UNIDENTIFIED PERSON: This is PLANET MONEY from NPR.
MARY CHILDS, HOST:
On Monday morning - two days ago - we woke up, and all of the new, usual things were happening. This new coronavirus was spreading. The stock market was way down. But on top of those two giant things was another new giant thing. The price of oil had just fallen by about 25%, the biggest drop this century.
JACOB GOLDSTEIN, HOST:
And the price of oil is this very special price. It's set or sort of set by this powerful international cartel, OPEC. The oil price affects everybody on Earth. You know, it affects how much it costs to drive and to transport stuff to market. It has an effect on climate change. And the oil price has all these really interesting global, geopolitical dimensions. It's this world where a fight between oil ministers in Vienna changes people's lives in the middle of America.
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GOLDSTEIN: Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.
CHILDS: And I'm Mary Childs. Today on the show, we follow the plunge in oil prices.
GOLDSTEIN: From a viral outbreak in China to a meeting in Vienna to a little mom and pop oil business in Kansas.
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CHILDS: OK. Jacob, the first thing we've got to talk about here is OPEC, the Organization of Petroleum Exporting Countries, which is this amazing global economic thing.
GOLDSTEIN: Yes. So - OK, OPEC goes back to the 1960s. That's when a bunch of oil exporting countries all got together and they ask themselves this basic question. Why are we all competing with each other? Why are we all pumping more and more oil and selling it for lower and lower prices when, instead, we could all just get together and agree to limit production and sell oil for a higher price?
CHILDS: So they formed what's called a cartel. A cartel is basically just a bunch of different people or companies who are in the same business or industry, and they get together and agree to limit production and coordinate prices.
GOLDSTEIN: Doing this, forming a cartel, is any industry's - basically, it's their dream come true. You know, instead of competing out in the brutal world of the free market, you just carve up the market with your pals and let the profits roll in. In fact, the only reason more industries don't do this - don't form cartels - is because it is wildly illegal. If all, say, the airlines in America got together and decided, let's just coordinate on routes and fares, and they got caught, they would be in massive legal trouble.
CHILDS: But those U.S. rules don't apply to the countries in OPEC. They're mostly countries in the Middle East and Africa. And there, those oil industries are largely controlled by their governments themselves, so their oil ministers can get together and decide how much oil each country is going to produce. For decades, OPEC was this cartel, unofficially de facto led by Saudi Arabia, that had all this power over the world's supply of oil. When OPEC decided to cut back, the price went up. When they decided to pump more, the price fell.
GOLDSTEIN: And then just in the past decade or so, that changed. Fracking took off in the United States, and suddenly, the U.S. was producing all this oil. In the U.S., of course, the oil industry is private, not public. The U.S. is not part of OPEC, so the rise of U.S. oil production meant that the Saudis and the other OPEC countries could no longer cut back on production and control the price like they used to. The cartel was just not that strong anymore. So to fight back, OPEC got bigger. They teamed up with Russia.
CHILDS: We don't really think of Russia as a petrostate, but it sort of is. I don't really realize this before we started working on this story, but along with Saudi Arabia and the U.S., it's one of the three biggest oil producing nations in the world. Something like half of its government budget comes from oil and gas revenue.
GOLDSTEIN: People started calling this new group of Saudis and the Russians and everybody else OPEC-Plus. Sounds like a boring streaming service - actually a pretty effective global megacartel. And in 2016, the OPEC-Plus countries agreed to cut production, prices started going back up, and the cartel dream was back. The cartel was working until just a few days ago, when something at the cartel went horribly wrong. And, Mary, when we came in Monday morning, we saw this stuff happening in the oil market. I asked you, like, who should we talk to?
CHILDS: So my immediate thought was Ed Crooks. Like, if I have to phone a friend on oil, I'm calling Ed. He used to cover energy at the Financial Times for ages. Now he's at an energy consultancy, Wood Mackenzie. So on Monday, Ed came in to help us make sense of what was going on.
ED CROOKS: It's one of those days that you get very, very rarely in life, very rarely the oil market or any other business, which is a really dramatic, unexpected event that completely changes your view of the world.
GOLDSTEIN: Ed says, OK, to understand what is just happening in the past few days with oil, start by going back a couple months. Think about China's response to the coronavirus, which, of course, we've heard a lot about. But this time, think about it from the point of view of oil.
CROOKS: What we saw in China were these very, very severe measures in order to curb the spread of the virus. And so there's - a lot of factories were closed, huge restrictions on travel. People were not driving around. Goods were not being trucked around. People were not flying. And so all of those things hit oil demand in China in particular.
CHILDS: And China is the world's biggest oil importer. So in the first few months of this year, the global demand for oil fell by the most since the financial crisis more than 10 years ago. And the price of oil just started falling.
GOLDSTEIN: So just last week, the countries in OPEC, in the oil cartel, got together to do what cartels do.
CROOKS: The OPEC countries got together on the Thursday, and they said, right, this is our plan. We need to cut production by 1.5 million barrels a day till the end of the year. We should bring the oil market back into balance, and that way everybody's happy and prices will stabilize.
