Experts and Politicians Get Slapped Down by Oil Markets

by Ray Keating

The Keating Files – April 20, 2020

The nice thing about saying stuff on television that doesn’t make much economic sense is that there’s often considerable lag time before the cold slap of economic reality hits. The same goes for politicians’ mistaken utterances on the economy, whether on TV or not. But on rare occasions, economic reality arrives almost immediately.

The peddlers of economic ignorance usually can escape with their reputations largely intact because by the time their wrongheadedness becomes clear, everyone has moved on to another topic. Indeed, politics, the media and the economics profession are over-populated by experts who consistently get their economics wrong, yet their views are still sought. Go figure.

Apparently, though, the oil markets were having none of this, as the price of oil descended into uncharted territory on Monday (April 20). The May crude oil futures price closed at $18.27 a barrel on Friday (April 17), but ended Monday’s session at negative $37.63. In effect, that would mean that oil sellers would have to pay buyers to take oil off their hands. Wow.

That’s endlessly fascinating for traders and economists alike. But what’s kind of humorous is how much time CNBC, for example, spent on the need for Russia and Saudi Arabia, along with the United States and Mexico in the mix, to agree to oil production cuts earlier this month. The deal was close to being done as oil markets were closing on Thursday, April 9, and then the “historic” and “unprecedented” deal was finalized on Sunday, April 12. 

CNBC reported on its website:

“This is at least a temporary relief for the energy industry and for the global economy,” Rystad Energy’s head of analysis Per Magnus Nysveen told CNBC in an email. “Even though the production cuts are smaller than what the market needed and only postpone the stock building constraints problem, the worst is for now avoided.”

CNBC also highlighted President Trump’s tweet: “The big Oil Deal with OPEC Plus is done. This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all!”

And on April 15, CNBC interviewed U.S. Energy Secretary Dan Brouillette. He said, “Think about what would have happened in the alternative had there been instead of a cut of 10 million on the part of OPEC and OPEC+, what if that number had been zero, what would we be looking at today suggests that it’s probably something much lower than where we are. And I think we may be at a floor. I think the intent of this conversation with OPEC and the rest of the G-20 countries is simply to do exactly that, to mitigate.”

The “Whoops” moments clearly have been stacking up.

I often have CNBC on in the background in my office, and as I shook my head at all of the time being spent on this deal, one anchor – Kelly Evans – finally put forth a relevant question. She basically asked: If this deal is happening, why does the price of oil keep falling?

Well, there you go. The obvious question with an obvious answer.

The price of oil has been declining since late February ($53.38 a barrel on February 21), and continued through and after the “historic” production deal ($22.41 on April 13 and, again, $18.27 on April 17), and went into freefall on April 20 because of the coronavirus and governmental responses that have crushed the economy, drying up oil demand and creating enormous uncertainty looking ahead as to when the U.S. and the rest of the world might get back on a growth track.

Anyone with minimal knowledge of how supply and demand works understood that the Russia-Saudi-U.S. production deal meant nothing. Markets clearly were dictating that oil production would have to decline, since there was little demand and nowhere for production to go. Duh.

But what the heck. Even though markets taught a quick, harsh lesson in economics this time around, few are likely to pay much attention, and misguided views on economics and markets will still be sought, spouted off, and forgotten.

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Ray Keating is a columnist, economist, podcaster and entrepreneur.  You can order his new book Behind Enemy Lines: Conservative Communiques from Left-Wing New York  from Amazon or signed books at RayKeatingOnline.com. His other recent nonfiction book is Free Trade Rocks! 10 Points on International Trade Everyone Should Know. Keating also is a novelist. His latest novels are  The Traitor: A Pastor Stephen Grant Novel, which is the 12^th book in the series, and the second edition of Root of All Evil? A Pastor Stephen Grant Novel with a new Author Introduction. The views expressed here are his own – after all, no one else should be held responsible for this stuff, right?