The future of oil futures: A&M energy economist discusses how price drop will affect Brazos Valley

On Monday, the price of a barrel of oil dipped into negative territory for the first time in history. Oil futures have since recovered from that rock bottom, but experts say the situation is still shaky.

“The challenge is that if you produce oil, you have to put it somewhere,” said Eric Lewis, an economist and professor at the Texas A&M Bush School of Government and Public Service who specializes in the oil and gas industry. “Refineries and other people who store oil are pretty much just full up.”

Decreased demand is the culprit—in the midst of COVID-19, few are driving to work or dropping the kids at school—but Lewis says that the pandemic is not solely to blame for the industry’s recent decline.

“The oil industry was really doing poorly already,” Lewis said. “Oil prices were very low already.”

However, there is hope: “Right now the price for delivering oil in May is negative, but in June, it’s still positive,” said Lewis. “So right now the industry is expecting that this overcapacity problem isn’t going to last forever.”

Yet the turnaround may not come quickly enough, as the oil production can be slow to respond to increased demand. Lewis says he does not expect all furloughed workers to get back to the oil fields right away.

“When you drill oil, it takes a lot of effort,” said Lewis. “So a lot of the labor is spent on drilling the well, fracking the well, and once those wells are producing, you have a lot of oil that’s coming out. Really the fact that we have so much oil that’s coming out means there’s going to be a little bit of delay as we wait for those wells to slow down their production until it makes sense to start drilling again.”

Lewis says that everything depends on how long the coronavirus crisis lasts. It’s why he’s hesitant to discuss any long-term effects this dip in the market will have. Of potential effects, he mentions that some oil companies could shudder forever, decreasing competition. Or, the economic incentive to innovate in the field of renewables could be limited as gas prices stay low. Finally, the global effects could be major, says Lewis.

“We in Texas, we depend on oil a fair amount, but there are other countries where oil is just an absolutely massive part of their national economy—think Nigeria, Angola, et cetera,” said Lewis. “For those countries, having that low of a price of oil can really have some big geopolitical impacts.”

But it all remains to be seen, according to Lewis. For now, he points out that at least the low gas prices are a break for the struggling consumer.

“When we regulate the price [of oil], often it becomes a really difficult thing to do in practice, leading to all kinds of other distortions, so I think the thing that makes the most sense is to ride this thing out,” said Lewis. “One thing to remember is that even though this is bad for the oil industry, consumers—who are really hurting right now with lots of people losing their jobs, lots of people uncertain about losing their jobs—those people, having a low gas price at the pump is one of the few bright spots that’s going on.”

For the full conversation, see the video player above.