Global Economy: Oil vs COVID-19

ECONOMICS, 4 May 2020

Prof. Cyrus Bina | New Cold War - TRANSCEND Media Service

How can oil prices become negative, and what does this mean for the global economy? World oil expert Cyrus Bina explains the current new turn of the global economy and the role that oil is playing in it.

22 Apr 2020 – The freefall of contract oil (i.e. the futures market in WTI) is due to an immediate halt in global demand for the various sectors of the economy. This includes nearly all modes of transportation (both recreational and commercial), the bulk of supply chains associated with production and the distribution of goods and services, as well as the compulsory (and indeed necessary) conservation of energy by shelter-in-place, at various degrees around the world.

The freefall in the price benchmark for crude (WTI) in the US has correlated impacts on other benchmarks in the larger crude oil markets globally, and directly compressed the average value of stocks in the US and around the world.

The uncertainty caused by the COVID-19 pandemic has instantaneously turned into uncertainty within the core of global supply chains and transportation networks worldwide. The same uncertainty plagued the oil industry, from Saudi Arabia, an oil producer in desperate need of cash, to the producers in the US, flooded with oversupply and under pressure due to the shortage of storage facilities.

The oil price had no place to go but down, and fast. As the crisis beleaguered the industry (as demonstrated in my earlier work on oil and theory of value [i]), a stable magnitude that normally synchronizes the amplitude of short run market fluctuations, has given way to oblivion.

II

The phenomenon of moving into “negative territory” – the term used by the industry – is indeed unprecedented since the inception of the futures oil market in 1983. This signals the fact that, as many oil analysts unanimously acknowledge, in the United States there is no space left to store the already produced crude. This includes storage facilities on the ground and tankers anchored near the shore.

Therefore, this is an American problem relative to other oil producers, for the following reasons:

(1) The United States has been producing oil for years by what is known as “fracking” – the injection of liquid at high pressure into subterranean rocks, boreholes, etc. – and by horizontal drilling, without any oversight and environmental safeguards.

(2) The US government and the oil lobby boasts of being “self-sufficient” in oil and has acted rather foolishly in attempting to accomplish this by any means necessary (including the senseless destruction of precious natural habitat across many states).

Little do they know that there is no such thing as “self-sufficiency” in capitalism, and someday the idea of the unlimited production of oil will come back to bite them. In an earlier study of the oil industry I extensively demonstrated that oil has been a global industry since the crisis of the early 1970s, and “national” self-sufficiency or phony arguments about an OPEC “cartel” are mere gimmicks.[ii]

III

The spot oil price (both WTI and Brent) has already dropped between 35% and 40% in two or three phases since the pandemic became known and duly acknowledged by the UN agency, the World Health Organization (WHO). The spot price is the competitive price oil trades at on a daily basis. The spot market and futures market are supposed to complement each other by linking the present to the near future, thus taming chance.

This entwines and distributes risks for the purpose of supposedly informed speculation, having to do with the so-called trade on paper barrels and thus finance. It is therefore important to point out the difference between calculable risk and uncertainty.

Risk refers to an event that comes with prior probability distribution concerning chances, thus subject to and under the jurisdiction of probability theory. To put it another way, a typical example would be the issuance of a life insurance policy for a particular age, gender or medical conditions.

Here, the underwriters have access to the readily collected information about a particular population and its demographic characteristics. Thus, by referring to the available probability distribution, risk is easily calculable. Uncertainty, on the other hand, has no probability distribution in advance of the event itself. An outstanding example of an uncertain event is the global pandemic of COVID-19 that is currently wreaking havoc in and across every nook and cranny of the globe.

There is no vaccine, no remedy, no prior experience with patients, no information on the pattern of immunity, confusing information about symptoms and their lack of – nothing, nada, none.

IV

Contrary to mainstream economics, the mechanism of demand and supply cannot lead to the determination of commodity prices by itself, given the fact that in a typical capitalist market with disaggregated consumers and producers of all kinds, the price may not clear in the short run. This should lead us to Léon Walras and his externally induced auctioneer (see Walras 2014 [1871]).[iii] In other words, there is no guarantee that there will not be a freefall, so one must look for the hidden reason for the stability of market prices in normal times.

