Publications: Notes at the Margin

Coronavirus Impact: Two Views; Hedging's Role in the Price Collapse; The Oil Industry's Effort to Self-Destruct (March 2, 2020)


This Notes at the Margin focuses on three issues. In the first segment, the longest section, we examine the debate over the coronavirus (COVID-19) impact on the petroleum market. One observer, Argus Media's chief economist, asserts that the consequences will be modest and short. The opposing view put forward by several macroeconomists is that we should expect a prolonged period of depressed demand. We analyze and assess these contrasting expectations. We conclude that the virus will cut global consumption by between one and three million barrels per day over twelve months based on professional economic studies of past pandemics.


The report’s second segment returns to the market impact of financial institutions that have written hedges to US producers. Data from the 2019 10K filed by Pioneer Resources shows that these institutions have exposures that might require them to sell over ten thousand contracts during the first quarter to hedge their obligations. Other companies may have hedges that settle each quarter as well, although the data are not yet public. The crude oil price fall likely triggered the selling needed to back hedges last week.


Finally, the American Petroleum Institute (API) has issued a report stating that the implementation of government policies that ban fracking could cost the US economy more than $7 trillion over the next seven years. While the study concludes correctly that such a ban would be a bad idea, the underlying details provided are terrible, so much so that they may turn this work product into additional ammunition for those looking to eliminate all fossil fuel use. The API paper is one of many produced by oil firms and their affiliated organizations that are so intellectually weak and economically illiterate they could boost the public’s disdain for the industry. It seems as if the oil business has lain down inside a coffin and then miraculously managed to nail it shut. The long-term consequence of this idiocy will discourage investors and cause economic harm to oil-exporting countries.


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