Jackie Hendry: The recent drop in oil prices could soon affect jobs here in South Dakota, assuming it hasn't already. The drop certainly has a major impact on Bakken oil extraction. Dan Soeder is the director of the energy resources initiative at the South Dakota School of Mines & Technology and he joins us today to discuss how the pandemic might impact the fossil fuel industry. Dan, welcome back to In The Moment. Thanks for joining us today.
Dan Soeder: Thank you for having me, Jackie. It's a pleasure to be back.
Jackie Hendry: Great, so this is a topic that I have not followed closely. I remember seeing kind of the headlines of oil prices in the tank, seeing some things about barrel selling for $0 if you can call it selling by that point. Tell us a little bit about what led to this collapse and just how bad is it?
Dan Soeder: Well, it's actually pretty bad. It's unprecedented and since oil has been produced that it's actually gone, the prices have actually gone negative. So this has been coming on for a while. There's been a surplus of oil in the world globally for probably the last six to nine months. Part of this has been an issue with oversupply and a number of countries over producing oil, primarily Russia and Saudi Arabia.
Saudi Arabia has been trying to get OPEC to cut back on their oil surplus so that the prices could come back. I mean it's totally a supply and demand thing. So when you have a lot of supply, you have little demand or dropping demand, prices go down. Russia didn't really want to cooperate on this and there's been a lot of negotiation going on back and forth between Saudi Arabia and Russia to try to come up with some ideas for some quotas on oil production so that they could maintain prices.
So this was already in place at the beginning of the year and then the coronavirus hit and people stopped driving, people stopped flying, people stopped using oil and gas. A lot of industries are shut down, and so this already existing surplus all of a sudden just was made really, really a lot worse, and so oil prices collapsed down, as I said, down to $0 and it looks like it's going to stay that way for a while.
Jackie Hendry: How does this impact the folks working in oil and gas industries and in particular South Dakota? Our neighbor has the Bakken oil fields. What does this look like locally?
Dan Soeder: Yeah, well it's been pretty devastating. There's not a lot of oil and gas production within South Dakota itself, except up in the Northwest corner of the state in Harding County, there's some production but a lot of people who live in South Dakota work in the Bakken and work over in the Powder River Basin and work down in the Denver Basin on some of the active production. The way things work in the oil business, the production businesses, is you go out on a rig and you actually live there for a couple of weeks at a time.
So people work 12 hours on, 12 hours off. They stay at the rig so you could live almost anywhere because you only have to do the commute when your beginning of your tour of duty starts up and then they stay there. So I've always been surprised when I go up to North Dakota and I visit the Bakken wells, there's a whole bunch of people up there that live in Rapid City that commute up for their work.
So there are a lot of people that are affected and it's not hitting us quite as bad as places that are really oil dependent, like midland Texas or places like that. But there's still an impact, and the other issue here is that in the past when there have been oil price collapses or oil job losses, people could usually go somewhere else. I mean, if you can operate heavy equipment, you can operate heavy equipment anywhere so people could choose to go somewhere else to find another job. But that's kind of not possible right now because everything is shut down.
Jackie Hendry: Wow. Do you know if any of the national congressional relief packages have considered this particular industry? Do you know what that is doing for folks who aren't able to go back to work necessarily right now?
Dan Soeder: Yeah, there has been some of the relief package that was directed to supporting oil and gas workers who aren't employed for unemployment benefits. So people have been complaining about that because the oil and gas industry has all this money. But really they don't, I mean a lot of their money, their capital is tied up in drill rigs and wells and production facilities and it's hard to turn that stuff into cash. So they tend to be, I mean they're a wealthy industry but they tend to be a little bit cash poor because most of their wealth is tied up in tangible assets, and it's pretty hard to pay somebody in drill rigs.
So there has been some support for employment and people right now are just kind of hanging on. The oil and gas business is cyclical and everybody who works in it knows that and they're all kind of aware of it, that it has its ups and downs and so you just kind of get through the lean times and you hang on until you get back to the good times. But right now it's not clear when that's going happen.
Jackie Hendry: That was leading into my next question, how long might these lean times go? Do we have any kind of hint of how this might play out?
Dan Soeder: Well, I think it's going to be down for at least six months. But as we see things start to reopen and businesses start to come back online, and especially as people start to travel again and flights resume and things like that, we'll start to see things come back. But the problem right now is that the supply of oil and gas is so much higher than the demand that it's going to take months and months for this excess supply to work its way out of the system before they need to get back into full blown production.
Jackie Hendry: So even when things kind of start to go back to "normal", whatever that looks like after this eases up, there's still so much surplus that these prices will remain low even after we're traveling more. Is that right?
Dan Soeder: Yeah. I'm afraid it's going to take a while for all that surplus to work its way out of the system. I mean, one of the reasons that the prices collapsed down to zero, a couple of weeks ago was because they're just totally out of storage capacity, they don't have anywhere to put it. They don't have anywhere to ... the refineries are full and everything is full and they don't have anywhere, their tankers are full, they can't unload. So everything is just kind of stopped up, and so they basically quit buying crude oil.