This is where Marx’s theory of value comes in and eloquently explains why and how the stability of prices are guaranteed in normal times.[iv] Here “value” plays as the center of gravity around which market prices tend to rotate. The position of such rotation also depends upon the momentary disparity between demand and supply in the short run. Neither is the price of oil an exception. During the crisis however, this state of normalcy disappears, and the possibility of freefall is on the cards. In such a situation, the magnitude of “value” also tends to change due to the calamity of crisis.

Having said that, the mainstream has no concept of crisis in the theoretical sense of the word. That is why, at any point we enter a crisis period, just like with the current pandemic, mainstream economists and uncritical journalists alike jump up and down and engage in improvisation, such as hanging onto Saudi Arabia or Mr. Putin, in the present collapse in the price of oil.

In other words, an off-the-cuff and casual approach to the recognition of the periodic crisis in advanced capitalism or the uniqueness of oil by practicing economists in the bulk of the profession create a breeding ground for equally illiterate and opportunistic journalism that spreads the untruth to the public at large.

A quintessential example of is treatment of OPEC as a cartel throughout the news media. This very misconception then allows the mass media to take the next step to bring the individual nations into this fraudulent echo chamber either for credit or for blame each time the price of oil tumbles or flips.

V

Given the tendency for the slowdown of the global economy prior to this pandemic, I particularly wish to emphasize that a decline in the global demand for oil was inevitable. In this context, the precarious oversupply of oil in the United States had already led to the abandonment of many oil fields in the US and Canada; for instance, those in North Dakota and Alberta’s tar sands.

Due to fracking, however, the storage capacity in the United States was already at its peak a few years before the arrival of this particular pandemic. In other words, American oil producers should have known that something or someone had to give – but they didn’t give a hoot. Thus, the day of reckoning, unprecedented in the not-too-long history of global markets and global oil, is upon us.

VI

The COVID -19 pandemic is, in a sense, internal (not external) to the current global economic crisis, in that it reveals the open secret of the ‘conquest of mode of production,’ a very powerful prediction made some 160 years ago by Karl Marx (see Grundrisse, pp 729-730).[v] As I established earlier and more fully in World Review of Political Economy (see Bina 2019) [vi], the periodization of capitalism necessarily involves encroachment across the geography of production worldwide in which the conquest of capitalist mode of production is complete. Yet, such a conquest necessitates (1) the wholesale destruction of the environment and (2) the destruction of species upon species, the invasion of natural habitat, and the exposure of human life to unknown viruses, thus initiating both knowingly and unknowingly uncertain conditions around the globe. By looking at the whole history of capitalism, it is not necessary to be a genius to realize that a pandemic of global proportions such as this, fast moving and causing colossal damage, must be the very product of globalization and hence, the dual crises of health and the economy combined.

VII

In recent years, much ink has been spilled on the issues surrounding the 2008 global financial crisis and the role finance played in it. However, the role of finance should not be detached from the rest of capital as a social relation. After all, finance is an aspect of capital as a whole – an aspect in money form. Yet capital in flux and as a whole has two other entwined forms or moments, namely, commodity capital and productive capital. Thus, from the standpoint of Marx’s methodology, the so-called financialization cannot be analysed – as obsessively pursued by many radical scholars – without the very context of our epoch: globalization.

Yet there are those who are resolutely fixated on the superficial policy-cum-strategy of all these misadventures by Western governments, namely neoliberalism. They even go as far as   elevating the status of these political actions, policies or strategies to an epoch and proxy for the periodization of capitalism.

This myopic and indeed circular view places the cart before the horse, reversing the direction of cause and effect – structure as opposed to policy. Their distraction and distance from the dialectical relation of degeneration and collapse of the postwar Pax Americana and the epoch of globalization could have been single reasons for putting so much accent on these desperate and destructive policies all at once and not enough emphasis on the altered structure of polity and economy (and power) in this era. Some even tend to mock the era of globalization by putting the phrase in inverted commas – like the recent article on the current crisis by Alfredo Saad-Filho in The Bullet (see Saad-Filho 2020).[vii]

