As people around the world continue to practice social distancing and stay home throughout the novel coronavirus pandemic, the decreased demand for oil has led to a dramatic decrease in prices worldwide.
And while consumers are the first to rejoice at paying less at the pump, this drop could signal trouble on the horizon for the energy sector at large.
Historically low prices on gasoline could signal oil companies’ marginal revenue on sales is dropping below the marginal cost of manufacturing.
In essence, when the marginal revenue — the profit gained from selling another gallon of oil — drops below the marginal cost to the producer to manufacture it, the producer is operating at a loss. This inevitably leads to a loss of revenue, breeding further layoffs and pump closings as companies attempt to make up for lost revenue, likely hitting oil-dependent states like Texas, Alaska, and North Dakota heavily.
Industry reports paint a bleak picture for how this decrease in profit will further add to U.S. unemployment, which reached 22 million last week per the Department of Labor.
In fact, an estimated one million Americans employed in oil-field services could lose their jobs due to COVID-19, according to a report by energy industry analytics firm Rystad Energy. Such projections dwarf unemployment related to the “oil glut” of 1998, in which a global surplus led to nearly 60,000 layoffs across the mining industry between 1997 and 1999, according to the Bureau of Labor Statistics.
This latest decline in oil prices comes on the heels of an agreement earlier this month between the Russian Federation and the Organization of Petroleum Exporting Countries to cut production in an effort to keep prices up during the current coronavirus pandemic. Only time will tell if such industry cooperation will be enough to offset the decreasing international demand.