
In
economics, negative pricing can occur when
demand for a product drops or
supply increases to an extent that owners or suppliers are prepared to pay others to accept it, in effect setting the price to a
negative number
In mathematics, a negative number represents an opposite. In the real number system, a negative number is a number that is less than zero. Negative numbers are often used to represent the magnitude of a loss or deficiency. A debt that is owed m ...
. This can happen because it costs money to transport, store, and dispose of a product even when there is little demand to buy it.
Negative prices are usual for
waste such as
garbage
Garbage, trash, rubbish, or refuse is waste material that is discarded by humans, usually due to a perceived lack of utility. The term generally does not encompass bodily waste products, purely liquid or gaseous wastes, or toxic waste produc ...
and
nuclear waste. For example, a nuclear power plant may "sell"
radioactive waste to a processing facility for a negative price; in other words, the power plant is paying the processing facility to take the unwanted radioactive waste.
The phenomenon can also occur in energy prices, including
electricity prices,
natural gas prices,
[
] and
oil prices
The price of oil, or the oil price, generally refers to the spot price of a barrel () of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC Refe ...
.
Examples
Natural gas in West Texas
Natural gas prices in the
Permian Basin
The Permian ( ) is a geologic period and stratigraphic system which spans 47 million years from the end of the Carboniferous Period million years ago (Mya), to the beginning of the Triassic Period 251.9 Mya. It is the last period of the Paleoz ...
,
West Texas, went below zero more than once in 2019. Natural gas is produced there as a byproduct of
oil production, but production has increased faster than the construction of pipelines to transport natural gas. Oil production in the Permian Basin is profitable, so the natural gas continues to be produced, but disposing of it is costly: producers must burn the gas (which is subject to regulations) or pay for space on existing pipelines. As a result the price of natural gas becomes negative; in effect, producers of natural gas pay others to take it away.
Oil in 2020

In March and April 2020,
demand for
crude oil
Petroleum, also known as crude oil, or simply oil, is a naturally occurring yellowish-black liquid mixture of mainly hydrocarbons, and is found in geological formations. The name ''petroleum'' covers both naturally occurring unprocessed crude ...
dropped dramatically due to
travel restrictions related to the COVID-19 pandemic.
Meanwhile, an
oil price war developed between Russia and Saudi Arabia, and both countries increased production.
The exceptionally large gap between
supply and demand
In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...
for oil began to strain available oil storage capacity.
In some cases, oil storage and transportation costs became higher than the value of the oil, leading to negative oil prices in certain locations, and, on one day (20 April 2020), negative prices for oil
futures
Futures may mean:
Finance
*Futures contract, a tradable financial derivatives contract
*Futures exchange, a financial market where futures contracts are traded
* ''Futures'' (magazine), an American finance magazine
Music
* ''Futures'' (album), a ...
(contracts for oil to be delivered at a future date).
West Texas Intermediate futures went as low as -$37.63 per barrel
(though consumer prices did not go negative). In effect, with demand low and storage at a premium, oil producers were paying to get rid of their oil.
''
MarketWatch
MarketWatch is a website that provides financial information, business news, analysis, and stock market data. Along with ''The Wall Street Journal'' and ''Barron's'', it is a subsidiary of Dow Jones & Company, a property of News Corp.
Histor ...
'' described the situation as "the opposite of so-called short squeeze". In a
short squeeze, investors who are
short
Short may refer to:
Places
* Short (crater), a lunar impact crater on the near side of the Moon
* Short, Mississippi, an unincorporated community
* Short, Oklahoma, a census-designated place
People
* Short (surname)
* List of people known as ...
an asset must cover their positions as the price goes up, leading to a vicious cycle as prices continue to rise. With oil prices in 2020, traders with
long oil positions needed to cover their positions for fear of finding themselves with oil and nowhere to store it. According to ''MarketWatch'' analysis, the rapid drop in oil futures prices may have been an artifact of the structure of the futures market rather than an accurate reflection of the supply and demand for oil.