Likewise, in his previous work with Ben Fine, Saad-Filho followed the same style by arguing as if neoliberal economic policies were a substitute for the periodization of capitalism (see Fine and Saad-Filho 2016).[viii] Others too have tautologically reduced globalization to the “American Empire,” a phrase that betrays a limited understanding of American wherewithal in light of the observable facts on the ground concerning the collapse of the Pax Americana (1945-79) and the bankruptcy of nearly all institutions of postwar polity and economy.[ix]

The great American author, Mark Twain, said something that perfectly fits with such ideas. He said, “You cannot depend on your eyes when your imagination is out of focus.” Now, the positive aspects (if there are indeed any) of this coronavirus crisis is that it teaches us that globalization is real and that it will remain so with or without neoliberalism and likewise, it persists with or without ultralight nationalist movements of the Donald Trump vintage.

As I have theorized for some decades now, America owes its rise to the infancy and its decline to maturity of globalization. At any rate, American standing in the world and nature of American power can be seen through the double crises of pandemic and economic.

Conclusively, this crisis is fundamentally different from previous ones, including the Great Depression of 1929, the 1987 saving and loan association crash, and the 2008 global financial crisis. The COVID-19/Economic Crisis of 2020 got swiftly underway by hitting at the heart of production, as well as disrupting global supply chains and distribution centers, while simultaneously crippling commercial transportation systems worldwide.

This led to the rapid dismantling of the oil and energy sectors, further speeding up the initial decline that emerged from China’s outbreak and the massive quarantine of the financial sectors across the world – from Shanghai, Tokyo, London, and eventually Wall Street – in the first wave of the pandemic.

Finally, the decline by some 40% early on and then the recent freefall eventually moving into negative territory in the WTI futures market, ready for delivery in May (2020), led to an oil crisis unprecedented in the history of globalized oil worldwide. One must bear in mind that, among others, there are critical factors in this crisis: (1) the universality of speed and (2) the universality of scope. This is equally so whether we speak of oil or the entire economy. These by themselves provide a clue to the contemporary era being the globalization of capitalist social relations.

References:

Ackerman, Frank. (2002). “Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory,” Journal of Economic Methodology, Vol. 9, no. 2: 119-139.

Bina, Cyrus. (2019). “Specter of Globalization: Marx, Gramsci, and Disjointed Time,” World Review of Political Economy, vol. 10, no. 4): 484-518 https://www.jstor.org/stable/10.13169/worlrevipoliecon.10.4.0484?seq=1.

Bina, Cyrus. (2013a). A Prelude to the Foundation of Political Economy: Oil, War, and Global Polity. New York: Palgrave/Macmillan.

Bina, Cyrus. (2013b). “Synthetic Competition, Global Oil, and the Cult of Monopoly.” In Alternative Theories of Competition: Challenges to the Orthodoxy(eds.) J. Moudud, C. Bina, and P. Mason, London: Routledge.

Bina, Cyrus. (2012). Oil: A Time Machine. Ronkonkoma, New York: Linus Publications, Second (Revised) Edition: https://linuslearning.com/product/oil-a-time-machine-2nd-edition/

Bina, Cyrus. (2006). “The Globalization of Oil: A Prelude to a Critical Political Economy,” International Journal of Political Economy, Special Issue: Oil in Global Economy vol. 35, no. 2, Summer.

Bina, Cyrus. (1990). “Limits of OPEC Pricing: OPEC Profits and the Nature of Global Oil Accumulation,” OPEC Review, vol. 14, no. 1, Spring.

Bina, Cyrus. (1985). The Economics of the Oil Crisis. New York: St Martin’s Press.

Bina, Cyrus and Minh Vo. (2007). “OPEC in the Epoch of Globalization: An Event Study of Global Oil Prices,” Global Economy Journal,vol. 7, no. 1, Article 2, March 2007: https://www.worldscientific.com/doi/10.2202/1524-5861.1236.

DiSavino, Scott and Eileen Soreng. (2020). “US Oil Rigs See Biggest Decline in a Week since February2015; Baker Hughes,” Reuters, April 17: https://www.reuters.com/article/us-usa-rigs-baker-hughes/u-s-oil-rigs-see-biggest-decline-in-a-week-since-february-2015-baker-hughes-idUSKBN21Z2XO.

