Oil prices plunged Monday, and for the first time ever, the cost of a barrel of oil in the Lower 48 fell below zero.
The prevailing value of Alaska North Slope crude is always published a day late, and when Monday’s figures are revealed Tuesday, they are likely to show a record-low price — possibly in the negative numbers. Industry observers said Monday that any below-zero price is an artifact of oil trading markets and will be temporary.
But the effects of rock-bottom prices may linger.
“At the very least, this should be a wake-up call that the pipeline might have to shut down at some time,” said economist Ed King.
That doomsday scenario isn’t close, he said, but “if oil stays in the $20s for months and months, you might start seeing some conversations about when’s this going to shut down.”
Companies are already cutting spending on new drilling, reminiscent of the situation Alaska faced in 2014, when a plunge in prices led to widespread layoffs. In that case, a statewide recession followed.
Supply and no demand
Oil demand has fallen sharply amid the coronavirus pandemic, but production remains high, even after an agreement among several nations to cut supply.
And on Monday, the price of a barrel of West Texas Intermediate crude oil hit negative $37.63.
The negative price doesn’t mean free oil. It’s a measure of demand, and few, if any, barrels were sold at negative prices, said John Coleman of oil-analytics firm Wood Mackenzie during a Monday webinar.
But what it does mean is that companies have a lot of oil and no place to put it.
“When prices are at this very extreme level … what that’s telling you is the market has tons of physical crude looking for a place to go and nowhere for it to go," said George Pearkes, global macro strategist for Bespoke Investment Group, a New York firm.
“What people are doing right now is saying, ‘I don’t want to take delivery of the oil,’” Pearkes said.
North Slope not immune
North Slope crude oil is shipped by tanker to West Coast refineries, including Cherry Point Refinery in Puget Sound, but it’s affected by the same storage issues, said Dan Stickel, the head petroleum economist for the Alaska Department of Revenue.
He said it is possible for North Slope crude prices to drop below zero on Tuesday and Wednesday, but he expects direct effects on the state treasury to be “fairly minimal" because oil taxes are calculated on a monthly average, not daily prices.
“Just generally, one or two days of very high or very low prices, they end up getting averaged out,” he said.
“The impacts of this particular one- or two-day futures market event are likely to be minimal, but the fundamental, big-picture drivers are a concern,” Stickel said, because after Wednesday, prices are expected to remain no higher than the low $20s per barrel.
That’s less than a third of the average price needed to balance the state budget.
In addition, that price requires oil companies to cut spending in order to make a profit, said economist Roger Marks.
Lower spending by oil companies means they invest less in finding and developing new oil fields, which means less production in the long term, leading to worse state budget problems later on.
Alaska’s principal budget reserve is almost exhausted. Lawmakers next year will be required to significantly cut spending, raise taxes or unsustainably spend from the Alaska Permanent Fund.
Wider effects on Alaska’s economy
Neal Fried, an economist with the Alaska Department of Labor and Workforce Development, said the low oil prices could cause significant harm to the economy if they continue for too long.
The last oil price downturn that began in 2014 led the industry to cut about 5,000 jobs, or about one-third of the workforce, over three years. The industry was recovering when prices began falling this year.
King said many of those layoffs happened in the “support” sector, rather than among actual oil production workers. He suspects that with companies cutting back on new development, it will happen again.
“We probably have already started losing jobs in that sector and probably will for a while, because the industry reacts quickly,” Fried said. “How low it will go, I don’t know. And I don’t think anyone knows because we don’t know how long this lasts.”
Oil companies ConocoPhillips and Oil Search in recent weeks have announced $470 million in spending reductions. And plunging oil prices have state regulators raising questions about Hilcorp’s financial capability as it seeks to buy BP Alaska’s assets for $5.6 billion.
Oil isn’t the only problem for the state’s economy at the moment, given that the tourism industry and fishing could be hard hit in the virus-shuttered economy, Fried said.
“I’m worried,” he said.
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