Episode 87 | Fuel FAQs | American Petroleum Institute





I spent seven years in the fracking sector, and must admit I still have a rudimentary understanding of how the oil market works. Why are there so many booms/busts? Does OPEC still control the price of oil? Why did the price of oil go NEGATIVE for the first time this year?

Dean Foreman, Ph.D. is Chief Economist of the American Petroleum Institute. Just prior to our interview he sent me their latest analysis on Q2 '20, covering the industry in the wake of the COVID-19 pandemic.

"We saw after COVID-19 kicked off, a price war was initiated by OPEC," he says. "After a month or so, they deescalated and turned to cuts to support prices."

I've heard about OPEC since I was a kid. we were told back then that they essentially controlled the world's oil prices. But that couldn't certainly be the case now, right?

Dean has also worked for Saudi Aramco. While he says the Saudis have acted as a "swing producer" in the past, "[OPEC] certainly does not set the [oil] price or control the price with any precision, and globally no producer really does."

We have long been told the Saudis have the lowest "break-even costs," and could essentially pump the rest of the global competition out of business. Dean says while their costs are under $10/barrel "on a pure lifting cost" basis, their economy is critically linked to that single industry.

"From a societal perspective, when you at to meet social needs, what the whole of 'Saudi Inc.' as an enterprise really needs to break even…you're talking into $80 a barrel," he says. "Most of the OPEC nations need something on that order to continue to have stable societies, stable politics, support their population, diversify their economies, and foster growth."

By that comparison, he says, the U.S. oil and gas sector has competitive prices. "Now we have Tier 2, Tier 3 drilling locations, that are as-or-more productive than the best rocks ever were a decade ago."

So why the continual booms and busts? Couldn't we put in place some economic measures to smooth out the rough period?

President Trump has levied tariffs on foreign goods in the past. I was surprised we had not heard about the administration trying it on the oil and gas sector. Dean admits proposals like these have come "from many corners," but says tariffs would lead to "collateral damage."

He also points out the interconnected nature of the American oil and gas market. The U.S. became a "net oil exporter" for the first time in September 2019. However, both Dean and the Energy Information Administration point out that the U.S. still needs significant imports of heavier crude oil. He says the American east and west coasts still lack sufficient pipeline infrastructure from regions like Texas.

Also, American refineries are geared towards heavier crude from Canada or Venezuela. U.S. crude is typically lighter and better-suited for transportation fuels. For that reason, a lot of it hits the open seas.

I asked him about the COVID-19 impact on the price of oil, particularly the negative-$40 oil price on April 20, 2020.

The way he explains it, on April 20, futures contracts were set to expire April 21 for delivery in May. A fair amount of parties were "caught" without the ability to get out of those contracts, and no place to store the oil.

"You had counterparties paying big money to get out of those contracts," he says. However, by the following month (June deliveries), this did not happen again.

At the time of this episode, oil prices began 2020 in the $60 range, dropped to the $20s during COVID, and have recovered to the $40s by the summer. EIA (API is not allowed to forecast prices) believes the price may reach the $50s by the end of the year.

"Have confidence that it’s gonna come back," says Dean. "It's just a question of in what form. The assets, the rocks, they're still there."

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