IssuesWest Texas Oil Price Drops Below Zero Dollars as Coronavirus Results in Historic Demand Downturn

Oil prices dropped to historic lows today as decreased demand because of the coronavirus pandemic resulted in an oversupply.
April 20, 2020
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Workers and entrepreneurs alike in Texas’ oil industry woke up Monday morning to see that West Texas Intermediate (WTI) oil prices had dropped 40 percent to just over $10 per bbl.

From there, it kept dropping to as low as -$40.00 per bbl.

Based on a historical price chart of monthly averages going back to 1946, the lowest monthly average price was $16.50 in March of 1946.

The dramatic price decrease comes after weeks of depreciation since the wake of the oil production fight started between countries Russia and Saudi Arabia.

Prices have plunged over the last month largely for two reasons: first, the drastic decline in demand since coronavirus confined many to their homes and, second, the oversupply caused by that sudden demand decrease.

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Production levels are often mapped out for a couple of months in advance, and therefore are not always immediately reactionary to price ebbs and flows. Many companies also have loans that must be paid, and so the only way to pay those off after oil prices dropped from $50 to $60 to just above $20 per bbl is by producing more oil to make up the difference of the lost revenues.

But since storage capacities have been filled up, now there is virtually nowhere to put newly-extracted oil.

Each of those factors is affecting oil futures (future price predictions) as one trading contract for the month of May expires Tuesday. All of this, sparked by the May contract expiration, has culminated in today’s oil devaluation.

With Texas being the largest state producer in the largest oil-producing country in the world, the oil supply and demand problems have hit home. Because of the way its “Rainy Day Fund” is financed, a drop in oil revenues will seriously affect its savings account balance.

In light of the market’s volatility, some producers have urged the Texas Railroad Commission (RRC) — the state regulatory body tasked with monitoring energy production — to prorate oil production. This hasn’t been done by the RRC since the 1970s during the oil embargo.

Tens of thousands of people tuned in across the U.S. and across the world at their first meeting on the issue last Tuesday. Numerous different stakeholders testified or submitted public comment on the proration question, and even featured an odd alliance of producers, a former RRC official, and environmental groups all in favor of the production cut.

Just before that meeting, the Organization of the Petroleum Exporting Countries (OPEC) announced a production cut in tandem with Russia to the tune of 10 million bbl per day.

Another RRC meeting will be held tomorrow, April 21. It is unclear whether a vote on the matter will occur or how the latest developments will affect the commissioner’s decision.

Texas’ oil and gas industry employs hundreds of thousands of people and massive layoffs had already begun from previous price depreciation.

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Brad Johnson

Brad Johnson

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.