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The Four Percent


michael barbaro

From The New York Times, I’m Michael Barbaro. This is “The Daily.”

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michael barbaro

Today: For decades, the United States has feared the consequences of running out of oil. Because of the pandemic, it now has far too much of it. Reporter Cliff Krauss on the energy crisis that nobody saw coming. It’s Monday, April 27.

Cliff, tell me about this moment when oil prices collapse.

cliff krauss

So, it was late at night, I’m about to go to bed, but I put on Bloomberg television.

archived recording

And in terms of how far down these moves are going to go, I mean, what are your expectations?

cliff krauss

Because I’m a wonky guy. [LAUGHTER]

archived recording

Oil really getting hammered today, hitting an 18-year low.

cliff krauss

And I see, suddenly, the oil prices are collapsing.

archived recording 1

It’s at $14 and change —

archived recording 2

Touched around $10. $10 —

archived recording 3

Oil today falling all the way to a penny a barrel —

archived recording 4

I mean, we just saw crazy historic drops in U.S. crude today. What on Earth is going on?

cliff krauss

And I write a quick note to my editors, saying, you’re going to see this. It’s weird. But this is a technical issue. It’s a contract. It’s a futures contract that’s going to roll over in 24 hours. It may not mean much.

michael barbaro

Mhm.

cliff krauss

Then I get up in the morning, and we’re in negative territory.

archived recording

At the top, I talked about the craziness of the oil patch. Then we watched as the price of West Texas Intermediate crude for May delivery went from the high teens to less than zero, just in one session.

cliff krauss

Which had never happened before.

archived recording

Oil falling below $0 a barrel for the first time ever.

cliff krauss

Just a few years ago, we had $147 — that’s a plus — barrel oil. And it’s bounced around in recent years between 40 and 60. But negative 37?

archived recording

The week begins with U.S. crude oil trading at minus $37.63 a barrel.

cliff krauss

Negative $37. Negative $37. Never happened before.

archived recording

You probably think that couldn’t happen. How do we make sense of this?

cliff krauss

Never. Preposterous.

michael barbaro

Right. I remember hearing this news the next morning, after you had flagged it to your editors, Cliff, and being genuinely confused by this. I mean, how can oil be worth less than $0? Right? Like, not just worthless, but somehow having a negative value.

cliff krauss

Well, since this had never happened before in history, everybody was confused. But nobody wanted the oil. So people had to actually pay to get rid of it.

michael barbaro

Hmm. I mean, why is it that people would need to pay to get rid of what we regard, universally, as the most precious commodity on Earth?

cliff krauss

Well, it gets very technical, and I don’t want to get into the technicalities of this. But basically, these were futures contracts that rolled over. And so this was a phenomena that occurred over a 12 to 24-hour period. So there’s something a bit artificial about it. But it does reflect something that’s real. Nobody wants the oil. It is not a precious commodity right now because people are not driving, people are not flying, cruise ships are not cruising, and industry is not burning as much fuel as it was. And yet the world is still producing this oil.

michael barbaro

What you’re saying is that the pandemic basically destroyed the normal demand for oil across the world?

cliff krauss

That’s right. So now the world is roughly producing 30 million barrels a day more than we’re consuming.

michael barbaro

Wow.

cliff krauss

So the world is awash in oil. We’re flooded.

archived recording

An incredible sight at the port of Long Beach: 24 oil tankers are anchored offshore. That’s four times the number normally waiting to unload crude from Mexico or Alaska.

cliff krauss

This problem, which is an immediate problem, the seeds of it go back many, many years.

michael barbaro

What do you mean?

cliff krauss

Well, there have been a series of traumas, perhaps three major ones that go back to my college days, actually, in the 1970s.

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archived recording

Good evening. It is an all-out war.

cliff krauss

In 1973 —

archived recording

That’s how Israeli Defense Minister Moshe Dyan describes an invasion of the Golan Heights and the East bank of the Suez by Syria and Egypt.

cliff krauss

During the Arab-Israeli War, the Yom Kippur War, as some still call it —

archived recording

All day today, Israeli reservists have been heading for their units. The streets have been full of military traffic.

cliff krauss

Arab countries were attacking Israel and almost overran Israel until the Nixon administration —

archived recording (henry kissinger)

We will, in this crisis, as we have in other crises —

cliff krauss

At the last minute —

archived recording (henry kissinger)

— not hesitate to take a firm stand.

cliff krauss

— decided to send Israel a massive amount of weapons.

archived recording

Kissinger hinted that the U.S. has begun to resupply Israeli military losses.

cliff krauss

Which, of course, made many of the oil-producing countries that we were becoming dependent on in the Middle East quite upset. And all they could do in retaliation was —

archived recording

The oil producing countries of the Arab world decided to use their oil as a political weapon.

