What Caused the Crash?

Breathless commentary on the crisis has rightly called it “unprecedented.” Yet, another way of thinking about it is just an extreme version of the normal state of oil markets, which are always characterized by volatility. Consider just the last twelve years, for example. In 2008, oil hit a record high price of $145/barrel — and Malthusian cries of “peak oil” had their moment in the spotlight. Later that year, in the wake of the crash of 2008, prices collapsed to $35 and (like today) oil tankers idled at sea. The crash didn’t last long, and prices returned to $70–80/barrel and even went above $100 again in 2011. Another crash hit in 2014–5, leading to an onslaught of layoffs and bankruptcies, before returning to somewhat higher levels by the summer of 2018. Now this.

The period of relative high prices spurred a feeding frenzy among finance capital and US companies employing horizontal drilling and hydraulic fracturing technologies to extract oil from shale rock — apparently “economical” in the high price environment. With oil prices hovering around $100/barrel, and taking advantage of rock-bottom interest rates, US shale rode a wave of debt-fueled expansion. As long as profits were being made, and the credit kept flowing, heavily indebted companies could continue to finance their debts and invest in more production. Most notable was North Dakota, which went from producing 39,000 barrels/day in 2006 to 512,287 in 2019.

The production explosion was accompanied by all the standard social dysfunction of oil “boom towns” — haphazardly constructed “man camps,” violence, corruption, and an uptick in industrial accidents and worker death. This crash appears to be the inevitable “bust” of the cycle, leaving much of these boomtowns polluted and economically devastated as oil capital pulls out.

Some analysis shows that despite investor enthusiasm, fracking was never particularly profitable in the first place. “The shale players were already stretched to their limits, and the virus has just broken every thread they were holding on by,” Ed Hirs, an energy economics lecturer told the New York Times.

Many producers will need to continue to produce amidst the glut because of the debts they’ve incurred. As Mazen Labban explains, “Oil producers have to keep producing oil because they have invested so much capital in its production; the more capital they invest in it, the more oil they have to produce to recapture their investments.” The spigot will remain open, even while hobbled, unless state power steps in to halt production.

This is in fact what happened the last time oil prices and demand crashed to this extent in the Great Depression of the 1930s. The largest discovery in the lower forty-eight states, in East Texas in 1930, unlocked a veritable flood of oil unto a market already collapsing due to curtailed demand. The states of Texas and Oklahoma declared martial law and forced the oil fields to shut down by barrel of a gun.

Texas has already announced plans to curtail production again. These provincial-level states must balance their desire to halt production to help raise the price, and their existential dependence on “severance” taxes to fund state and local budgets.

Yet, at a wider scale, oil-exporting countries will surely be reluctant to give up their shares of global production, in part because many states’ economies depend on oil exports to run, and in part because every state would rather sell oil on the cheap, rather than let its rivals grow market share and geopolitical gain. The likely outcome is little coordination of output as a whole, meaning more glut and market chaos ahead.

While the climate crisis demands a rational and planned transition to a new zero-carbon energy system, capitalism brings energy chaos. This boom and ” volatility is a perfect example of what Engels described as the “anarchy of production” under capitalism. Yet, what appears irrational and anarchic from the point of view of society as a whole, can become an accumulation strategy for others.

Although oil markets were relatively stable in the immediate postwar period of “managed capitalism” (Texas limited oil production much like OPEC tries to today), the 1970s oil crisis ushered in a new period of volatility in the era of neoliberal financialized capitalism. Shortly thereafter, oil “futures markets” were set up in the New York Mercantile Exchange (NYMEX) in 1983 and the London Intercontinental Exchange (ICE) in 1988. Although neoliberal ideologues would argue that these futures markets served important functions as “efficient and effective tools for isolating financial risk and ‘hedging’ to reduce exposure to risk”, they preferred not to mention how these markets themselves thrived on volatility.

Oil futures trader profits depend on exploiting the margins between expected and actual prices; their trades in “paper oil” are mere speculative bets on the future price. Violent swings in price create the opportunity for tremendous windfalls (and, to be sure, losses too). Oil volatility, or what Kent Moors calls “the Vega factor,” has been part and parcel of the larger shift of “financialization” where it is more profitable to speculate on financial markets than it is to invest in material production.

