On 21 April, for the first time in history, oil sold at a negative price when the futures contract for West Texas Intermediate (WTI), the benchmark US crude oil, traded as low as -$40.32 a barrel. Far from a technical glitch, this is the most extreme financial signal yet of the deep crisis in which capitalism finds itself – a crisis which is spurring international conflict over oil and beyond. Séamus Padraic reports.
For the last decades of the twentieth century, the oil supply needs of imperialism were vulnerable in the face of the Organisation of Petroleum Exporting Countries (OPEC), whose members controlled the majority of production and kept supply restricted and prices high. From being a huge net importer of oil in the 1970s, however, the world’s dominant power now vaunts its so-called ‘energy independence’: in 2019, the US produced more energy domestically than it used. Underpinning this shift is the ‘shale revolution’ which has seen domestic oil production rapidly expand: between 2011 and early 2020, US oil output rose from 5.5m to 13m barrels per day (b/d), and its world market share rose from 8% to 14%.
With OPEC keeping prices high and supply growth contained, the US was able to capture a growing world market share with its increased production. Alarmed at this development, in 2015-6, OPEC’s largest producer and de facto leader Saudi Arabia increased production in order to drive down prices and undercut the new competition. US production fell by 1m b/d; but this decline was reversed as, from 2016, the OPEC countries and Russia (OPEC+) agreed to restrict production, sacrificing market share gains for higher prices. Between then and the onset of the coronavirus pandemic, the US increased its output by 4.5m b/d. The US share of world oil production rose by 4%, while the combined share of Saudi Arabia and Russia fell by 3%.
US shale production is markedly less efficient than Russian or Saudi production. Where Russia estimates the price it must secure to break even at $42 per barrel, US production requires $50. Thus, the shale revolution and the US’s ‘energy independence’ depend on the willingness of OPEC+ to restrict supply and maintain high prices. As one hedge fund adviser put it to the Financial Times (13 March) in New York, ‘What would happen if Opec stopped cutting? Shale would be fucked.’
The price war
Faced with the threat of collapsing oil demand in the face of the coronavirus crisis, OPEC crisis talks on 5 March agreed to production cuts of 1.5m b/d for three months. Keen to prevent further capture of world market share by the US, and well-placed for a number of reasons to ride out a price war, Russia refused to participate, shattering the OPEC+ alliance which had underpinned the shale revolution’s dramatic growth since 2016. A spokesman for Rosneft, in which the Russian state holds a controlling stake, explained on 8 March that ‘the total volume of oil that was reduced as a result of the repeated extension of the Opec+ agreement [from 2016] was completely and quickly replaced in the world market with American shale oil’ (Financial Times 9 March). In response, on Saturday 7 March, Saudi Aramco, the state oil company, slashed $8 a barrel from its crude price and began to ramp up production. When the financial markets opened on Monday 9 March, oil prices crashed: Brent crude, the international benchmark, fell to $31.02 (from $52 a week before), while WTI fell to $27.71 (from $46.75 a week before). The price war had begun. The speculators whose whims drive daily price movements panicked that heavily-indebted US shale producers would be unable to pay their debts: over $100bn of bonds sold by energy companies in the US fell into distressed territory, indicating that investors thought they were holding junk and were scrambling to offload it.
Meanwhile, on 9 March, Italy went into lockdown, and three days later US President Donald Trump banned travel from much of the rest of the world into the US. Industry, transport, shipping, and aviation outside China (where this process had already begun) began to grind to a halt. On 14 March, Trump finally announced a national emergency over coronavirus. Faced with plummeting demand and skyrocketing supply, Dan Bouillette, the US energy secretary, ordered his department to ‘immediately initiate the process of purchasing American-made crude oil for storage in the US Strategic Petroleum Reserve as expeditiously as possible.’
Over the next few weeks, oil giants including Shell, Total and Chevron announced plans to suspend share buybacks and slash spending to preserve cash. On 1 April, the first shale producer, Whiting Petroleum, filed for bankruptcy protection. Trump announced that the US oil industry was being ‘ravaged’ by the price war and warned of tough steps against Saudi Arabia. Two days later, Trump called tariffs against Russian and Saudi oil ‘one tool in the box’, and insinuated that US military support for Saudi Arabia could be withdrawn: ‘we provide military assistance to countries for pretty much free . . . and they don’t even like us’. Canada and the US began talks over oil tariffs against Russia and Saudi Arabia.
