amidst the glut
because of the debts they’ve incurred. As Mazen Labban explains
[[link removed]],
“Oil producers have to keep producing oil because they have invested
so much capital in its production; the more capital they invest in it,
the more oil they have to produce to recapture their investments.”
The spigot will remain open, even while hobbled, unless state power
steps in to halt production.

This is in fact what happened
[[link removed]] the
last time oil prices and demand crashed to this extent in the Great
Depression of the 1930s. The largest discovery in the lower
forty-eight states, in East Texas in 1930, unlocked a veritable flood
of oil unto a market already collapsing due to curtailed demand. The
states of Texas and Oklahoma declared martial law and forced the oil
fields to shut down by barrel of a gun.

Texas has already announced plans
[[link removed]] to curtail production
again. These provincial-level states must balance their desire to halt
production to help raise the price, and their existential dependence
[[link removed]]
on “severance” taxes to fund state and local budgets.

Yet, at a wider scale, oil-exporting countries will surely be
reluctant to give up their shares of global production, in part
because many states’ economies depend on oil exports to run, and in
part because every state would rather sell oil on the cheap, rather
than let its rivals grow market share and geopolitical gain. The
likely outcome is little coordination of output as a whole, meaning
more glut and market chaos ahead.

While the climate crisis demands a rational and planned transition
[[link removed]]
to a new zero-carbon energy system, capitalism brings energy chaos.
This boom and ” volatility is a perfect example of what Engels
described
[[link removed]]
as the “anarchy of production” under capitalism. Yet, what appears
irrational and anarchic from the point of view of society as a whole,
can become an accumulation strategy for others.

Although oil markets were relatively stable in the immediate postwar
period of “managed capitalism” (Texas limited oil production much
like OPEC tries to today), the 1970s oil crisis ushered in a new
period of volatility in the era of neoliberal financialized
capitalism. Shortly thereafter, oil “futures markets” were set up
in the New York Mercantile Exchange (NYMEX) in 1983 and the London
Intercontinental Exchange (ICE) in 1988. Although neoliberal
ideologues
[[link removed]]
would argue that these futures markets served important functions as
“efficient and effective tools for isolating financial risk and
‘hedging’ to reduce exposure to risk”, they preferred not to
mention how these markets themselves _thrived _on volatility.

Oil futures trader profits depend on exploiting the margins between
expected and actual prices; their trades in “paper oil” are mere
speculative bets on the future price. Violent swings in price create
the opportunity for tremendous windfalls (and, to be sure, losses
too). Oil volatility, or what Kent Moors calls
[[link removed]]“the
Vega factor,” has been part and parcel of the larger shift of
“financialization”
[[link removed]]
where it is more profitable to speculate on financial markets than it
is to invest in material production.

Consequences of the Crash

Most immediately, oil’s crash undermines the future of the US shale
industry, with many independent oil companies on a deathwatch
[[link removed]].
After decades of declining American oil production, shale oil had
catapulted the United States to the position of world’s top
producer. Though peak oil proponents claimed the US production crested
in 1970 with 9.1 million barrels/day, it has since then gone from
producing 5 million barrels per day in 2007. to 12.2 today
[[link removed]].
This massive expansion of fossil-fuel extraction has occurred at
exactly the time when we should be scaling it down to cope with the
climate crisis.

Yet, politicians continue to trumpet this increase in production. It
plays a central role in Trump’s America first, planet-crushing
“American energy dominance
[[link removed]]”
agenda. However its rise was sustained first by Barack Obama’s
“all of the above” energy policy, which he was still bragging
about
[[link removed]]
in 2018: “Suddenly America is the largest oil producer, that was me
people … say thank you.” He said these words _after _the
Intergovernmental Panel on Climate Change’s famous report
[[link removed]]
suggesting we had twelve years to implement, “rapid, far-reaching
and unprecedented changes in all aspects of society.”

Now we can expect US oil production to decline like it did during the
price crashes of the 1980s. In the past month alone, the number of
active oil rigs in the United States dropped by a third. And in a
period of mass unemployment, it will take months, if not years for oil
consumption to increase. Stephen Schork, editor of the oil-market
newsletter The Schork Report, told the _Financial Times:_
[[link removed]]
“It just gets uglier from here …This summer is dead on arrival.
The biggest demand months are not going to happen.”

Even if government bailouts succeed in holding out a lifeline to
failing companies until consumption levels someday rebound, an
industry that was already saddled with high production costs, waning
profitability, and heavily indebted budgets, will face myriad
bankruptcies
[[link removed]]
and great obstacles to restructuring and recovery.