Consequences of the Crash

Most immediately, oil’s crash undermines the future of the US shale industry, with many independent oil companies on a deathwatch. After decades of declining American oil production, shale oil had catapulted the United States to the position of world’s top producer. Though peak oil proponents claimed the US production crested in 1970 with 9.1 million barrels/day, it has since then gone from producing 5 million barrels per day in 2007. to 12.2 today. This massive expansion of fossil-fuel extraction has occurred at exactly the time when we should be scaling it down to cope with the climate crisis.

Yet, politicians continue to trumpet this increase in production. It plays a central role in Trump’s America first, planet-crushing “American energy dominance” agenda. However its rise was sustained first by Barack Obama’s “all of the above” energy policy, which he was still bragging about in 2018: “Suddenly America is the largest oil producer, that was me people … say thank you.” He said these words after the Intergovernmental Panel on Climate Change’s famous report suggesting we had twelve years to implement, “rapid, far-reaching and unprecedented changes in all aspects of society.”

Now we can expect US oil production to decline like it did during the price crashes of the 1980s. In the past month alone, the number of active oil rigs in the United States dropped by a third. And in a period of mass unemployment, it will take months, if not years for oil consumption to increase. Stephen Schork, editor of the oil-market newsletter The Schork Report, told the Financial Times: “It just gets uglier from here …This summer is dead on arrival. The biggest demand months are not going to happen.”

Even if government bailouts succeed in holding out a lifeline to failing companies until consumption levels someday rebound, an industry that was already saddled with high production costs, waning profitability, and heavily indebted budgets, will face myriad bankruptcies and great obstacles to restructuring and recovery.

Oil companies are struggling to pay the interest on their loans. And with investors staying clear of a tanking industry, companies are having difficulties raising new finance. One portfolio manager explained: “Somehow they were able to convince investors that never generating cash was cool.” The problem with that model is that “when you lose access to that capital, things break down.”

This may seem like good news for the planet, but as Kate Aronoff has argued, “There’s also nothing inherently good for people or the planet about negative oil prices, which could easily give way to some shambolic White House bailout that keeps the sector limping along as it continues to hemorrhage cash, and as oil and gas executives sew their golden parachutes and leave workers out to dry.”

Negative oil prices is a painful and unmitigated crisis for workers, and could mean over a million jobs lost in the oilfield industry this coming year. On top of this, millions of union members and retirees will be impacted by their pension funds’ investments in fossil fuels.

It’s instructive to look at the last time oil prices collapsed in 2014–5 , when shale oil consolidated and recovered. Many small producers went bankrupt. Meanwhile large companies like Exxon Mobil and Chevron came out the other side, leaning on subsidies and state incentives, with easier access to credit, and capable of buying their bankrupt competitors’ assets on the cheap. Those companies that survived did so by cutting production costs and borrowing their way out of the crisis. Large oil producers will no doubt try to replay these dynamics, but in a much more punishing economic climate, with creditors having already soured on the industry.

Oil also plays an outsize role in the rest of the economy because, in one way or another, it touches nearly every other industry. It is integrated into the production of so many other products, including nearly every military arsenal — where it fuels military ships, vehicles, aircrafts — and the entire shipping industry. For these reasons oil also holds special powers as a geopolitical currency. Whichever states command the spigots of oil, then control other countries’ access to fuel their own industrial production and national defense.

Yet, no matter how much states attempt to — or claim to — control oil, the reality is that they are themselves subject to the unpredictable volatility of oil markets. As Marx explained long ago, despite all the jockeying over energy dominance, states are somewhat helpless to control markets, which are “established by a social process that goes on behind the backs of the producers.”

The most immediate ripples will be felt by businesses closest to oil production. One small oil producer explained to the Financial Times: “If I go out of business or shut wells it’s not just me, it’s the five guys who service the wells, truck the oil, lease their trucks — and the community that depends on their tax dollars.” As oil extraction and refining projects are taken offline, it will further draw back demand for the raw materials (steel, concrete, plastics, electricity) and engineering necessary for the production of oil rigs and pipelines. The construction business, service, and retail companies, which had benefited from the springing up of oil boomtowns, will suffer as well.

