Negative oil prices are not a new phenomenon

NEGATIVE prices for oil have caused a sensation in the last few days. The price of a barrel of West Texas Intermediate (WTI) fell to minus-US$40. But the phenomenon of negative prices is by no means new.

In several sectors of the economy, negative prices have existed for years, meaning that it is not the seller but the buyer of a product who is paid. Examples can be found in power generation and banking. Triggers are imbalances between supply and demand, and marginal costs (the costs of producing one additional unit of a good) of zero. Both new production conditions and the Internet are the drivers behind these triggers. In addition, cross-period and cross-product effects can induce the optimality of negative prices.

In normal transactions, the customer pays the seller a positive price and receives the product or service in return. The customer is willing to pay the positive price if the good purchased is of benefit to him. From the seller's point of view, the short-term lower price limit is the marginal cost, which means that he or she only sells a product at a positive contribution margin. In the traditional world, marginal costs have generally been greater than zero, so that prices of zero were rare and those below zero practically never occurred. In the case of oil, this has now happened for the first time.