cliff krauss

— to inflict an embargo, an oil embargo on the United States and other Western countries that were aiding Israel.

archived recording

They will reduce oil production by 5 percent a month until the Israelis withdraw from occupied territories.

cliff krauss

And this was a trauma for Americans, causing long lines at the gas pump.

archived recording (richard nixon)

Our supply of petroleum this winter will be at least 10 percent short of our anticipated demand. And it could fall short by as much as 17 percent.

cliff krauss

Certainly, people of my generation recall this. I was in college. I had a new, sporty, red Capri. [LAUGHTER] And I loved tooling around. And then suddenly —

archived recording

Gasoline shortages are spreading across the country. Odd-even service, gasoline lines, and closed gas stations are becoming increasingly common.

cliff krauss

— you had to wait on line. I was in college in Poughkeepsie, New York, at Vassar.

archived recording

So they waited three hours and there was no gas.

cliff krauss

I remember that I would wait as long as possible, till I was almost on empty, to fill up the tank.

archived recording

We’re all out of gas! Tomorrow morning! [LAUGHTER] We’re all out!

cliff krauss

It was a real bother to do that.

archived recording 1

Now, after waiting two hours, and we’re not sure if I can make it.

archived recording 2

Make it in what way?

archived recording 3

Well, if there’s any gas left.

cliff krauss

Now my problem was small compared to people who had to rely on their cars

to get to work every day and drive long distances.

archived recording 1

I’ll betcha there’s no gas.

archived recording 2

I heard this morning —

archived recording 3

Well, you get the gas down here.

archived recording 4

— the Commissioner of Energy from Washington. And they claim there’s gas.

archived recording 5

We can’t make a living. What about this?

archived recording 6

I mean, this is ridiculous.

archived recording 7

I have to travel.

cliff krauss

So that was a trauma. And it was a political problem and an economic problem for the country. Prices skyrocketed. The economy was badly damaged. We’d just lost the war in Vietnam. And now we don’t even have a secure supply of energy. And we’re dependent on countries such as Saudi Arabia, far away. We barely understand these countries. And they’re not friendly.

michael barbaro

Mhm.

cliff krauss

We’re in trouble.

archived recording (richard nixon)

Let me conclude by restating our overall objective. It can be summed up in one word that best characterizes this nation and its essential nature. That word is independence.

cliff krauss

And so from that pain comes a dream: energy independence.

archived recording (richard nixon)

What I have called Project Independence 1980 is a series of plans and goals set to ensure that by the end of this decade, Americans will not have to rely on any source of energy beyond our own.

cliff krauss

And the leadership of the country —

archived recording (gerald ford)

With a comprehensive plan to make our country independent of foreign sources of energy by 1985.

cliff krauss

— basically, Nixon, Ford, Carter —

archived recording (jimmy carter)

The energy crisis has not yet overwhelmed us. But it will if we do not act quickly.

cliff krauss

— over those years made energy independence a, basically, keystone to all of their policies. The dream is that we can produce our own energy supply so that we don’t feel this vulnerability anymore. That was the dream.

michael barbaro

And what do we start to do to achieve that dream?

cliff krauss

Those three administrations did several things.

archived recording (gerald ford)

It is in that spirit that I have decided to sign the energy bill just passed by the Congress.

cliff krauss

There was the establishment of a strategic petroleum reserve in 1975.

archived recording (gerald ford)

It will enable us to set up a strategic oil storage system.

cliff krauss

So we would have a reserve when there would be a war or a natural catastrophe.

archived recording

Starting in 1977, oil will begin flowing through the pipeline, across Alaska, and then by tanker to the lower 48 states.

cliff krauss

We built the Trans-Alaska Pipeline.

archived recording (jimmy carter)

— in a new energy department.

cliff krauss

The Department of Energy was created.

archived recording (jimmy carter)

— to bring order out of chaos.

cliff krauss

We started to use more coal to burn for power.

archived recording

Ready for war, sir. Ready for war.

cliff krauss

We went to war —

archived recording

Well, at this hour, Iraq remains in firm control of the tiny oil-rich country of Kuwait.

cliff krauss

— years later, in the Middle East —

michael barbaro

Right.

cliff krauss

— over the invasion of Kuwait by Iraq.

archived recording

And now sirens, air raid sirens, are beginning to sound over Baghdad.

cliff krauss

In part, not just to liberate oil fields in Kuwait, but to defend our gas station, Saudi Arabia.

archived recording (george h.w. bush)

Much of the world is even more dependent upon imported oil and is even more vulnerable to Iraqi threats.

michael barbaro

Because suddenly, those foreign sources of oil that we still needed, because we weren’t quite energy independent, they were at risk of being overtaken by Saddam Hussein?

