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Belated April Fool’s: An optimist looks at the oil market

Here’s a quote from a wire article yesterday: “Planes are grounded, streets are empty and factories are shut. That adds up to a huge fall in demand for oil.” Yes, it has been a horrible month for stocks in general and the oil industry in particular. In fact, the market fell by about ? in late March. Since then it’s rallied a bit. Latecomers like me, interested in getting in at the bottom, must wait like vultures for prices to drop lower again which is of course possible, or buy now and hope that the price will continue higher. Meanwhile, waiting impatiently on the sidelines costs nothing (at least in cash). We Fools should be productive with our time, and not just be stealing the rare roll of toilet paper we find in a public restroom. Shame on you! You shouldn't even be in a public place right now.

But here, I’d like to offer my own optimistic view. Right now, there is widespread fear in the world, not just at the Coronavirus, which is blamed for much misfortune. True, it is an epidemic that has sickened many but (so far) only killed thousands. Yes, it’s a problem, but Humanity has seen far worse plagues, including in modern times (the Spanish flu killed tens of millions in 1918). The COVID-19 pandemic will calm down, yes it’ll take months, and there will lasting economic damage. Some argue that this decline is just beginning, that the virus was just the catalyst that set in motion the decline (recession, depression, take your pick) due to preexisting factors (the usual suspects, too much debt, etc.) Broadly speaking, they are correct. Even in our lifetimes, we've survived many books and busts, they are a part of the economy. We can hope that the present one isn't one for the record books, but we really can't know.

Even those of us who try and educate ourselves about the economy will never know it all. And if we have wisdom, we know that it often acts irrationally. Well why shouldn't it. The market is the result of millions of people (or their robot stand-ins) all with different levels of information, etc. But despite all this information and logic, there is still the element of emotion. Consider that in recent weeks, the price of oil has dropped at least briefly by 2/3, while the price of eggs has tripled.

A brief sideline: Is virus entirely to blame? "Entirely", certainly not. "To blame", probably “straw on camel’s back” level of culpability. Explained below.

Just as the novel coronavirus is a health hazard: for most people it is a minor illness, perhaps no worse than a cold or flu. Some patients won’t show any symptoms at all, bully for them, but the problem is these can be unwitting spreaders of the illness, due to its very high contagiousness (R0 for your technical guys out there). Beyond its easy spreading, one of the scarier things of the virus is that it is serious to lethal for at least a couple percent of the population. Yes, people have and will continue to take sick. Some have died and many more will. But all epidemics crest and then decline, down to low levels. Yes, it may recur, but eventually we will be out of lockdown and the economy will revive, somewhat.

One thing that is in the consumers' power, and the spot of optimism I want to develop here, is the chance for increased demand. Yes there has been an enormous decline in demand for oil. Primarily due to coronavirus, cruises ships are vacant, many are still de-facto quarantine ships as infected passengers are treated, tested and perhaps slowly released. Airplanes are hardly flying. They are sort of the airborne version of the Petri Dish that is a cruise ship. Across the board, much economic activity has pulled back due to social distancing and voluntary or mandatory “sheltering in place”. But, even if pessimists are right and this is the start of another Depression,there is still cause for optimism. Economic activity will not remain low forever.

Folks, a turn-around will come soon in Oil and other fossil fuels. As it becomes apparent that the economy won’t recover, when the emergency aid and “loans” have gone to the politically connected, perhaps with some crumbs ($1000 check ! Whoopee, how long will that last?) for the peons, what happens next? Well, the factories won’t be humming any time soon, so no demand there. But we must rely on the grassroots. Consider that the typical Molotov cocktail needs a pint of gasoline. With a typical revolutionary making eight, that is one or two gallons per riot at least. Three will be continuing demand for cheap wine and beer to supply the bottles that will be used for this home-made incendiary devices. These must be transported by truck to the stores (fuel). As civil order continues to deteriorate, and central legal authority breaks down, there will likely be further increases in demand for fossil fuels. Of course gasoline demand is unlikely to reach its pre-crisis levels, but there will residual demand as people drive to stores to loot them in a desperate last-ditch attempt to find food, beer and toilet tissue. Community organizers will spur demand for oil.
For example, if old tires are available, there will be gasoline demand for using the mob if they want to “necklace” some criminal. As society continues to break down, there will be some remaining demand for those few with camp stoves, the desperate making a run for rural areas and finally, to douse and burn any remaining structures. So as you can see, the outlook is not at all bleak for demand for fossil fuels!
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