Oil companies are struggling to pay the interest on their loans. And
with investors staying clear of a tanking industry, companies are
having difficulties raising new finance. One portfolio manager
explained
[[link removed]]:
“Somehow they were able to convince investors that never generating
cash was cool.” The problem with that model is that “when you lose
access to that capital, things break down.”

This may seem like good news for the planet, but as Kate Aronoff has
argued
[[link removed]],
“There’s also nothing inherently good for people or the planet
about negative oil prices, which could easily give way to some
shambolic White House bailout that keeps the sector limping along as
it continues to hemorrhage cash, and as oil and gas executives sew
their golden parachutes and leave workers out to dry.”

Negative oil prices is a painful and unmitigated crisis for workers,
and could mean over a million jobs
[[link removed]]
lost in the oilfield industry this coming year. On top of this,
millions of union members and retirees will be impacted by their
pension funds’ investments in fossil fuels.

It’s instructive to look at the last time oil prices collapsed in
2014–5 , when shale oil consolidated and recovered. Many small
producers went bankrupt
[[link removed]].
Meanwhile large companies like Exxon Mobil and Chevron came out the
other side, leaning on subsidies and state incentives
[[link removed]],
with easier access to credit, and capable of buying their bankrupt
competitors’ assets on the cheap. Those companies that survived did
so by cutting production costs and borrowing their way out of the
crisis. Large oil producers will no doubt try to replay these
dynamics, but in a much more punishing economic climate, with
creditors having already soured on the industry
[[link removed]].

Oil also plays an outsize role in the rest of the economy because, in
one way or another, it touches nearly every other industry. It is
integrated into the production of so many other products, including
nearly every military arsenal — where it fuels military ships,
vehicles, aircrafts — and the entire shipping industry. For these
reasons oil also holds special powers as a geopolitical currency.
Whichever states command the spigots of oil, then control other
countries’ access to fuel their own industrial production and
national defense.

Yet, no matter how much states attempt to — or claim to — control
oil, the reality is that they are themselves subject to the
unpredictable volatility of oil markets. As Marx explained long ago
[[link removed]],
despite all the jockeying over energy dominance, states are somewhat
helpless to control markets, which are “established by a social
process that goes on behind the backs of the producers.”

The most immediate ripples will be felt by businesses closest to oil
production. One small oil producer explained to the _Financial Times_
[[link removed]]:
“If I go out of business or shut wells it’s not just me, it’s
the five guys who service the wells, truck the oil, lease their trucks
— and the community that depends on their tax dollars.” As oil
extraction and refining projects are taken offline, it will further
draw back demand for the raw materials (steel, concrete, plastics,
electricity) and engineering necessary for the production of oil rigs
and pipelines. The construction business, service, and retail
companies, which had benefited from the springing up of oil boomtowns,
will suffer as well.

Wider ripples still will be caused by the reduced spending capacity of
a million or more laid off workers, who may also default on mortgages
and credit-card bills. The creditors, who financed shale oil, will
also be dragged down by the $300 billion in bank loans to the
industry. (This compares to $1.3 billion of subprime mortgages held in
the US in 2007.) As _Forbes_
[[link removed]]
notes:

There will be a contagion effect, not least among the banks that have
extended some $300 billion in loans to the energy sector. According to
data this week from analysts at Keefe, Bruyette & Woods, there are
some mid-sized banks with outsized exposure to energy credits. Though
they don’t face the same existential crisis from low oil prices, a
20% loss in their energy portfolio could wipe out most or all of the
year’s expected earnings.

Lastly, geopolitical rivalries will continue to play out on the oil
market, and may strain to a breaking point. Well before “Black
Monday,” price wars between Saudi Arabia and Russia had already
delivered the first shock
[[link removed]] to
the global economy. Both countries intentionally benefited from the
spillover of their power struggle into a depressed market. Just as
they did during the last oil crash in 2014–5, they are wagering that
more costly American shale will be less likely to survive a bottomed
out market.

In the Middle East, where much of the region’s political economy is
dominated by oil, the current crisis will shake up the balance of
power between Saudi Arabia and Iran, while tanking several economies
in the region. The United States for its part, will engage in the
dangerous tradition of threatening military conflict with Iran
[[link removed]], in
the hope of raising the price at which oil trades. The specter of war
in the Middle East is always a windfall for oil investors, as it
endangers global supply chains.