cliff krauss

That’s right. So all of those things were done. But all that was accomplished, and it was something, was to stem the bleeding. And that brings us to the second trauma, which is the early years of the current century. When suddenly, our production is in decline again. China is growing by leaps and bounds. India is starting to grow by leaps and bounds. A middle class is growing around the developing world. So demand is going up, like, 5 million barrels a day around the world. And the Middle East is suddenly more unstable. And so prices skyrocket between the years of about 2004 and 2007.

michael barbaro

And when you say skyrocketing, what do you mean?

cliff krauss

I mean, prices skyrocket to as high as $147 a barrel.

michael barbaro

Hm. Correct me if I’m wrong. This is the point where U.S. gasoline prices at the pump reach $5 a gallon.

cliff krauss

Yes.

michael barbaro

And I remember how upsetting that was to consumers and to voters.

cliff krauss

Yes. It was very, very upsetting. And for those of a certain age, it was a reminder of the 1970s.

michael barbaro

Huh.

cliff krauss

We were right back in the same problem, dependent on foreign oil, which was very expensive. But then something big happened.

There was a Texas oil man named George Mitchell. And for years and years, he had been experimenting with hydraulic fracturing, which is basically splitting up shale, hard, shale rock which had been useless when drilled vertically. George Mitchell came up with the idea of drilling horizontally through these layers of rock and unleashing the oil in the rock by basically exploding the rock and then introducing sand and water to keep the cracks open, releasing the oil.

michael barbaro

Fracking.

cliff krauss

Fracking.

archived recording

Consider this a eureka moment for the rest of the world, the biggest energy innovation of the decade.

cliff krauss

Suddenly, they were able to release enormous amounts of oil in fields that big companies had given up on years before.

archived recording

The so-called shale revolution has spawned boom towns in the Dakotas. That’s a lot of money. It’s life-changing money. It’s a dream.

cliff krauss

We were able to do it in North Dakota, Texas, Colorado, Oklahoma, a few other places.

archived recording

Thanks to fracking technology, the U.S. now producing about 9 1/2 million barrels a day, a 70 percent jump from just five years ago.

cliff krauss

And it’s occurring because the price of oil was so high. That incentivized innovation.

michael barbaro

And Cliff, what does fracking for oil mean for this still quite unfinished American dream of energy independence?

cliff krauss

Well, it means that we actually, at least momentarily, seem to almost reach that independence. Because American oil production more than doubled in about five years.

michael barbaro

Wow.

archived recording (barack obama)

Last year, we relied less on foreign oil than in any of the last 16 years.

archived recording

It’s changed the whole world and the economy of the whole world. It’s changed our dependence on foreign oil. It’s changed our alliances in terms of their value to us.

cliff krauss

The United States became an exporter of oil for the first time in many years. And last year, actually leapfrogged over Russia and Saudi Arabia as the biggest oil producer in the world.

michael barbaro

So this seems like a pretty good problem to have, right? I mean, too much American oil for the first time, basically, in our history.

cliff krauss

Economically speaking, no question about it. By 2014, we were bringing down gasoline prices for consumers. It was part of our recovery from the recession. And all of this American production puts the United States in a extremely powerful position economically, employing millions of people and producing revenues for state and local governments across much of the country. Also giving the United States the freedom to act in foreign policy in ways that would have been unheard-of years before, such as putting pressure on Iran without endangering our energy supply. It was basically the culmination of the dream from the 1970s. And it was hard to imagine, just a few months ago, what could happen that could undercut that dream.

michael barbaro

Like a pandemic?

cliff krauss

Like a pandemic that would suddenly destroy the demand for oil and kneecap the American oil industry that had produced all of this oil in the first place.

michael barbaro

We’ll be right back.

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michael barbaro

So Cliff, when this third trauma arrives, the pandemic, the world at this point, and the United States, in particular, is awash in oil. And from what you’re saying, demand for that oil has instantly plunged. So what’s actually happening to all of this overproduced oil?

cliff krauss

So the oil has no place to go. And it’s rapidly filling up tank farms, strategic reserves around the world. Refineries are running out of space to put the oil. And so the inventories are building to a point where there’ll be no physical space to put the oil. You now have tankers which, you know, used to ship oil from place to place, just storing the oil and sitting out off of the shores of Los Angeles, for instance, and other places. And these are the people who are making a lot of money. They’re getting paid to just hold the oil.

michael barbaro

So this explains those negative oil prices, right? They’re producing so much oil that they have nowhere to store it. So they end up having to pay people to take it.

cliff krauss

Exactly.

michael barbaro

Cliff, maybe this is a bit of a stupid question, but why don’t oil producers, knowing that there’s just way too much oil, and that, if they keep producing it, they’re going to hurt their own ability to command meaningful prices, just stop pumping or fracking oil? Just leave it in the ground.