Fine, Ben and Alferedo Saad-Filho. (2016). “Thirteen Things You Need to Know About Neoliberalism,” Critical Sociology,vol. 43, nos. 4 – 5: 685‒706, August 19.

Geiger, Julianne. (2020a). “Extreme Volatility in Oil Continues as WTI June Contract Tanks 65%,”Oilprice.com, April 21, 2020: https://oilprice.com/Energy/Oil-Prices/Extreme-Volatility-In-Oil-Continues-As-WTI-June-Contract-Tanks.html.

Geiger, Julianne. (2020b) “The Largest Rig Count Collapse in 5 Years,” Oilprice.com, April 3: https://oilprice.com/Energy/Energy-General/The-Largest-Rig-Count-Collapse-In-5-Years.html.

The Guardian. (2020a). “Oil prices deep below zero as producers forced to pay to dispose of excess,” April 20: https://www.theguardian.com/world/2020/apr/20/oil-prices-sink-to-20-year-low-as-un-sounds-alarm-on-to-covid-19-relief-fund.

The Guardian. (2020b). “Complacency to chaos: how Covid-19 sent the world’s markets into Freefall,” March 28, 2020: https://www.theguardian.com/business/2020/mar/28/how-coronavirus-sent-global-markets-into-freefall.

Heath, Thomas. (2020). “Oil Prices Extend Slide One Day after US Crude Drops below Zero; Dow Plunges more than 600 Points,” The Washington Post, April 21: https://www.washingtonpost.com/business/2020/04/21/oil-crash-stocks-today-coronavirus/.

Kool, Tom. (2020). “A Massive Wave of Shut-Ins Fails to Halt Oil Price Crash,” Oilprice.com, April 21: https://oilprice.com/Energy/Energy-General/A-Massive-Wave-Of-Shut-Ins-Fails-To-Halt-Oil-Price-Crash.html.

Moffatt, Mike. (2020). “The Definition and Significance of the Walrasian Auctioneer.” ThoughtCo, Feb. 11: https://www.thoughtco.com/overview-of-walrasian-auctioneers-1147333

Saad-Filho, Alferedo. (2020). “Coronavirus, Crisis, and the End of Neoliberalism,” The Bullet, April 17: https://socialistproject.ca/2020/04/coronavirus-crisis-and-the-end-of-neoliberalism/#more.

Sergent, Jim and Veronica Bravo. (2020). “6 Charts Offer Lessons from Past Bear Markets,” USA Today, March 17: https://www.usatoday.com/in-depth/money/2020/03/17/coronavirus-how-stocks-moved-previous-bear-markets/5011397002/.

Walras, Léon. (2014 [1871]).  Elements of Theoretical Economics. Cambridge: Cambridge University Press.

NOTES:

[i] See Bina 1985, 2006, and 2013b. The value in Marxian theory preconditions the stability of short-term market prices in a disaggregated system, such as capitalism. Contrary to Walras and Marshal’s untenable verdicts on short-run equality of demand and supply, and the resultant market clearing prices, value functions as the long-run center of gravity and thus simply clears the markets, in the absence of such equalities in normal times. The issue of freefall comes in when the economy is in crisis, and given break in the circuits of capital, value too is subject to restructuring and thus unable to operates as in normal times.

[ii] See Bina 1990, 2012, and Bina and Vo 2007. Contrary to the mainstream economics, the 1973-74 oil crisis was neither about OPEC, nor essentially about negotiation between the oil producing and oil consuming countries. This was the mother of all crises about decartelization and globalization of oil as a modern industry. The globalization has two intertwined effects: (1) it put an end to colonial and semi-colonial structure of petroleum sector and (2) it sliced off the umbilical cord of American foreign policy of monopoly oil. The advent of globalization also led to the burgeoning spot markets for oil and soon thereafter (in 1983) to the futures markets. OPEC and non-OPEC producers across the globe take their cue from these competitive markets ever since. In other words, OPEC is neither a cartel nor a monopoly.

