Covering COVID-19 is a daily Poynter briefing about journalism and coronavirus, written by senior faculty Al Tompkins. Sign up here to have it delivered to your inbox every weekday morning.
You may have seen some version of an alert that read like this from CNN Business: “US oil prices plunged, falling below $0 Monday to $-37.63 a barrel. That’s the lowest level since NYMEX opened oil futures trading in 1983.”
What happened Monday is historic. Contracts for U.S. oil to be delivered in May dropped more than 100% and turned negative for the first time in history. But how can oil fall below zero? Why did this happen?
For starters, notice that the contracts that are involved are for May delivery. Imagine you have a warehouse full of stuff you should be shipping out, but nobody wants what you have to sell. And imagine you already have a contract for more stuff to be delivered in a few weeks, but you have no place to store that additional stuff. That is what is happening in the oil business.
May deliveries “expire” today. When oil contracts expire, buyers do one of two things: Either take the oil delivery or sell the contract to somebody who can take it. If nobody wants it, sellers are in a pickle because they have to get somebody to take it. Typically, those who take oil are airlines, refineries and so on. But they don’t need oil right now, so whoever is holding the contract has to get rid of it, even if they have to pay somebody to take it.
There was even conversation on the business channels Monday that some contract holders will try to park oil on big freighters out in the ocean at megabucks per day until there is someplace to put it.
The oil storage facilities are nearly full partly because the world is using so much less oil while we stay home. Saudi Arabia, Russia and others cut production, but even that won’t free up enough space.
So, with so little storage space left, oil producers find themselves today in the incredible position of having to pay customers to take their oil.
Why does this matter?
When oil prices drop below profitability, there is a real chance that some oil production will shut down. In that case, it is not just the people working in the field who are affected. The ripple effect runs across the railroad industry, trucking, shipping and companies that make pipe. Even small businesses like restaurants feel the effects.
Politico reported that the Trump administration is even considering paying some producers not to pump oil, but to consider what is left in the ground part of the government’s strategic reserves.
Reports that the Trump administration was considering paying oil companies not to pump oil under a plan that would reclassify those supplies still in the ground as part of the nation’s strategic reserves have not comforted oil executives.
Dan Eberhart, chief executive of oil services company Canary LLC, dismissed the talk of paying drilling companies to keep the oil in the ground as mostly “headfakes.”
“A tidal wave of bankruptcies is about to hit the sector,” Eberhart said.
Why is Cushing, Oklahoma, so important today?
What happened in the U.S. oil market has a link to a tiny town in rural Oklahoma.
The oil that is most affected is a type of oil called West Texas Intermediate, or Texas light sweet crude oil. (It is called “light” because it is not as dense as some other oil in the world, and “sweet” because it is lower in sulfur than other oil.) The other type of oil you commonly hear about is Brent crude, which is produced in the North Atlantic and is easier to move around the world by ship.
West Texas Intermediate crude typically moves to a place you probably never heard of: Cushing, Oklahoma. That is the main storage hub for oil in the United States. They can store 90 million barrels of oil there, almost 13% of all oil storage in the country. Cushing itself has a population of about 8,000 people but the facilities there can take in and push out more than 6 million barrels of crude a day through two dozen pipelines. (Watch this video to learn more about the importance of Cushing, Oklahoma, and why it is called the pipeline crossroads of the world.)
It might surprise you that 34 states produce some oil. That industry doesn’t just translate to jobs. States impose something called “severance taxes,” which is a tax on the oil that comes out of the ground. Some of those taxes are imposed based on the value of the oil and some on how much oil is extracted. Some combine both value and the amount pumped.
Of course, the biggest players are Texas, North Dakota, New Mexico, Oklahoma, Colorado and Alaska (in that order).
Barrels of oil produced per day (Courtesy: World Population Review)
Let’s don’t forget how big the U.S. oil business has become. Once dependent on foreign producers, the U.S. is now is the world’s largest crude oil producer. The U.S. currently produces approximately 12,108,000 barrels per day.
Texas is the largest producer of crude oil in the United States. In 2018, Texas alone produced more oil than the other top nine oil-producing states combined. Texas, by itself, is close to being the third-largest producer of oil in the world, rivaling Iran and Iraq.
Is there any good news here?
Sure, gasoline prices and heating oil prices will all be lower because of supply and demand. But remember that gasoline prices have many ingredients, including taxes, retail and delivery costs. About 51% of the cost of gasoline is the price of crude.
But these are not normal times, when consumers might take the money they save on gasoline and spend it on something else.
And once businesses come back online, once we start driving again, we will draw down our reserves. If oilfields shut down because drillers can’t afford to run them and have no place to put the oil, then there would naturally be a lag and a price spike for the oil we need.
Mostly, what is happening with a big glut in oil is not good news. Not at all.
Will cable companies issue rebates for sports channels?
So you bought the sports channel tier and there are no live sports to speak of. And, even if you didn’t buy a sports tier, you are already paying for sports channels on basic cable. So will you get some of your money back if there is no live sports coverage? The answer, “maybe, could be, we will see.”
Let’s take a look first at how much money we are talking about. CNBC reported:
A successful campaign to demand partial refunds for sports networks could cost media companies hundreds of millions of dollars, given there are more than 80 million U.S. households and all-sports networks easily make up more than $20 per month of a standard cable bill and closer to $30 for major cities like New York. Add in the diversified broadcast networks and cable networks such as TNT and TBS that also carry sports, and those numbers jump another $10 or $12 per month, said Rich Greenfield, an analyst at LightShed Partners.
