Really despair at the media approach to the world currently, everything is shock and awe and it shows up how few of the journalists really understand much about anything.
Yesterday was the last day to complete on storage contracts for May in the USA. With a huge fall in demand, production is way ahead of needs. As you would expect the price of oil has been falling, but it has to go somewhere. One little understood aspect of oil production is that once a well is drilled you more or less have to keep it swtiched on - if you cap and stop the flow it might never work again - or only at huge cost to re-start. So you can throttle back production but the rule is don't stop the flow completely. Over-supply is hard to contain.
Also, as a business generally you need cashflow, in Oil and Gas the expensive bit is the exploration and production set-up. Literally a sunk cost. So, to pay your loans back you produce - the price don't matter so much. All the calculations of around cost of production are of course a projection across the lifetime of the project - there is little real-time cost. The daily production cost is very small, it is the financing and set-up that swallowed the investment.
Anyway, in the US some less than smart people decided that going long physical oil whilst the price was low would be a smart thing to do. Those who trade a lot, just laughed; they bought the storage contracts as they felt the physical price was being held up given the demand shock. Try taking physical delivery with no storage. This is what happened yesterday, dumb money getting eaten by smart money to buy storage and get rid of the oil. A good lesson in not to interfer in things you don't understand.
Addtionally, whilst we are on oil prices, China bought a year's worth of physical supply from the US last week at $7 per barrel. Saudi was trying with Russia to sell at $10 to kill the US Shale producers. Now who is laughing. The shale producers may not make it, but neither will the Saudi or Russian budgets.
Plus of course, this demand shock is very deep. Anyone fancy a long-haul holiday this year? Thought not. How about a cruise? Drive to Milan? The only thing even close to this was the 1974 oil shock which was a Government led demand reduction. The idea, also floated today in the media, that there will be some big re-bound to $80 in a year is hilarious. The world is literally full of ships with unused crude - it has been around for hundreds of millions of years, it is not a perishable good. Months of normality to burn off this surplus and as I just said, normailty is for 2021 people. Yes, no new exploration will be done, but with such massive over-capacity in USA, Russia and Saudi we are looking at a few years of low prices, not a few months.
So, no the real price of oil is not zero but may get close, but it won't get there for us petrol-station using people (tax will end up as near 90% of the price we pay!). Nor there will not be some easy spring back and yes Oil dependent nations will feel a fiscal shock - but who isn't today? Not the big deal many may think it when put into the context of the global recession facing us all.