Negative oil prices "meant the discovery of a new market condition
.an ‘oil Everest, but in reverse’. Oil prices not only hit rock bottom, but they also broke the rock." However prices recovered to pre-
COVID-19 levels, and the glut of oil is gone.
Electricity
When demand for
electricity is low but production is high,
electricity prices can go negative. This can happen if demand is unexpectedly low, for instance due to warm weather, and if production is unexpectedly high, for instance due to unusually windy weather.
In 2009 alone, the Canadian province of
Ontario experienced 280 hours of negative electricity prices, and in 2017, German power prices went negative more than 100 times.
Negative electricity prices happen due to uneven and unpredictable patterns of supply and demand: demand is lower at certain times of day and on holidays and weekends, while wind and solar production are highly dependent on weather.
When excess supply causes electricity prices to fall, some producers, including wind and solar, may cut production. But for some
coal and
nuclear power plant
A nuclear power plant (NPP) is a thermal power station in which the heat source is a nuclear reactor. As is typical of thermal power stations, heat is used to generate steam that drives a steam turbine connected to a electric generator, generato ...
s, stopping and starting production is costly, (the
xenon pit
The iodine pit, also called the iodine hole or xenon pit, is a temporary disabling of a nuclear reactor due to buildup of short- lived nuclear poisons in the reactor core. The main isotope responsible is 135Xe, mainly produced by natural decay of ...
may also preclude quickly restarting a reactor after a certain period of shutdown) so they are more likely to continue production even if prices become negative and they must pay to offload the energy they are producing.
Moreover, for wind and solar,
renewable energy subsidies in some markets can more than offset the cost of selling power at negative prices, leading them to continue production even when the price drops below zero.
Possible solutions to this problem involve improving technology and expanding capacity to store excess power for later use, (e.g.
pumped hydro storage
Pumped-storage hydroelectricity (PSH), or pumped hydroelectric energy storage (PHES), is a type of hydroelectric energy storage used by electric power systems for load balancing. The method stores energy in the form of gravitational potential ...
) distributing electricity more widely along a
super grid,
demand response
Demand response is a change in the power consumption of an electric utility customer to better match the demand for power with the supply. Until the 21st century decrease in the cost of pumped storage and batteries electric energy could not be ...
and better predicting surges in supply.
This phenomenon occurs in
wholesale electricity prices,
and it is possible for businesses to earn money or receive credits for using electricity at times of negative pricing,
However, while residential electricity consumers may also save money on electricity when wholesale prices go negative, they generally do not experience negative prices, because their electricity bills also include various taxes and fees.
In certain markets, financial incentives for the production of renewable energy can more than offset the cost of selling power at a negative price.
In the United States, these incentives are found in the federal renewable electricity
production tax credit
A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit they have accrued from the total they owe the state. It may also be a credit granted in recognition of taxes already paid or a form of state "disc ...
(PTC) program and through the trading of
renewable energy credits (RECs). Eligible generators that opt into the PTC program receive a tax credit for each
kilowatt-hour (kWh) of electricity produced, over a period of 10 years for most types of generation. In 2020, this payment ranged from $0.013/kWh to $0.025/kWh, varying based on the type of generation.
The avoided tax from the receipt of a production tax credit can more than offset the cost of dispatching electricity at a negative price.
Separate from tax credits are RECs (in the United States) or
green certificate
A green certificate are a tradable commodity proving that certain electricity is generated using renewable energy sources. Typically one certificate represents the generation of one Megawatthour of electricity. What is defined as "renewable" varie ...
s (in Europe), tradeable instruments that represent the environmental benefits of renewable generation.
These instruments can be sold and traded, allowing generators to offset negative power prices.
In
Texas, a large buildout of wind energy has driven negative pricing in
ERCOT, Texas's electrical grid operator.
From January 2018 through early November 2020, pricing in ERCOT was negative in 19% of hours.