Ars Technica polled some of the biggest cable providers. Comcast said, “any rebates will be determined once the NBA, NHL and MLB announce their course of actions for their seasons, including the number of games played, and of course we will pass those rebates on or other adjustments to our customers.” In short, Comcast said if the leagues play all or most of their seasons, don’t look for a rebate.
Verizon said it is “looking at options” if it cannot provide the services people are paying for, like live sports programs.
Charter Communications said “it will take months to sort out” what it will do because the contracts with so many parties — from individual teams to leagues to, well, lots of people — are complicated to unravel.
AT&T told Ars Technica that if it gets a rebate from leagues or programmers it will pass them along to subscribers.
In Europe, Ars Technica said, cable companies are allowing subscribers to “pause” their accounts until live games return.
CNBC explained why cable companies might not be pressing hard for rebates from the leagues just yet:
Most contracts signed with the National Basketball Association and Major League Baseball don’t have clear provisions for media networks to demand refunds on already paid broadcast rights fees, according to familiar with the language of the contracts. While deals do have so-called “force majeure” provisions, or “act of God” clauses that allow for refunds in some cases, pandemics may not be specifically covered.
Even if they are, networks might not enforce them given the longterm importance of their relationships with sports leagues. In the past, when strikes have shortened seasons, media payments for broadcast rights haven’t been refunded. Networks can’t afford to be too aggressive with the NFL and MLB, who can make or break media companies by divvying out their rights to competitors.
On top of that, CNBC explained, the NFL, NBA and MLB all have contract renewals coming up in the next 24 months and nobody wants to irritate their partners.
When we drive less, local government incomes from speeding fines drop, too
Police said that even while there are fewer cars on the road, they’ve noticed that the drivers who are out there are driving faster. It makes sense: Less traffic leads to faster speeds.
Make no mistake about it, traffic fines are an important source of income for local communities, especially smaller towns. And traffic fines fund important government functions. For example, Louisiana public defenders are funded largely by income from traffic tickets.
The Manhattan Institute for Policy Research used the phrase “taxation by citation” to describe local governments’ increasing dependence on traffic fines as a revenue source:
Examples abound of communities generating immense revenues from tickets and other fines. In Colorado, numerous towns generate anywhere from 30% to 90% of their yearly revenue from tickets and court fees. Similarly, multiple towns in South Carolina rely on traffic fines for more than 60% of their annual budget. Washington, D.C. collects more than $200 per-capita in annual law-enforcement-related fees and has floated proposals to increase certain traffic penalties to $1,000.
According to surveys, 90% of U.S. mayors are seeking new revenue from sources other than traditional taxes, and 65% are looking to increase municipal fees for services. The attractiveness of tickets and fines as revenue generators is underscored by the fact that most people who receive tickets simply pay the fine and move on. Few are motivated enough — or possess the requisite time, patience, and resources — to challenge tickets in court. For those who do, the process in many local jurisdictions can be so time-consuming and convoluted that they simply give up and pay the fine even if they feel they did nothing wrong.
Governing.com keeps a chart of how much fines mean to local governments state by state. Governing said, “North Carolina mandates its cities’ fine and forfeiture revenues be appropriated to public schools. Georgia, Maryland, Missouri and Texas similarly maintain caps restricting amounts of fine revenues that their localities retain.
Esurance, the online auto insurance company, listed the states that issue the most traffic tickets. Look to them to find the states that will be hurt most by people driving less:
- Ohio
- Pennsylvania
- New York
- California
- Texas
- Georgia
- Virginia
- North Carolina
- Massachusetts
- Connecticut
In some states, nearly a fourth of the population has a speeding ticket on their record.
And, if history is a teacher, when local governments are pinched for money, like they are right now, one of the most popular ways to prop up budgets is to hike fines.
Economists Thomas Garrett and Gary Wagner looked at North Carolina counties for more than a decade and a half and found that in the year after economic declines, traffic tickets went up. They found that when traditional local government incomes drop, they lean on traffic fines more. They found that local governments offset a 10% drop in tax revenues with a more than 6% hike in fines. They wrote, “Our results suggest that tickets are used as a revenue-generation tool rather than solely a means to increase public safety.”
All those tickets add up. The National Motorists Association estimated the cost: “Not including parking tickets, we can estimate that somewhere between 25 and 50 million traffic tickets are issued each year. Assuming an average ticket cost of $150.00, the total up-front profit from tickets ranges from $3.75 billion to $7.5 billion.”
We may find that local governments will learn an important lesson from losing a ton of money from traffic fines this year. Fines increase and decrease from year to year as people drive more when fuel prices are low and less when prices are up. But property taxes are a fairly stable, if unpopular way to pay for government services.
Courts are still collecting fines and fees
Various levels of government have urged or demanded that landlords and lenders give debtors a break during the COVID-19 economic breakdown. But courts around the country are still pressing people for fines and fees that may have accumulated over the years. The Marshall Project reported that at a time when local governments are hurting for income, they are scouring records for unpaid fines that might bring in some dough.
The Marshall Project said not all governments are pressing for fine collections. Maine, for example, walked away from 12,000 warrants, mostly for unpaid court fines. California stopped garnishing people’s wages for unpaid fines. Florida left the decisions up to counties and judicial districts. Kentucky stopped arresting people for unpaid court fines.
Here is a running list of how local governments around America are handling fine and fee collections.
The way we work now
We’ll be back tomorrow with a new edition of Covering COVID-19. Sign up here to get it delivered right to your inbox.
Al Tompkins is senior faculty at Poynter. He can be reached at atompkins@poynter.org or on Twitter, @atompkins.
