Oil Collapse, the Expansive Wave of the Crisis Continues

By Carlos Carcione

The historical drop of oil prices, which reached negative figures for transactions that must take place in May, can only be understood in the context of the global capitalist crisis. The COVID19 pandemic acts as backdrop and catalyst for a collapse of the system that has been developing since March 9. It is an expression decade-long pronounced decline of capitalism, which began with the 2008 crash. The immediate possibility of a new crisis was on the horizon even before the outbreak of the virus.

The overproduction of oil in relation to a world economy that was in decline and undergoing a slowdown, is evident in the physical limit of storage that we are witnessing due to the collapse of demand. This fact leads to 160 million barrels – 60% more than the world daily consumption – being stored in tanker ships at sea without the certainty of being able to unload the product, during the week of the biggest price drop. Another immediate cause is the speculation that led to the bursting of the crude oil bubble in the financial futures market. But this string of collapses occurs as part of the shock wave of the unfolding crisis. A crisis that the IMF calls “Depression,” to point out that the current collapse is greater than the one in 2008, which they call the “Great Recession,” and that it is only comparable with the crisis of the 1930s that led to World War II. The importance of establishing the context of this collapse is related to the perspective for oil prices, but especially for the oil industry as a whole.

On the second day of negative prices in the United States, Trump was forced to announce that he would never allow the (North) American oil industry to fall. U.S. oil companies are among the most affected, since OPEC and Russia broke an agreement in February that they had maintained for years, according to which they regulated oil prices, rationing the production of crude oil. But the global economic situation is so uncertain that even the reduction of 15 million barrels a day in production that was agreed in early April, or the purchase of 75 million barrels for the United States strategic reserve, did not have the expected effect of sustaining prices. Trump’s promise to support his country’s oil industry could result in yet another fiasco. The serious problem posed for the system is that the bankruptcy of the oil industry would drag part of the banking system down with it, which would have a multiplying effect. Today the these companies owe the United States over 100 billion dollars. This debt was already difficult to service with the barrel at $ 60 at the beginning of the year, and in current conditions it has become directly impossible to pay. This being the case, it is likely that the price volatility is acting as a hammer demolishing the foundations of the industry as we know it. It is part of the reconfiguration of an economic world that is in the process of collapse.

Prices, Market Wars, Economic Paralysis and Speculation

Contrary to liberal economists claims that this phenomenon of oil prices demonstrates Marx’s mistake, which exposes their Olympic ignorance, this abrupt oscillation once again confirms the critique of political economy developed by Marx and Engels. In addition to the movement of excessive supply and the abrupt drop in demand, which is one of the main angles for analyzing the current crisis in this case, oil extraction is more associated with mining income as part of land rent than to the law of labor value. Oil extraction is more related to the extraordinary differential rent that obtained from the most productive lands, than to the profit obtained from the exploitation of labor. This extraordinary rent makes it possible for prices to be manipulated on the basis of extraction costs. And the variations in these costs are enormous. For example: Saudi Arabia extracts at a cost that ranges from $4 to $8 a barrel, while it costs over $18 to extract a barrel in Russia and shale oil, which is extracted at The United States, or Vaca Muerta, costs around 48 dollars a barrel. These differences have little to do with the amount of work or level of wages, nor with the type of technology used, but fundamentally with the level of productivity of the land from which the oil is extracted. The capacity to manipulate prices derives from this extraordinary income.

This is ultimately what explains the OPEC + (Saudi Arabia and Russia fundamentally) decision to release each producing country and led Saudi Arabia to reduce its prices by approximately half in February to pressure Russia into reducing production. This unleashed the collapse by coinciding with the elements of economic crash that were already developing. Behind the breakdown of the OPEC + agreement lay the market dispute that developed while consumption reduced, due to the slowdown of the productive economy that had been announcing the start of a global recession since late 2019.

The paralysis of much of the economy that is currently taking place to contain the virus, under different forms of confinement, pushed the restriction of energy consumption and especially of oil even more. The reduction of almost 80% of flights and, to a lesser extent, the reduction of automobile circulation for the same reasons, collapsed the entire chain of production, refining and distribution of crude oil, maxing out the storage capacity of crude oil, placing the refining system on the verge of closure and threatening storage capacity. It has become a new sharp point in the global economic crisis.

As we pointed out above, one of the most significant numbers of the current collapse in barrel prices was expressed in the speculative futures market, that is, the papers with which oil production is negotiated and must be delivered at a future time. When operations closed for purchases in the month of May, the barrel was at minus $37. In other words, the person who sold the paper, transferring their ownership, must also pay almost $40 per barrel to the buyer. But this is not the only speculative practice, the most dangerous one lays in the oil companies´ debts. The massive bankruptcy expected in the industry could drag part of the banking system down with it, as that debt is guaranteed by the oil reserves that those companies were expected to extract. That is to say, by oil that is still underground or in the bedrock and that nobody will want to extract at current prices.

Physical limits for the storage of excess supply, market wars, falling consumption, paralysis of the productive economy and financial and banking speculation, are at the base of the current oil collapse. But the background is the structural crisis of the capitalist system and its mode of production.

The Oil Collapse Exacerbates the Global Economic Mess

For system analysts, oil is capitalism´s “blood.” For the peoples who suffer the disasters that over two centuries of oil exploitation have caused, it is “The devil’s excrement,” as the “Father of the OPEC,” Venezuelan Juan Pérez Alfonso, called it. Whatever metaphor is used to name it, oil has been a key to the development of modern capitalism. If the crisis we are going through is simply a crisis of overproduction – which it also is – then a drastic reduction in production could stabilize prices. But in the current economic context, in which the crisis is in full swing and the end is not in sight and monetary and fiscal policies similar to those that slowed the 2008 collapse have already failed, it is unlikely that an isolated measure in this branch can fix the disaster we are witnessing. The crisis, rather than a specific problematic knot, resembles a minefield, on which a new crash can break out at every step.  The famous “invisible hand of the market” can maintain a relative equilibrium of the system while the system is in order. But when the laws of the market do not order or balance anything, when capitalism shows one of its main characteristics – the anarchy of production – with full force, when what predominates among the capitalists is “every man for himself,” and when the bourgeois state is obliged by the severity of the crisis to assume itself the attempt to bring order to the system, all its certainties disintegrate. The reconfiguration of the current world that many predict for after the pandemic is already happening in its destructive phase of the old world. In this context, the oil collapse acts as an entropic force that exponentially aggravates the overall disorder of the system.