The Oil Industry Is Freaking Out and You Should Too

February 12, 2016, 5:12 PM UTC
Views Of Tankers & Refineries As Oil Trades Near 12-Year Low
A pump jack operates in an oil field near Corpus Christi, Texas, U.S., on Thursday, Jan. 7, 2016. Crude oil slid Thursday to the lowest level since December 2003 as turbulence in China, the worlds biggest energy consumer, prompted concerns about the strength of demand. Photographer: Eddie Seal/Bloomberg via Getty Images
Photograph by Eddie Seal — Bloomberg via Getty Images

When oil prices become depressed, so do oil executives.

Not that their mental state kept them from spending lavishly and living it up at International Petroleum Week, a leading confab of leaders in the global energy industry, according to a report in Bloomberg.

Amidst the music of jazz quartets, and delicacies like champagne and oysters, oil executives fretted that a recovery of their businesses might take a very long time. The basic problem for oil producers is that there simply is no incentive for individual actors to cut production. Today’s oversupplied market is the result of years of investment, and now that the production infrastructure has been built, it makes sense to keep pumping, even if prices continue to fall.

“Tell me who is supposed to cut?” Igor Sechin, CEO of Rosneft, asked Bloomberg. “Will Saudi Arabia cut production? Will Iran cut production? Will Mexico cut production? Will Brazil cut production? Who is going to cut?”

Oil markets remain in contango, meaning oil futures are trading at a higher level that current oil prices. This reflects the markets rational faith in the inherent value of oil, and also means that it’s profitable for oil traders to buy and sit on the commodity. But the oversupply is getting so extreme that these folks are starting to run out of storage space meaning that “it’s becoming profitable to hire supertankers, fill them with crude and anchor them offshore,” according to the report.

And with demand for energy from China appearing like it will only continue to fall, the execs could be crying in their champagne for years to come.