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What Negative Oil Prices Mean For Our Regional Economy

A gas station on a snowy day.
Elodie Reed
VPR File

The price of oil has gone negative, meaning it's worth less than zero. Unfortunately, that doesn't mean someone is paying you to fill your gas tank. But what does it mean for our regional economy? Dartmouth economist Bruce Sacerdote joins us to explain.

Our guest is:

  • Bruce Sacerdote, professor of economics at Dartmouth College

Broadcast live at 1 p.m. on Tuesday, April 28, 2020; rebroadcast at 8 p.m.

The following has been edited and condensed for brevity and clarity.

Jane Lindholm: So it's a negative price we're seeing for a barrel of oil, why won't someone pay me to fill up my gas tank?

Bruce Sacerdote: Well, they might pay you to take a whole mess of crude oil off their hands if you show up in Cushing, Okla. But unfortunately, a lot of things have to happen to get from crude in Cushing to your local gas pump in Vermont.

I mean, nevertheless, we are seeing lower gas prices in Vermont and around the country than we were a couple of months ago. We’re also seeing significantly lower emissions. Could this be seen as a silver lining?

Bruce Sacerdote: Yes, that's right. And that's obviously one silver lining to this terrible mess. Not only lower gas prices, but significantly reduced pollution levels and higher air quality levels and such. That's absolutely right.

And, you know, I hope there may be some good that comes out of it, because either we'll learn to live with somewhat of a lower emissions lifestyle, or people who live in cities will realize, hey, wait, we actually could have a much nicer quality of life here if we made some changes. So there could be some long term upsides to this if we're lucky.

So who is being paid to take oil off the hands of the oil producers and how does that actually work?

Bruce Sacerdote: Right. We've never seen this sort of negative price for oil before. The world has become incredibly good at producing oil over the last 10 years, due to technological changes. Now we're producing much more than we need to consume, at least in the short run, in some places. And it costs money to store

"Energy is kind of at the base of everything that we do. And certainly all the goods that we consume have a lot of energy built into them." - Professor Bruce Sacerdote

it. One of the classic ways of storing it is to take very large crude oil carriers – oil tankers --  fill them with oil, and just anchor them at sea, close to shore.

There are also tanks on land, and many small industrial users have storage capacity. But we're getting more and more full, up to the point where nobody wants it. And it's very expensive.

This conversation about the path that oil would take from extraction to something like your gas tank, or to your home heating unit, reminds me a little bit of the conversation that we're having around dairy, where dairy producers aren't necessarily slowing down their production fast enough to meet a change in demand.

 And we're seeing the dumping of milk in some cases, even though there may still be demand on the other side of this pandemic. Why can't oil producers just stop extracting or slow their production to meet this decreased demand?

Bruce Sacerdote: You know, this thing turned on a dime. In the short run, people didn’t forecast the price crash as rapidly as they might have and producers kept producing. Now, of course, the markets are sending them a strong signal: Hey, stop production.

Do you see, Professor Sacerdote, any any other silver linings for our regional economy?

Bruce Sacerdote: I think we’re learning new ways to interact. This is a very small thing, but in teaching my class, I'm learning new technologies and new ways to interact with my students effectively without them having to travel to my office or travel to campus. So there are some advances happening. But let's face it, it's mostly downsides we're seeing.

Do you have a sense, Professor, of how quickly we might see the price of oil rebound?

Bruce Sacerdote: The market is giving us plausible prices for oil a year from now (for example, you can’t buy your heating oil ahead for next January at an exorbitantly low rate), and the stock market is telling us that the economy is going to bounce back relatively quickly. The stock market is not always right, but it may be in some ways our best forecast.

I think this is telling us a couple things: that they think that the economy will bounce back quickly, and also that the federal government, the Federal Reserve Bank, are successfully waging a war against the recession and that they might even create some inflation, which is further boosting asset prices.

Inflation being, in this case, a good thing?

Bruce Sacerdote: Yes. Since the last since the Great Recession, we've been trying to create inflation. And we've shown ourselves to be not very good at it or maybe put more accurately too timid in printing money and having the Federal Reserve buy assets. And we've had just abysmally low inflation below the Fed's target. Now, with the very aggressive moves being taken by the federal government and the Fed, I think they're going to be able to create 2% inflation.

Food has the price of oil built into it -- the cost of shipping and all of the transportation costs that go along with getting things to a place like Vermont. Do you think we’ll see any impact here in Vermont on the pricing of consumer goods or groceries because of oil prices?

Bruce Sacerdote: The short answer is yes, for sure.

Energy is kind of at the base of everything that we do. And certainly all the goods that we consume have a lot of energy built into them. So I think that food prices, energy prices, those core things are going to be less expensive. And I think there's such a damper on economic activity, our housing prices are not going to be going up like crazy anytime soon either.

Jane Lindholm is the host, executive producer and creator of But Why: A Podcast For Curious Kids. In addition to her work on our international kids show, she produces special projects for Vermont Public. Until March 2021, she was host and editor of the award-winning Vermont Public program Vermont Edition.
Matt Smith worked for Vermont Public from 2017 to 2023 as managing editor and senior producer of Vermont Edition.
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