In the Global South, from Nigeria and Ghana, to Bolivia and Ecuador,
national economies rely on oil exports to fuel public spending.These
smaller oil states have already been suffering
[[link removed]]
greatly since the price declines of 2014. A cratering of demand will
cause even deeper cuts to spending and untold suffering in the
population, with potential explosions of class struggle, political
upheaval, and military tension.

Fossil Fuel Bailouts or Energy Transformation?

In contrast to the wild energy chaos that will continue to wreak havoc
on our planet, our lives, and the economy, the moment demands a
planned transition
[[link removed]]
to a Green New Deal. The fossil fuel industry needs to be
nationalized, rationally wound down, and refitted to a zero-carbon
energy system. As others have eloquently laid out
[[link removed]],
we need a Green Stimulus
[[link removed]]
to create jobs while we shut down the dirty energy systems that power
our economy, but sabotage our future on the planet. At just this
moment, when trillions of dollars are being thrown into propping up
the economy, these are not pie-in-the-sky demands.

Yet, no matter how rational or urgent the case is for a planned
transition, the political power of the oil industry and the
geopolitical interests of the world’s superpowers will point in the
exact opposite, disastrous direction.

Donald Trump signaled
[[link removed]] early
on that the government would prop up the oil industry at any cost. In
order to avoid a public outcry or require congressional approval, the
Federal Reserve has taken the first step by sneaking in changes to its
so-called “Main Street Lending Program.” Originally intended for
small and medium sized businesses, it will be opened up to larger,
heavily indebted gas and oil producers. Maximum loan totals will also
increase from $150 to $200 million. Another funding source, the
Fed’s “Primary and Secondary Market Corporate Credit Facilities”
is also being loosened to allow access to firms with junk ratings (as
many of the US shale companies have been downgraded to).

The White House will also impose political pressure on other states
to act in the interest of US oil, backed, of course, by the threat of
American military and economic might. These tactics
[[link removed]]
include pressuring the Saudis to further reduce supply, the Chinese to
import US oil, and imposing tariffs on foreign oil.

Trump’s administration has also floated the idea of buying crude
itself, or using federal storage facilities to offload some of the
glut. Ironically, another idea gaining prominence is for the
government to pay oil producers to leave the oil in the ground until
prices recover. Once they do, the scheme goes, companies will repay
the government and continue production. Leaving the oil in the ground
is, of course, the right idea. But instead of doing it in such a way
that drags zombie oil companies
[[link removed]]
along, only for the sake of returning them to their dangerous game
once the economy recovers, the government should shut down the
industry for good, and set about retraining its workforce with wage
parity.

An increasingly affordable option would be to buy out the industry
outright. With the price of oil and energy stocks plummeting, one
estimate
[[link removed]]
recently showed that the entire energy-industry portion of the S&P
1500 is currently valued at $700 billion, or, as one proponent of this
strategy put it
[[link removed]],
“roughly one-third of what the US government just spent on the CARES
Act.” There has never been a better time to nationalize and phase
out these industries.

The future direction of our energy economy will be determined by the
struggles ahead in the coming months and years. If future generations
are stuck with the planetary ruin most scientists predict, imagine
what they will think if we bailed out the very industries causing this
ruin in the year 2020. The power behind Big Oil and American
geopolitical might is hefty, but it is in crisis. Our side has a long
way to go, but we have the moral winds at our backs, and a vision of
what’s possible and necessary has grown in both clarity and urgency.
This is as good a time as any to organize for an ecologically viable
world.

Hadas Thier is an activist and socialist in New York, and the author
of the forthcoming book A People's Guide to Capitalism: An
Introduction to Marxist Economics.

Matt Huber is assistant professor of geography at Syracuse University.
He is the author of _Lifeblood: Oil, Freedom, and the Forces of
Capital_.

Our spring issue, “Pandemic Politics
[[link removed]],” is on its way
from the printer and will be released soon. Get a discounted
subscription today
[[link removed]]!

*
[[link removed]]
*
[[link removed]]
*
* [[link removed]]

 

 

 

INTERPRET THE WORLD AND CHANGE IT

 

 

Submit via web [[link removed]]
Submit via email
Frequently asked questions [[link removed]]
Manage subscription [[link removed]]
Visit xxxxxx.org [[link removed]]

Twitter [[link removed]]

Facebook [[link removed]]

 




[link removed]

To unsubscribe, click the following link:
[link removed]