Unlike most other commodity industries there is almost no storage in the system for oil and it relies on a steady progress of one hundred million barrels a day from the wellhead to the user.
Fracking is a more expensive method of extraction and needs a higher oil barrel price to make a profit but, because of the oversupply, some oil wells were making a loss and many were only breaking even. The banks were supporting the losses because most of the costs were in discovery and drilling and it is better to keep pumping and selling the oil than to shut and cap the well.
Before the Covid19 crisis the demand for oil was already slowly falling and the price was going down and the price had fallen to $30 and now the Corona19 has collapsed demand and the situation is not going to change for some months.
For technical reasons oil wells cannot be switched off and on and, once they are shut and capped, a new well will have to be drilled. Once the storage tanks are full, and at a hundred barrels a day this won’t take long, wells will have to be shut down. Many of the oil fields are almost depleted and are not going to be reopened so there will be an instant loss of capacity.
Clearly the whole oil industry will be under extreme stress and the banking industry that has been supporting them with billions of dollars of loans will also be at risk.
When the world reopens for business and demand increases back to the old rates of consumption I suspect that we may be short of supply and the price could rocket, but whatever happens, nations will want to have a more stable and controllable supply of energy and will enlarge their renewable electricity capacity of wind, solar, geothermal and hydro.
Big changes have been forecast for some time but this is a real ‘black swan’ event and will bring changes that we were not expecting to see in our lifetime.
(A black swan event originates from the northern hemisphere and from a time when the only known swans were white and therefore black swans were not going to happen.)