Texans woke up Monday morning to a troubling sight as worldwide crude oil prices dropped up to 30 percent. As of this writing, the U.S. benchmark’s price per barrel (West Texas Intermediate: WTI) is floating around $33.50 — on pace for its worst single-day drop since 1991.
A major catalyst for the drop is the knock-down-drag-out scrap between Saudi Arabia and Russia. Saudi Arabia has been in negotiations with Russia over curbing oil production. A deal between OPEC and Russia was in the works, but those talks broke down after Russia refused the terms from OPEC.
At that point, Saudi Arabia decided to retaliate — reportedly deciding to ramp up production itself. The tit-for-tat has contributed to the plunge in oil prices.
Oil prices, as with everything in the market, are a balance between production levels (supply) and the value consumers place on it (demand).
Despite claims to the contrary, the U.S. is not “energy independent.”
While the U.S. produces and exports more oil than ever before, that does not mean oil from abroad isn’t imported. The reason oil remains imported is that just as it is beneficial to diversify one’s financial portfolio, it is also beneficial for U.S. producers and consumers to diversify their oil market.
In many instances, it can be economically advantageous to export domestically produced crude oil and import some for consumption based on the infrastructural realities in different regions.
For example, it is often cheaper for American buyers in the north to purchase oil from Canada through its pipelines than ship Texas oil in economically inefficient ways such as by truck.
The other critical component worth noting when discussing the U.S.’s role in the world energy market is that private entities and individuals largely decide how much to produce, how much to charge, and where to send it as opposed to the United States government.
These decisions are largely predicated on market forecasting driven by individual or business interests in response to demand.
In a competitive market, producers are incentivized to provide the best possible product for the lowest possible price.
However, the world market is much more complicated, not least because state-dictated producers (such as OPEC and Russia’s government-run companies), often make decisions to leverage their position in the market — as evidenced by the international tiff happening now.
Another key factor in the stock market reaction is the fact that as oil prices are dropping, those producers who have hedged contracts with Wall Street financiers are still receiving $60-ish per barrel — around double the current oil price. This creates a massive loss for those financiers and results in market disarray.
And adding the proverbial fuel to the market fire is the worldwide anxiety over coronavirus.
An industry insider told The Texan that in their estimation, coronavirus has far more to do with the oil price drop than the Saudi Arabia-Russia dispute.
Since coronavirus first became a significant domestic concern around Feb 20, the S&P 500 has dropped 14 percent. In the same timeframe, NASDAQ and Dow Jones have each dropped about 20 percent.
Today, the New York Stock Exchange was frozen for 15 minutes after a 7 percent single-day drop. This is a safeguard implemented to prevent spiraling devaluation.
Texas produces about 40 percent of America’s oil and gas and its energy industry is the most significant driver of its economic successes.
With the Saudi-Russian fracas over oil production continuing and markets in shock over coronavirus concerns, Texas and its robust economy is likely to be greatly impacted in the days and weeks to come.
Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad watching and quoting Monty Python productions.