On 9 April, under US pressure and faced with a worse demand slump than expected, OPEC+ met to discuss reinstituting production cuts. Saudi Arabia and Russia agreed to cuts of around 5m b/d each, and called on the US to accept an equal cut at the extraordinary G20 meeting the next day. The US argued that its private companies had already made cuts in response to the decline in demand: ‘the cuts are automatic if you are a believer in markets,’ said Trump. Trump hailed the deal, claiming it would save ‘thousands of jobs’ in the US. But when markets opened the next day, on 11 April, oil prices barely rallied at all, as the underlying problems had not been resolved.
The extent of the rot became clear on 21 April, when, for the first time in history, oil traded at a negative price: the May futures contract for WTI traded as low as -$40.32 a barrel, before ending the day’s trading on -$37.63; down from $18.27 on 19 April. For one day, sellers were willing to pay buyers to take off their hands the king of commodities which for a century has powered industry, transport, and war. With physical storage reaching capacity, the holders of the contract found themselves obliged to receive physical delivery of the commodity. Presented in some quarters as a technical glitch down to the peculiarities of the futures markets, this event was in fact the most extreme expression yet of the deep crisis affecting not only the world oil market, but the world capitalist system as a whole.
Oil dominance
Brouillette told the Financial Times on 15 April that Washington’s successful brokering of the Russia-Saudi oil deal marked a ‘fundamental shift’ in global oil politics. The shale revolution, he said, has ‘dramatically’ elevated US negotiating power: ‘When we were wholly dependent upon oil being imported into the country, we could not have brought these two major oil producers to the table to resolve their dispute. […] If you want access to the number one economy . . . you’re going to agree to terms and conditions that are going to be set by that economy.’ Since the dissolution of the USSR, and the strategic, political and economic alternative to imperialist domination it presented to the world, the US has made energy a key battleground for defending its global dominance, scaling up aggression against major oil producers Iran, Venezuela, Iraq, and Russia through sanctions, economic warfare, and covert and overt military aggression.
US dominance, however, is built on shaky foundations. Shale is distinguished from other oil sources by its high decline rates: typically, a well produces strongly for around a year, before plateauing and declining thereafter. Thus, more and more wells must be drilled, requiring huge and ongoing capital investment. With world prices depressed, this means high investment for low profits. The private corporations which make up the shale sector must raise their funding on the financial markets, and have done so by issuing high-risk high-yield bonds. JP Morgan Chase, therefore, estimates that energy companies were the single biggest issuers of junk bonds in ten of the last 11 years. According to ratings agency Fitch, 58% of the most concerning issuers of junk debt were energy companies. Since 2016, 208 producers have filed for bankruptcy involving $121.7bn in total debts. The last few months have only exacerbated the problem: unable to secure further financing, by the end of May, a further 18 shale producers had filed for bankruptcy; and in June huge players including the ‘pioneer’ company which first exploited shale in the US, Chesapeake, joined the club.
The knock-on effects are significant for US imperialism and its strategic plans: by the end of May, US net oil imports were rising, while exports were falling. This means recovering demand was not being met by domestic production, undermining ‘energy independence’. By 26 July, domestic production had recovered by 1.2m b/d, but at 10.9m b/d, this was still well below the 13m peak at the start of 2020.
On 8 September, oil prices fell to a three-month low as fears grew of a new wave of coronavirus cases suppressing oil demand. Brent crude fell 5.9% in a day, to close trading at under $40 a barrel, while WTI ended around $36. Both were down 15% since the previous week. There is little sign, however, that OPEC+ have any intention of reintroducing production cuts. Russia has been itching to raise production since June, fearful of the US making market share gains as in the period before the price war; while OPEC members UAE, Iraq and Nigeria have all produced more oil than stipulated in April’s agreement. People ‘briefed on Saudi Arabia’s thinking’ told the Financial Times on 9 September that the kingdom would continue with increased production. With oil prices thus likely to remain depressed for the foreseeable future, more chaos and conflict beckons. Low prices also mean there is little hope of slashing production and consumption of oil in order to arrest the climate crisis. The so-called ‘energy transition’ will not be achieved while imperialism continues to dominate the world.
