In a matter of one day, the value of a barrel of crude oil plummeted by 30%, a move that could have a lasting impact on this region’s economy.
Brian Zolkos, chief financial officer for American Refining Group, explained the issue is supply and demand — more supply from Russia and Saudi Arabia, and less demand because of travel restrictions and panic caused by the coronavirus.
“On the supply side, Russia and Saudi Arabia are in a major war” over market share, he explained. Talks between OPEC+ members collapsed last week, and Saudi Arabia slashed prices and is threatening to ramp up production, while Russia’s largest supplier said it will ramp up production next month.
At the same time, “demand is affected by coronavirus, with airlines canceling flights, and with economic conditions, the demand for crude oil has come down materially in China and the rest of the world,” Zolkos said, giving some background on the current volatility.
“Record supply and lowered demand sent the markets out of control,” he said. In January, crude oil was around $60 a barrel, while it was $31 on Monday. “All the big investment banks keep reducing the forecast for the crude price. It’s really a volatile situation not knowing when this is going to bottom out.”
Just how does the coronavirus impact crude oil prices?
Dan Weaver, president and executive director of Pennsylvania Independent Oil & Gas Association, said the volatility is caused by “pure panic.”
“Crude oil pricing has a lot to do with the fact that number one, the panic, and number two, the overall markets. That’s what the price is reacting to,” he said.
Businesses have canceled conferences, travel is down, some places have been quarantined and a public panic has caused shortages of goods like bottled water, hand sanitizer and toilet paper.
“People in China aren’t working, they aren’t making goods,” Weaver said. “We won’t know the true impact of this until 6 to 8 months down the road when those products that aren’t being made now are missing.”
In this region of Pennsylvania, most oil producers are smaller, independent, family run operations. When the price of crude drops, they can’t afford to produce.
“Our producers were already struggling for a variety of reasons to compete economically,” he said. “Something like this really puts a huge burden on them.”
While consumers at the pump will see lower gas prices for awhile, it doesn’t translate into a positive for the long-term regional economy.
“It’s no different than when a major manufacturer leaves the area,” Weaver said. “They can’t produce, they can’t sell, there’s less money in the economy, they are no longer using services from other companies, they are no longer buying goods.”
Weaver said he is hopeful this will be a shorter-term issue, but that doesn’t mean it will be a quick recovery.
“If we look at when the crude price fell out in 2015 and into 2016, it took us through 2016, ’17 and into ’18 to recover. It takes a good 16 to 18 months to start recovering,” he said.
For now, the best case scenario is an end to the panic.
“We get beyond the fear and the markets start to recover,” Weaver said. “The quicker the markets recover, the better off we’ll be.”