Wider ripples still will be caused by the reduced spending capacity of a million or more laid off workers, who may also default on mortgages and credit-card bills. The creditors, who financed shale oil, will also be dragged down by the $300 billion in bank loans to the industry. (This compares to $1.3 billion of subprime mortgages held in the US in 2007.) As Forbes notes:

There will be a contagion effect, not least among the banks that have extended some $300 billion in loans to the energy sector. According to data this week from analysts at Keefe, Bruyette & Woods, there are some mid-sized banks with outsized exposure to energy credits. Though they don’t face the same existential crisis from low oil prices, a 20% loss in their energy portfolio could wipe out most or all of the year’s expected earnings.

Lastly, geopolitical rivalries will continue to play out on the oil market, and may strain to a breaking point. Well before “Black Monday,” price wars between Saudi Arabia and Russia had already delivered the first shock to the global economy. Both countries intentionally benefited from the spillover of their power struggle into a depressed market. Just as they did during the last oil crash in 2014–5, they are wagering that more costly American shale will be less likely to survive a bottomed out market.

In the Middle East, where much of the region’s political economy is dominated by oil, the current crisis will shake up the balance of power between Saudi Arabia and Iran, while tanking several economies in the region. The United States for its part, will engage in the dangerous tradition of threatening military conflict with Iran, in the hope of raising the price at which oil trades. The specter of war in the Middle East is always a windfall for oil investors, as it endangers global supply chains.

In the Global South, from Nigeria and Ghana, to Bolivia and Ecuador, national economies rely on oil exports to fuel public spending.These smaller oil states have already been suffering greatly since the price declines of 2014. A cratering of demand will cause even deeper cuts to spending and untold suffering in the population, with potential explosions of class struggle, political upheaval, and military tension.

Fossil Fuel Bailouts or Energy Transformation?

In contrast to the wild energy chaos that will continue to wreak havoc on our planet, our lives, and the economy, the moment demands a planned transition to a Green New Deal. The fossil fuel industry needs to be nationalized, rationally wound down, and refitted to a zero-carbon energy system. As others have eloquently laid out, we need a Green Stimulus to create jobs while we shut down the dirty energy systems that power our economy, but sabotage our future on the planet. At just this moment, when trillions of dollars are being thrown into propping up the economy, these are not pie-in-the-sky demands.

Yet, no matter how rational or urgent the case is for a planned transition, the political power of the oil industry and the geopolitical interests of the world’s superpowers will point in the exact opposite, disastrous direction.

Donald Trump signaled early on that the government would prop up the oil industry at any cost. In order to avoid a public outcry or require congressional approval, the Federal Reserve has taken the first step by sneaking in changes to its so-called “Main Street Lending Program.” Originally intended for small and medium sized businesses, it will be opened up to larger, heavily indebted gas and oil producers. Maximum loan totals will also increase from $150 to $200 million. Another funding source, the Fed’s “Primary and Secondary Market Corporate Credit Facilities” is also being loosened to allow access to firms with junk ratings (as many of the US shale companies have been downgraded to).

The White House will also impose political pressure on other states to act in the interest of US oil, backed, of course, by the threat of American military and economic might. These tactics include pressuring the Saudis to further reduce supply, the Chinese to import US oil, and imposing tariffs on foreign oil.

Trump’s administration has also floated the idea of buying crude itself, or using federal storage facilities to offload some of the glut. Ironically, another idea gaining prominence is for the government to pay oil producers to leave the oil in the ground until prices recover. Once they do, the scheme goes, companies will repay the government and continue production. Leaving the oil in the ground is, of course, the right idea. But instead of doing it in such a way that drags zombie oil companies along, only for the sake of returning them to their dangerous game once the economy recovers, the government should shut down the industry for good, and set about retraining its workforce with wage parity.

An increasingly affordable option would be to buy out the industry outright. With the price of oil and energy stocks plummeting, one estimate recently showed that the entire energy-industry portion of the S&P 1500 is currently valued at $700 billion, or, as one proponent of this strategy put it, “roughly one-third of what the US government just spent on the CARES Act.” There has never been a better time to nationalize and phase out these industries.

The future direction of our energy economy will be determined by the struggles ahead in the coming months and years. If future generations are stuck with the planetary ruin most scientists predict, imagine what they will think if we bailed out the very industries causing this ruin in the year 2020. The power behind Big Oil and American geopolitical might is hefty, but it is in crisis. Our side has a long way to go, but we have the moral winds at our backs, and a vision of what’s possible and necessary has grown in both clarity and urgency. This is as good a time as any to organize for an ecologically viable world.