2030 Finance | April 21, 2020

Just in time for Earth Day: Oil’s epic crash

Amy Cortese and David Bank
ImpactAlpha Editor

Amy Cortese

ImpactAlpha Editor

David Bank

ImpactAlpha, April, 21The dramatic drop in the global price of oil meant that traders with oil contracts for May delivery are willing to pay someone – anyone – to take the crude off their hands. The price of West Texas Intermediate, or WTI, ended the day at more than $30 below zero. 

It was an unprecedented event in a year of unprecedented events. This month’s U.S.-brokered deal to rein in production by Saudi Arabia, Russia and other producers – starting next month – proved no match for the global oil glut and the drop in demand caused by worldwide COVID shutdowns. One oil expert quipped WTI should be renamed WTF.

The at-least-temporary demise of the oil industry arrives 10 years after the Deepwater Horizon oil rig disaster in the Gulf of Mexico, and on the eve of the 50th anniversary of Earth Day. When the first Earth Day in 1970 brought millions of Americans into the streets to stand up for the environment. U.S. oil production had peaked, and Mideast tensions set the stage for an oil crisis that drove up prices.

“Fracking” in places like Texas’ Permian Basin returned the U.S. as a major oil producer – and glutted world markets. “America’s energy independence was built on an industry that is the very definition of dependent — dependent on investors to keeping pouring billions upon billions in capital into money-losing companies to fund their drilling,” writes Bethany McLean, author of the book, “Saudi America.”

The carbon bubble has burst. Let’s not re-inflate it

The challenge now: winding down U.S. fossil fuel production and accelerating the shift to a low-carbon economy. “While massive infusions of capital and special privileges may briefly delay the inevitable decline of these companies, they will not reverse the trend,” the Center for International Environmental Law writes in a new report. 

Mixed messages. Earlier this month, Shell became the latest oil giant to commit to shrinking its so-called Scope 3 carbon emissions. Its plan to reach net zero by 2050 vaulted it ahead of even BP (whose new CEO said the company would reduce emissions from its own products but not from products it resells from other producers). How serious is Shell? The day after its announcement, Shell finalized plans for a $6.4 billion pipeline project in Queensland, Australia. 

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Stranded assets. Shell warned in late March it will take a write-down of between $400 million and $800 million for the first quarter due to declining oil prices. The Spanish energy company Repsol in December wrote down $5 billion in fossil fuel assets – for starters – as part of its commitment to reach net-zero carbon emissions by 2050. Chevron wrote off $11 billion in natural gas assets late last year. 

The market shocks are less severe than they once would have been. Oil and gas companies represent less than 3% of the public markets, down from more than one-quarter in 1980. Major oil companies paid $216 billion more to shareholders than they earned directly from business over the past decade, notes the Institute for Energy Economics and Financial Analysis (IEEFA).

Meanwhile, renewable energy costs are on a steeply declining curve, and benefit from low interest rates. “With petroleum, you’re stuck with stockpiles,”  climate scientist Michael Mann tweeted. “The wind and sun will never become stranded assets.”

Managed decline. An orderly wind down of the industry could avoid the chaos that inaction could ultimately inflict on employees and oil-dependent communities, says Kathy Hipple, an analyst with IEEFA.  A growing number of investors see the oil companies as cash cows that can spin off cash as they wind down operations over time. One way to drive such a change: public ownership of majority stakes in U.S. and U.K. oil majors. Hipple said environmental interests potentially dovetail with at least some in the oil sector. A managed decline, she says, “might be of interest to many in the oil patch.” 


Fossil fuel wind-down