Oil is one of the world’s most valuable and most-traded resources. It’s the catalyst for making things go- cars, machines, and entire societies. Oil has the potential to create a rags-to-riches for anyone who finds it and has been the subject of wars and battles across the globe. For years it’s almost been liquid gold, and now it’s… less than worthless?
Last week saw a historic event; the price of oil went negative. How did that happen? We’ll explain.
Whether it’s coming from Saudi Arabia or the North Sea, oil is traded on open exchanges around the world. The demand comes from distributors in cities and countries who need oil to supply movement and function within their borders. Without warning, in came the coronavirus. With everyday life shut down across the world, the demand for oil has drastically fallen. The production of oil, on which millions of jobs are dependant, has not.
With a massive surplus of oil owing to sustained production and virtually no demand for it, this oil must be moved; production centers and refineries have the capability to generate oil production, but not to store it, as there has never been a need. When the world sees a surplus of oil as we have before, the price falls because there is more supply than demand. But with virtually zero demand, there is currently more oil being produced than can be stored.
Here’s where things get a bit tricky. When oil producers have more oil than they can store, they need someone else to take it off of their hands. In a normal world, the distributor pays the producer for their product; in this scenario, the producer actually pays the distributor to remove the oil from their refinery. Since the price of oil reflects the amount that the distributor would pay the refinery, the negative number represents the changing of direction of the transaction.
The silver lining? Oil is really cheap for consumers right now, and when the pandemic ends, it’ll be a great opportunity to take a road trip. But for now, stay home and stay safe!