cliff krauss

Well, that’s beginning to happen, but it’s a cumbersome, complex process. First of all, you have thousands of producers in the United States. We don’t have a national oil company which is taking orders from the government, such as in Saudi Arabia. And then there are complications that go along with shutting in wells. It’s an expensive process. You can actually damage the resource to the point where, when you restart the oil, you’ll actually pump less oil out. And then, you have all of these companies that, even when they’re losing money, they need cash flow. They need cash flow to meet their payroll, to meet their debt responsibilities. So what oil companies prefer to do, you let the well, basically, slowly decline.

michael barbaro

So if we can’t easily turn off the pumps, and we can’t suddenly overnight create enough storage for all this oil, what can — and I guess what is — the U.S. doing about this glut of oil?

cliff krauss

Well, there are a number of things that are being considered, such as stopping imports from coming in, particularly imports from Saudi Arabia that are on their way in tankers.

archived recording

40 million barrels of Saudi oil is already on its way to the United States. Shipping —

cliff krauss

But there are probably American refiners who have already paid for it.

archived recording

President Trump is facing pressure to stop Saudi crude oil imports in an effort to save the American oil industry.

cliff krauss

And so you would be hurting American refiners. That’s not something that the administration would like to do, I’m sure. So they don’t have a lot of options. But meanwhile, small oil producers are in dire straits and on the verge of bankruptcy. And that could be the future, especially if our demand is going to be depressed for a long time.

michael barbaro

So Cliff, how is this new reality of the glut and the small producers struggling within that glut, how is that starting to look on the ground in America’s biggest oil towns, including, I’m sure, yours, which is in Texas?

cliff krauss

Well, thousands of people are losing their jobs. Others are being furloughed. Probably, it’s only going to get worse. You have oil states that rely on what’s called severance taxes, which is dependent on the price of oil. So that will have an impact on state and local services. And it will have an impact on people who actually earn money because oil is coming out of fields on their private property. So there’s going to be a big macroeconomic impact in these oil-producing states.

michael barbaro

Cliff there are going to be people who hear this and think, this is what happens when a country like the United States becomes overly focused in this discussion of energy and dependence on old line forms of energy, on oil, rather than on newer, greener forms of energy. And what do you say to that?

cliff krauss

So there are definitely going to be a lot of people who will celebrate the demise of the American oil industry.

michael barbaro

Mhm.

cliff krauss

And there is a strong argument to be made that we need to diversify our energy supply. And we have done that successfully when it comes to power. We are now using wind and solar. But not for our cars. The electrical age, the electric cars, they’re coming. There’s no question about it. But it’s going to take decades. Because the average car today is on the road for 10 years. So it takes a long time to change the transportation fleet. And our transportation fleet is overwhelmingly dependent on gasoline and diesel.

michael barbaro

Right. Which comes, of course, from oil.

cliff krauss

Exactly.

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michael barbaro

Cliff, what’s so interesting about the history that you have described here is that it feels like every decision the United States has made about oil was about avoiding a single scenario, which is that we would run out of oil and we would be beholden to our adversaries to get that oil. And it feels like we never really prepared for the opposite scenario, which is the situation we’re in now.

cliff krauss

That’s right. Nobody anticipated a pandemic that would destroy demand. And no one is to blame for this, but we are now facing an entirely new set of problems.

michael barbaro

Right.

cliff krauss

And of course, if we had anticipated this problem, we would not have solved the problem that we had being dependent on producers in the Middle East and other unfriendly powers.

michael barbaro

Mhm.

cliff krauss

So my big takeaway, and it may be obvious to everyone, is the idea of energy security is simply an illusion.

michael barbaro

Hm.

cliff krauss

We are not energy secure when we have little oil. And we’re not energy secure when we have a lot of oil. It’s hard to get it just right.

michael barbaro

Thank you, Cliff.

cliff krauss

Thank you.

michael barbaro

We’ll be right back.

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michael barbaro

Here’s what else you need to know today. On Sunday, the head of the White House task force on the coronavirus, Dr. Deborah Birx, said that social distancing rules would likely remain in place throughout the summer, even as some states begin reopening their economies. During an interview on NBC’s “Meet The Press,” Birx was asked about President Trump’s unproven claim, made last week, that an injection of a disinfectant like bleach could combat the virus.

archived recording

Dr. Birx, help me understand what happened with the suggestion that the president made that the task force study disinfectant injection. Do you have any more information? And are you concerned that people might take bleach because of what the president said?

archived recording (deborah birx)

I think I made it very clear in how I interpreted that. I also made it very clear, and so has Dr. Fauci and everyone associated with the task force in their clarity around, this is not a treatment. What was meant —

michael barbaro

The president’s statement was widely condemned and prompted local health officials, and the makers of cleaning supplies, to warn Americans not to ingest or inject their products. As of Sunday night, the coronavirus had infected more than 938,000 Americans and has killed at least 50,000 of them.

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That’s it for “The Daily.” I’m Michael Barbaro. See you tomorrow.



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