Sobering Thoughts About Oil Industry’s Challenges
“The surprising strength in air travel during Thanksgiving weekend, offered some hope for Christmas travel and oil demand. The virus mutations cause fear for the oil price recovery, just as OPEC+ boosts global supply. ”
The volatility of crude oil prices during the past few weeks has not been particularly surprising. Prices are moving in response to whatever narrative about the state of the global Covid-19 pandemic is dominating the news. A few weeks ago, the upturn in virus cases seemed to catch the world off-guard and caused equity markets, as well as the oil market, to drop. The logic was that an increase in cases would force governments to enact stricter activity measures on their citizens to help control the spread of the virus. More restrictions mean reduced energy demand, and lower oil prices.
It was no surprise that once government approvals of Covid-19 vaccines were announced, optimism swept through both equity and oil markets, sending prices higher. Vaccines – the long-sought tool for eradicating the virus and restoring the world to a pre-pandemic state of normality – were seen as the ticket to greater economic activity in 2021, signaling more energy would be needed and higher oil prices would result.
In the days leading up to Christmas, the discovery of a more rapidly transmitted virus mutation in England has set off another round of pessimism about oil demand. The heavy lockdown being imposed on the southern portion of England, and the banning of travelers from the U.K. to other parts of the world, signaled that the economic benefit from vaccines might be muted, thereby meaning a less robust economic snapback in 2021. This uncertainty is coming just as the revised OPEC+ agreement to add an additional 500,000 barrels per day of supply into the market becomes effective on January 1, 2021. That additional supply will not be held back, as the agreement among the various parties required extensive negotiations. People are already wondering whether Russia, the key member of the “+” component of the agreement, will continue to push for adding more barrels to the market, as it had signaled it would earlier.
Exhibit 11. Gasoline Pump Prices Exhibit Volatility SOURCE: EIA, PPHB
As oil prices climbed during November and December with positive vaccine news dominating the airwaves, petroleum product prices became more volatile, especially gasoline. In late November, the United States celebrated its Thanksgiving holiday, which traditionally sees significant numbers of Americans traveling. That was not to be this year. Forecasts predicted fewer travelers due to the Covid-19 outbreak and the guidance from the Center for Disease Control (CDC) for people to stay home as a way to reduce exposure to the virus. The AAA automobile club predicted there would be fewer travelers both driving and flying during the holiday. The forecast proved correct for driving, but not for flying.
A chart prepared by National Public Radio (NPR), based on GPS data from mobile phones assembled by SafeGraph, showed that the percentage of people who stayed home during Thanksgiving was considerably higher this year than in 2019. According to the study, fewer people traveled less than 31 miles, as well as more than 31 miles this year. The AAA had forecast driving to show a 4.3% decline in the number of travelers this year compared to 2019, although other forecasts expected 10% fewer drivers.
Exhibit 12. Travel This Thanksgiving Trailed Last Year SOURCE: NPR
Although AAA had forecast slightly more than 50 million Americans would travel, with 93% driving and 2.4 million flying, it appears more people traveled than anticipated. It is harder to measure driving, but air travel can be tracked much easier, as the Transportation Safety Administration (TSA) records and reports the daily number of passengers screened at airports nationwide. The 2.4 million flier estimate reflected a 48% decline from the number that flew 2019, which was a record. With November 25th, the day before Thanksgiving Day, seeing 1.07 million fliers, the holiday weekend was off to a much stronger travel response than anticipated. On November 29, the Sunday after Thanksgiving Day, 1.17 million passengers traveled. While this was only 41% of the number of passengers screened last year, the total number of holiday fliers well exceeded the estimate. In fact, that Sunday marketed the largest daily number of airline passengers since the pandemic cratered travel this past spring. Cabin fever has certainly gripped Americans, who are looking for reasons to travel at these year-end holiday times. Health officials are attributing the rise in Covid-19 cases in
Exhibit 13. Air Travel Was Stronger Than Anticipated SOURCE: NPR
recent weeks to the travel and gatherings of Thanksgiving Day, although not all states and localities have experienced jumps in virus cases. These health officials are warning about travel and gatherings for the Christmas and New Year’s holidays.
One of the more interesting insights to come from our examination of holiday travel was the discovery that the price of gasoline measured by today’s dollar is virtually the same as it was in 1929! This may be surprising to many people.
Exhibit 14. Real Gasoline Pump Prices Equal 1929 SOURCE: EIA
Those of us who track oil prices closely, have understood that there have been a few periods marked by increased price volatility and extremely high oil prices. Those periods have largely been associated with political turmoil and/or unique market conditions. Most of history, even pre-dating our nearby chart, has been marked by stable oil prices. The most interesting observation is that for the period from 1947 to now, the average real oil price ($2020) is slightly under $49 per barrel. Amazingly, this is about where oil prices had been trading up until early last week when the U.K. Covid-19 outbreak drove oil prices down.
Exhibit 15. Amazing History Of Real Oil Prices Since 1947 SOURCE: EIA, BEA, PPHB
The modern oil industry has experienced two periods of extremely high oil prices – 1973-1986 and 2005-2014 – that have colored most people’s views of the industry. From 1947 to 1973, oil prices both in nominal and real terms was very stable. Following the 1986 oil price crash, the industry experienced about 16 years of relatively stable, and much lower real oil prices, before the industry went into its next boom. The shock that caused the last boom to end, much like the 1986 crash that caused the prior high-oil price boom to end, has still not been fully grasped by industry executives. As most of the post-war history of the oil industry has been characterized by stable and relatively low oil prices, industry executives need to understand that a return to this environment may be in their long-term future.
A recent article by a renewable energy proponent argued that the shift from petroleum to clean energy will result in economies moving from inflationary to deflationary energy prices. That is not the reality of the oil business as demonstrated by both an analysis of the real price of crude oil and gasoline. Comparing renewables pricing against the 2005-2015 decade for oil pricing ignores the long history of petroleum, which has actually delivered improved living standards with little oil-price inflation impacting society’s economic well-being.