Publications: Notes at the Margin

Toward Collapse (April 13, 2020)


The oil industry has suffered a global heart attack. Survival cannot be assured without rapid action. Unlike a human, though, parts may persist even if crippled.


Lockdowns, not the inconclusive meetings of OPEC+ and the G20 energy ministers, are the source of the danger. The COVID-19 shelter-in-place measures have shut down almost all the major economies. The associated economic collapse threatens global depression. For major countries, the average decline in GDP is more than twenty percent per month, according to the OECD.[1]


The oil industry is particularly vulnerable to the shutdowns because the impacts are uneven. The use of some products such as jet fuel and gasoline has collapsed, while consumption of others like diesel remains relatively unaffected. The change in the product demand mix was sudden. Refiners responded slowly. As a consequence, gasoline and jet fuel inventories have built up. The refinery configurations that have historically emphasized gasoline output worsen the situation. The stock builds threaten to clog the oil industry’s logistical system. Widespread shutdowns in refining may be required to remedy the problem.


In the coming weeks, run cuts at refineries could bring sky-high diesel prices and rock-bottom gasoline prices. Meanwhile, “market foreclosure,” a term from the antitrust literature, will permanently shut most if not all independent oil producers in the United States. These firms are the victims of actions by Middle Eastern oil producers and the fact that the light sweet crude they sell produces substantial volumes of unwanted gasoline and jet fuel but little distillate. The banks will be turning out the lights at such companies soon.

[1] OECD, Evaluating the initial impact of COVID-19 containment measures on economic activity,” April 2020 [].



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