CHILDS: So that is old-school Saudi-led OPEC. The next day, they go to meet with OPEC-plus, basically adding in the Russians.
CROOKS: On the Friday, you start hearing kind of noises from the Russian camp - well, they're not happy about this; they weren't necessarily going to go along with it. So it's getting weird. There are delays. It's clear that not all is well. It's clear that you aren't just going to have an easy agreement of everyone coming out and smiling and shaking hands or maybe not shaking hands and saying, yeah, we've all agreed on this 1.5 million barrel a day cut. And the time dragged on. And then the meeting kind of broke up in chaos. And the - this was the really kind of telling comment - when the Russian Energy Minister Alexander Novak walked out of the meeting, he said everyone can pump as much as they want. He said you can pump at will.
GOLDSTEIN: What did you think when you heard what had happened?
CROOKS: So I thought - wow was my first reaction.
CROOKS: I thought this...
GOLDSTEIN: Is that the edited-for-NPR version?
CROOKS: (Laughter) Yeah.
GOLDSTEIN: I mean, the whole point of a cartel is you can't pump as much as you want, right?
CROOKS: Exactly that. Discipline is everything. A cartel needs two things - it needs as large market share as possible, as many members as possible, and it needs discipline. And on Friday, it seemed to lose both of those things.
CHILDS: And then in the days after the meeting, Russia and Saudi Arabia both went further. They said, OK, not only are we not going to cut production, we are going to increase production. That promise of increased supply, even as demand is falling, led to that giant fall in oil prices on Monday.
GOLDSTEIN: There is this really basic question here, which is - why? These countries have this dream thing that most businesses would kill for, a cartel. They can rig the market in their favor. All they have to do is agree to cut production. Why didn't they do that?
CROOKS: The absolute truth of the why-did-this-fall-apart one is that we are still trying to find that out ourselves. We don't really know.
GOLDSTEIN: But Ed does have an educated guess. It's, frankly, the best explanation I've heard for what happened, and I love it because it speaks not just to what's going on here with OPEC, but it gets at this really basic kind of human tension that exists in any cartel. It works like this. Everybody in the cartel agrees yes, sure, we should cut production and drive up prices. Great idea.
CHILDS: But each individual member of the cartel thinks, I want the other people to be the ones doing the actual cutting, that way prices go up and I still get to keep selling the same amount of stuff, which is important because these countries largely fund their governments by selling oil.
CROOKS: Particularly at times where there's a need to make a big cut in production, you can see everyone essentially volunteering everybody else, people not being prepared to step up to the plate and cut their own production for the sake of the greater good of the group. When you look at what's been going on in the past few days, it looks like that's what's happened, which is that what they've not been able to agree on with Russia is who should bear the greatest burden of reducing production, taking that financial hit, in order to achieve the best result for the group as a whole.
GOLDSTEIN: These countries are getting together to rig the market for their own benefit, but their own selfishness means they're not able to do it. It is sort of like a perfect dark story about human nature.
CHILDS: So OK, that is the what just happened with OPEC and why did the price of oil crash story, but then there are all these questions about what does the price crash actually mean? Like, is it going to have any long-term effect on oil consumption, on climate change? Which - probably not.
CROOKS: In a world without coronavirus, where coronavirus is under control, people are still going to want to drive. People are still going to want to fly. People are still going to want to heat their homes. None of that is going away, and so the demand will be there. And if the demand will be there, that's going to create supply.
GOLDSTEIN: But, Ed says, in the short term, it will have big economic effects.
CROOKS: At the most basic level, it's great if you use oil. It's great if you are a motorist. And countries that import more of their oil, it's good for them. So China, the world's largest oil importer, it's great news for them.
GOLDSTEIN: If you go back 10 or 20 years, a big fall in oil prices would also have been great economic news for the U.S. - basically, a big economic stimulus. And that is still sort of true. Everybody who buys gas and stuff that's made and transported with oil is going to save some money because oil prices are lower. But...
CROOKS: But things are very different now because of the shale revolution. The U.S. is now the world's largest oil producer. So you'll have a big hit to West Texas, North Dakota, Colorado, Wyoming, New Mexico - the big oil-producing states. You know, truck drivers, people who make the pipes and the equipment used in the oil field, people who run hotels, restaurants, all the places that benefit from the tax revenues - the schools, local services, the roads that are paid for by the taxes, paid by the oil industry - all of those things are going to get hit.
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CHILDS: After the break, we talk to two people in those oil-producing states about what's been happening and what is about to happen.
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CHILDS: Yesterday I called Rachel Adams-Heard. She's based in Texas. She covers the energy industry for Bloomberg News, and she told me about this conversation she had recently with the mayor of Odessa, this little oil town in West Texas.
RACHEL ADAMS-HEARD: And he was saying, we don't depend on OPEC anymore. I mean, that's the rallying cry - that we don't need them. All this talk about American energy independence and - you know, we produce so much oil. We don't need OPEC. It's not true. And I think the past weekend really showed that.