[iii] See Walras 2014 [1871], Ackerman 2002, and Moffatt 2020. The mechanism of market-clearing prices has since Léon Walras’ Elements of Pure Economics (1871) been the issue in neoclassical economics. The crucial question of short-run market clearing prices in the presence of disaggregate economy in which there are many buyers and sellers, compelled Walras to pull an “auctioneer” out of his “Marginalist Revolution” hat and then cleverly escort the exchange toward a market-clearing price. Walras was aware that no market in capitalism could internally clear without this external device in the person of auctioneer, not unlike falling back on God of certain evangelists who tend to resolve the earthly problems by pray or fiat. The assumption of “perfect information” and the malleability of time across the past, present, and the future leave not much imagination for a typical neoclassical economist to reveal the secret of real markets and real economy in terms of their genuine process. Similar delusions are common in topics like global oil, oil rent or OPEC where the signpost of governing orthodoxy is in control.

[iv] Based on Marx’s value theory, value of a commodity is the center of gravity of fluctuating market prices. While demand exceeds the supply, price would be above the value, and when supply exceeds the demand, price would be below the value. Now, if there’s no value, as center of gravity, there’s no stability for any price to hold, since market fluctuations could send the prices to either free-rise or free-fall. In either case, in normal (none-crisis) times, there is a necessity for a center of gravity in long run. This task is performed either by an entity external to the system, i.e., the auctioneer, or by a mechanism internal to the system, the value. The choice is obvious for those who are well versed in oddity of Walrasian equilibrium. This was for the none-crisis times. For the crisis period, the value itself cannot hold and the center of gravity falls by the wayside.

[v] Karl Marx, Grundrisse. London: Penguin Edition, 1993: pp. 729-730. Here Marx reveals the tip of the periodization of capitalism, which obtains theoretical conclusion in the first volume of Capital, a decade later.

[vi] Bina 2019 takes its cue from Marx’s approach to periodization of capitalism (originated first in Grundrisse and then advanced further in Capital). In this article, I review the prevailing view of periodization of capitalism by the left scholars informed (mostly) of Lenin’s approach to this perplexing subject. In this newly published piece, I beg to differ by flowing Marx’s post signs, which involves the theory of value and the conquest of mode of production across the geography of production worldwide. Here, while the theory of globalization given a concrete foundation along the theory of value; I interrogate David Harvey’s pointless dichotomy concerning the “logic of history” and “logic of territory”.  See Bina 2013a, Ch. 5, for further information.

[vii] See Saad-Filho 2020 for a dramatic reduction of COVID-19 pandemic to neoliberal policies, rather than pinning down the outbreak to the very “conquest of mode of production” across the globe, as Marx would have declared, an objective ground for implementation of such policies. Saad-Filho goes on to the details of these dreadful policies in order to demonstrate that era of “neoliberalism” is over. Reading this article more than once, I wonder (1) what happened to the Saad-Filho whom I once knew, and (2) what is the difference between, say, Bernie Sanders and a Marxist economist concerning the critique of these neoliberal policies?

[viii] In this article, titled “Thirteen Things You Need to Know about Neoliberalism,”Fine and Saad-Filho attempt to persuade their readers that neoliberalism and neoliberal policies since the 1970s consist of an era – and not the corollary the transformation of the world toward the era of globalization. Yet nearly all the “things” the authors itemized and authorised as an era are but the very distinguishing insignia of globalization. Being intimately familiar with Fine’s work and much appreciative of his pioneering contributions to Marxian theory and critique of political economy, I am nevertheless at loss at his blundering way of treating the periodization of capitalism. For further discussion over periodization and critique of Ben Fine, see Bina 2019.

[ix] For an ample critique of writers on the postwar Pax Americana, American Hegemony, and the shift in balance of power in the world see Bina 2019.

__________________________________________

Cyrus Bina, distinguished professor of economics at the University of Minnesota, has been writing and researching the world oil industry since the 1980s. He wrote, The Economics of the Oil Crisis; Oil: A Time Machine; and A Prelude to the Foundation of Political Economy: Oil, War, and Global Polity. He was co-editor of Modern Capitalism and Islamic Ideology in Iran; Beyond Survival: Wage Labor  in  the Late  Twentieth  Century; and  Alternative  Theories of  Competition: Challenges to the Orthodoxy plus over 300 scholarly articles. Email: binac@umn.edu

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