Jackie Hendry: So, where is that surplus going? Who's buying that for zero bucks a barrel? Where does that go?
Dan Soeder: Well, some of it is going into the strategic petroleum reserve. The US set up a strategic petroleum reserve after the oil embargo in the 1970s and they're basically refilling some old oil fields in places like Louisiana and Texas. So some of the cheap oil is going there, but a lot of the producing wells are just shut in. They've just decided to leave the oil in the ground, not pump it, because if you're going to pump it, lose money, you might as well leave it in the ground and not lose money, and they'll turn the pumps back on when the price has come back up.
Jackie Hendry: All right. Of course, it's no secret that long before this, there have been critics of the oil industry, folks with concerns about our reliance on oil in general. What does this situation tell us about our reliance on oil in general?
Dan Soeder: Well, it tells us that it's still pretty bad. There was a push in the ... after the OPEC embargo in the 1970s, there was a push for diversification in US energy, and the idea was, they called it all the above energy strategy. The idea was that you spread out your risk and you get energy from as many different sources as possible, and that could be oil and gas, it could be biofuels, it could be geothermal, it could be solar, it could be wind, but the more spread out you are, the less at risk you are of having a problem if one of these sources goes down. So we've been working on that strategy, but obviously there's still a huge amount of dependence on fossil fuels and I think we need to diversify even more away from that and use some of these other types of energy to basically spread the risk, minimize the risk of any one particular source being a problem.
Jackie Hendry: How does ... and this might be an apples and oranges kind of question, but how does this relate to like ethanol and biofuel industries? I know we hear a lot about that here in South Dakota too. Is this a trickle down thing? How was this oil industry thing impacting those other industries?
Dan Soeder: Well I think it's going to depend on what the oil industry looks like after this virus. Everybody's talking about how different things are going to be. In fact, your previous guest was talking about this with the physician, how different things are going to be afterwards, and I think we're going to see energy different afterwards. I think there's going to be a change in maybe some energy policies on how we're dealing with things like domestic resources.
The issue with oil is it's a global resource, so people put it on tankers and ship it all over the world and the gasoline that goes into your tank can be from Saudi Arabia, it could be from Venezuela, it could be from all sorts of different places, and the problem with that is that we don't have any control over world events.
So if there's a disruption or there's a war or there's whatever. For example, last year there was an attack on a refinery in Saudi Arabia, a missile attack that shut down and that caused a big supply bump because it was a major refinery and it was shut down for several months while they did repairs and that shouldn't affect the US but it did. So maybe we need some energy policies where we focus more on domestic resources and we have a little more control in biofuel, it's much more of a domestic resource, it's grown and produced right here.
Jackie Hendry: Tell us a little bit more about some of those possible policy reactions to this when the pandemic is over, maybe we're starting to work through that surplus again. Do you suppose the industry's memory will be long enough by that point to look at how do we prevent this seemingly once in a lifetime situation?
Dan Soeder: Yeah, I think the country has never really had a good solid energy policy. There's been a couple of attempts, but I think that ... and it'll probably have to wait till after the election because people aren't thinking about it right now. But I think we need to sit down and really think about energy policy in the United States and how we do energy security here in energy sustainability, so that we don't have these things slamming us every few years where we don't have any control, and hopefully that will get developed and things will change. But for now, what's going to happen is we'll just end up going back to where we were if the oil and gas industry is left sort of to their own devices because they'll do what they know.
And like I said, the business is cyclical and people think when they get into good times, people think the gravy train is going to last forever and then it collapses, and everybody's surprised until it happens the next time. So, I don't know. But I would like to see some actual rational policy developed for energy in this country. We've never really done that, it's all been kind of haphazard, stuff has sort of grown organically and there needs to be a plan.
Jackie Hendry: Who do you see leading that charge most effectively? Because this is an industry ... so like you mentioned these ideas about big oil kind of holding all the cards, maybe that's not always the case in situations like this. Is it the oil industry itself bringing these things forward or what do you see that looking like potentially?
Dan Soeder: Well I think the lead I think has to come from the federal government, and I'm a retired federal employee, so that's kind of why I say that because I think the federal government is in the position to kind of make these decisions. But I also think they need to bring all the stakeholders in. So this would be the oil and gas people, the coal people, the biomass people, the wind people, the solar people, everybody, all the different energy groups, and really have kind of a coalition of everybody to sort of hammer out some of these new energy policies.
Jackie Hendry: Interesting. My guest has been at Dan Soeder, director of the energy resources initiative at the South Dakota School of Mines & Technology, talking to us about oil prices and how the pandemic is impacting the oil industry. Dan, really informative. Thanks for taking the time to be with us again today.
Dan Soeder: You are welcome.