From Guest Blogger Emily Folk: Is This the End of Oil Companies?
People love saving at the pump — if they’re actually using their cars. In the midst of a global pandemic and a nation-wide lockdown, however, consumers aren’t exactly reaping the benefits. Even as gas prices dip below $1 in some states, people simply aren’t filling their tanks. After all, many aren’t driving anywhere but the grocery store these days.
This unprecedented decrease in demand is putting crude oil companies around the world in a predicament. As the price of oil drops, many companies aren’t making enough of a profit to continue operations. This is especially true of smaller companies that are beginning to shut down their oil wells for lack of profit. Larger companies, however, have agreed to reduce their production to less than 10 million barrels per day globally during the months of May and June.
Still, a 10% drop in production won’t be enough to offset the 30% decrease in prices. In the following months, the world will likely see an even bigger decrease in production. Does this signal the end of oil companies, though? Quite possibly.
No Help for the Oil Sector
As smaller oil companies begin to shut down, many larger ones are looking to the U.S. government for a bailout. On March 19, President Trump answered their cry for help, promising to purchase 77 million barrels of American-made crude oil. The Department of Energy planned to begin this process by purchasing 30 million barrels from small to midsize producers first. However, Congress refused to supply the $3 billion necessary to purchase the oil. The reason? Global warming.
Democrats balked at the notion of aiding the oil industry as the sector is majorly responsible for rising global temperatures. Thus, U.S. oil companies will have to wait in line behind the rest of corporate America in the unending request for financial aid and bailouts. In the meantime, more producers will inevitably shut down, possibly for good.
High Risk, Low Return
Naturally, oil stocks have declined along with demand, falling lower than the rest of the stock market. They likely won’t begin to recover until June and, even then, the U.S. will still have a huge inventory of oil to sell. This stockpiling could keep oil demand and prices at all-time lows for the rest of the year and even into 2021. Thus, many investors aren’t looking to put money into the oil industry anytime soon.
Even before the COVID-19 pandemic, investors were hesitant to invest in oil. Governments were increasing carbon emission regulations and implementing carbon taxes, driving down the demand for oil. Now, in the current oil price situation, investors are finding the industry to be an environment of an even larger risk and lower return. Furthermore, even if the oil industry does recover, many analysts predict it likely won’t rebound to previous levels.
Investing in New Opportunities
Thus, many investors are looking to put their money into a more stable and lucrative industry — the green energy sector. After all, a bright future for oil only means a bleaker one for humans. Eventually, the growing concern for the climate will boost the demand for clean energy and eradicate the oil industry. It was only a matter of time — one the virus simply accelerated.
Moreover, renewables like wind and solar are now cheaper than most fossil fuels. Plus, at $35 per oil barrel, renewables now offer a higher return on investment. Diversifying assets into green energy would also provide more protection against oil price volatility, which would bode well for the economy. However, the government must first make deliberate policy changes before the U.S. is to secure a green economic recovery.
Is This the End?
Even if Saudi Arabi and Russia’s oil reserves only break even with rock-bottom oil prices, they’ll still last for three and 10 more years, respectively. Thus, while the world may not see an end to oil companies within the year, the coronavirus may indeed signal the beginning of the end.