GOLDSTEIN: Rachel says the fracking industry in Texas is about to get just completely hammered by this OPEC-driven fall in oil prices, and there are a couple of reasons for this. I mean, one is just the obvious reason. If you sell something and the price of that thing goes down, that is really bad for business.
CHILDS: But there is this other thing that's going to make things much, much worse for the frackers.
ADAMS-HEARD: The shale boom is funded by massive amounts of debt, and the most exposed companies are in a very precarious position right now.
CHILDS: And we kind of had a preview of this when oil prices fell a few years ago. Lots of small, heavily indebted oil companies went bankrupt. Rachel says that's about to happen again.
ADAMS-HEARD: Those are the companies - the smaller ones with a ton of debt - that we'll probably see go under because of this massive shock to the system. And with that, there's going to be massive layoffs.
GOLDSTEIN: So, OK, that's the oil reporter in Texas view of what's happening right now. As it happens, we also - we kind of got an oil guy at PLANET MONEY. You might remember this. A few years ago, we actually bought 100 barrels of oil as part of this reporting project. We bought that oil from a guy named Jason Bruns. He's not a fracker. He's not in Texas. He lives in Kansas, and he has this just small family oil business.
JASON BRUNS: We're just a mom and pop operation. You know, me and my wife, we do the books. And my son helps us a little bit on that. So we don't have engineers, you know? It's just us.
CHILDS: So when there's all this massive geopolitical stuff going on with oil, we wanted to check in with Jason and hear how this was affecting him.
GOLDSTEIN: So it's amazing to me that, like, you know, the oil ministers of Saudi Arabia and Russia getting into some fight where we don't even know what happened - they're having this effect on you, right? This is happening to you at least in part because of that. Do you think about that? Is it strange to you?
BRUNS: Yeah, it is, but it's the oil business. It's a roller coaster.
BRUNS: I mean, my grandpa used to say, you'll go out in the morning and buy a Cadillac, and by evening time, you'll be ready to apply for food stamps. I mean, that's the business we're in. And - but I am concerned. I'm very concerned. I'm very concerned for the economy. I don't think people realize the amount of jobs and things - I've already had a friend of mine lost his job and a couple more on their way out because of this scare. So, you know, you can pray.
GOLDSTEIN: Your friends who lost their jobs - they were - it was because of the fall in the price of oil.
BRUNS: Yeah. They've already - they came to work Monday morning, and they said, hey; we're not going to need you. So, you know, they're going to look for another job.
GOLDSTEIN: Just yesterday. This happened just yesterday.
BRUNS: Yeah, yeah.
GOLDSTEIN: Oh, wow.
CHILDS: Jason says he and his wife borrowed money to get into the oil business. They own about 40 wells, each one producing about 100 barrels of oil a month. And at the new, lower prices, about a quarter of those will be losing money.
BRUNS: There's an average operating cost. You have the pumper that checks it every day, which is a contractor.
BRUNS: You have the electricity. You have certain chemicals for corrosion.
GOLDSTEIN: And it ends up being - whatever - a hundred and - a hundred or so barrels of oil per month times the price...
GOLDSTEIN: ...Of oil minus the cost. Is it greater than zero - yes or no?
BRUNS: You got it.
BRUNS: You should be in the oil business.
GOLDSTEIN: I'm in. Sign me up. I'm buying low.
BRUNS: Yeah (laughter). That's right. I did get a phone call. It was interesting. The guy is - you know, he called me yesterday and said, hey; if you know anybody that's wanting to sell, we're interested. They say - I said, man, I think it's a little bit quick, but I'm - I love the attitude.
GOLDSTEIN: So you got a call from somebody yesterday looking to buy. You didn't want to sell.
BRUNS: No, no. I'm not ready. We've built this up too long. My wife wouldn't let me. We've put much work into it now.
GOLDSTEIN: So just yesterday, you had a couple of people you know get laid off. You got a call...
GOLDSTEIN: ...From somebody offering to buy oil wells from you. Anything else happen? This is a big day for you.
BRUNS: Oh, yeah. Well, no. I mean, that was all on my birthday yesterday.
BRUNS: That's a big day, but it was...
CHILDS: Happy birthday.
GOLDSTEIN: Happy birthday.
BRUNS: Yeah. So I got my dinner bought, so that was big. But I don't know. I'm - I don't think I want any more big news.
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GOLDSTEIN: Is there a massive change in the price of some essential global commodity? Let us know - firstname.lastname@example.org. We're @PlanetMoney on your various social media platforms.
CHILDS: Today's show was produced by Alexi Horowitz-Ghazi, Nick Fountain and Liza Yeager with help from James Sneed. Bryant Urstadt is our editor. Our senior producer is Alex Goldmark. If you want to sign up for the newsletter, it's once a week, and it's wonderful - npr.org/planetmoneynewsletter. I'm Mary Childs.
GOLDSTEIN: I'm Jacob Goldstein. This is NPR. Thanks for listening.
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