Oil’s perilous drop may signal more worries for overall economy
Published 9:15 pm Friday, April 24, 2020
When the price of oil dropped below zero this week, the financial market watchers shuddered.
The reaction wasn’t simply because the price of a barrel of oil fell to negative territory for the first time in history. The concern, felt around the world and close at home, lies in the price of oil as an indicator of the health of the larger, global economy.
“It’s an indicator of the extent of reduction of overall economic activity,” said Dan Sutter, with the Manual H. Johnson Center for Political Economy at Troy University.
“The longer the shutdown goes, on, the more unclear it’s going to be if the economy is going to bounce back when we lift some restrictions,” he said.
The demand for crude oil is what Sutter describes as a crucial measure of economic activity. “Oil is primarily our fuel of transportation – driving a car, powering a truck, powering airplanes – it’s how we transport ourselves and our goods.”
If the demand for oil increases, that means more goods are being transported around the world. Consumers are buying and producers are selling goods. “But if business is bad, there’s less demand for fuel.”
When the worldwide demand for oil was reaching record highs, that was “a sign of a very booming, prosperous active economy,” he said. But with the COVID-19 pandemic came the shuttering of businesses; the quarantine of millions of people around the world; the nearly instant cessation of travel, via air or ship or train.
“According to the International Energy Agency, the use of oil worldwide is down 30 percent,” Sutter said. “So, if our demand was 100 million barrels per day, that’s down by 30 million.”
That means a glut of oil in the market that exceeds consumer demand, and traders holding oil futures panic that they have no one to take delivery of that oil because tanks are full; storage capacity is not available; and consumer demand isn’t expected to change quickly. “What happened (on Monday) was like a game of musical chairs … someone didn’t have a chair and panicked,” Sutter said.
Panic aside, the declining demand in oil has prompted oil suppliers to restrict production in an effort to stabilize the markets, in a hope that reopening the economy will bring an increase in demand for oil.
But just how and when the economy will reopen continues to be an unknown factor.
Alabama Gov. Kay Ivey has said that the state will remain under a stay-at-home order until April 30, although Lt. Gov. Will Ainsworth has lobbied for a responsible reopening of small and service businesses, as well as a lifting of many restrictions, as quickly as possible.
Nationally, Georgia, Oklahoma and Alaska began loosening lockdown restrictions on Friday, despite warnings from some. Health experts that the gradual steps toward normalcy might be happening too soon.
“In March (when COVID-19 shutdowns began occurring) it seemed like people were choosing health over economy,” Sutter said. “Now the question becomes if you loosen the restrictions and have another flare-up (of the virus), will you make the same choice next time?
“People are divided: some say keep the economy shut down to protect against the virus, other people disagree. And we simply don’t know how that will play out in the political process.”
Though limited in scope, and subject to social-distancing restrictions, Friday’s reopenings marked a symbolic milestone in the debate raging in the United States — and the world — as to how quickly political leaders should lift economically damaging lockdown orders.
Similar scenarios have been playing out worldwide and will soon proliferate in the U.S. as other governors wrestle with conflicting priorities. Their economies have been battered by weeks of quarantine-fueled job losses and soaring unemployment claims, yet health officials warn that lifting stay-at-home orders now could spark a resurgence of COVID-19.
During a White House press briefing Friday, President Donald Trump spoke optimistically of the economy but also asked people to continue social distancing and using face coverings.
“We’re opening our country. It’s very exciting to see,” Trump said.
The coronavirus has killed more than 190,000 people worldwide, including — as of Friday — more than 50,000 in the United States, according to a tally compiled by John Hopkins University from government figures. The actual death toll is believed to be far higher. New cases are surging in Africa and Latin America as outbreaks subside in some places that were hit earlier.
In Oklahoma, Gov. Kevin Stitt authorized personal-care businesses to open, citing a decline in the number of people being hospitalized for COVID-19. Those businesses were directed to maintain social distancing, require masks and frequently sanitize equipment.
Still, some of the state’s largest cities, including Norman, Oklahoma City and Tulsa, were opting to keep their bans in place until at least the end of April.
With deaths and infections still rising in Georgia, many business owners planned to stay closed despite Gov. Brian Kemp’s assurance that hospital visits and new cases have leveled off enough for barbers, tattoo artists, massage therapists and personal trainers to return to work with restrictions.
Kemp’s timeline to restart the economy proved too ambitious even for Trump, who said he disagrees with the fellow Republican’s plan.
On Friday, Trump signed a $484 billion bill to aid employers and hospitals under stress from the pandemic — the latest federal effort to help keep afloat businesses that have had to close or scale down. Over the past five weeks, roughly 26 million people have filed for jobless aid, or about 1 in 6 U.S. workers.