The high frequency of negative electricity pricing in Texas is driven by the high penetration of wind relative to other states – nearly three times that of the next state as of mid-2019
– and ERCOT's isolation as a separate transmission system with limited interconnection into other parts of the United States, limiting ERCOT's ability to transmit excess power to other parts of the country.
Onions in 1956
In the United States in 1956,
commodities traders Sam Siegel and
Vincent Kosuga
Vincent W. Kosuga (January 17, 1915 – January 19, 2001) was an American onion farmer and commodity trader best known for manipulating the onion futures market. Public outcry over his practices led to the passing of the Onion Futures Act, which ...
bought up large quantities of
onions and then
flooded the market
Flooding the market is an excess amount of inventory for sale causing an undesired drop in price for the product that can, in extreme cases, make the price go negative or make the products impossible to sell at any price.
Businesses take measure ...
as part of a scheme to make money on a
short position in onion
futures
Futures may mean:
Finance
*Futures contract, a tradable financial derivatives contract
*Futures exchange, a financial market where futures contracts are traded
* ''Futures'' (magazine), an American finance magazine
Music
* ''Futures'' (album), a ...
.
This sent the price of a 50-pound bag of onions down to only 10 cents, less than the value of the empty bag.
Effectively, the price of the onions was negative.
Installment receipts
It is possible for
installment receipt
An instalment (or installment in American English) usually refers to:
Economics and finance
* Equated monthly installment, a fixed payment amount made by a borrower to a lender at a specified date each calendar month
* Installment Agreement, an I ...
s to trade at negative prices. An installment receipt is a
financial instrument
Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form ...
for which the buyer makes an initial payment and is obligated to make a second payment later on, in exchange for ownership of a
share of stock.
In 1998, investors in Canada bought installment receipts for shares of
Boliden Ltd
Boliden AB is a Swedish multinational metals, mining, and smelting company headquartered in Stockholm. The company produces zinc, copper, lead, nickel, silver, and gold, with operations in Sweden, Finland, Norway, and Ireland.
Boliden is ...
. Investors made an initial payment of
CA$8 per share for the receipts, which obligated them to make a second $8 payment later on. But when the share price dropped to $7.80, the value of a receipt became negative: a receipt obligated its holder to make an $8 payment for a share worth less than $8. As a result, the receipts traded at negative values ranging from -$0.15 to -$0.40, and their trading was suspended on the
Toronto Stock Exchange.
Effects
Typically, negative prices are a signal that supply is too high relative to demand. They can lead suppliers to cut production, bringing supply more in line with demand.
Challenges
Electronic trading systems may not be set up to handle negative prices. If negative prices are a possibility, market participants must verify that their systems can process them correctly. This includes
pricing model
In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models.
There have been many models developed for different situations, but correspon ...
s,
market data feeds, risk management, monitoring for unauthorized trading, reporting, and accounting.
Derivatives
The derivative of a function is the rate of change of the function's output relative to its input value.
Derivative may also refer to:
In mathematics and economics
* Brzozowski derivative in the theory of formal languages
* Formal derivative, an ...
traders traditionally rely on models, like the
Black–Scholes model, that assume positive prices. In a situation where products have negative prices, these models can break down.
As a result, in April 2020 amid the collapse in oil prices, the
CME Group
CME Group Inc. (Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, The Commodity Exchange) is an American global markets company. It is the world's largest financial derivatives exchange, and trades in asset class ...
clearinghouse switched to the
Bachelier model The Bachelier model is a model of an asset price under brownian motion presented by Louis Bachelier on his PhD thesis ''The Theory of Speculation'' (''Théorie de la spéculation'', published 1900). It is also called "Normal Model" equivalently (a ...
for pricing
options
Option or Options may refer to:
Computing
*Option key, a key on Apple computer keyboards
*Option type, a polymorphic data type in programming languages
* Command-line option, an optional parameter to a command
*OPTIONS, an HTTP request method
...
in order to account for negative futures prices.
See also
*
Bad (economics)
An economic bad is the opposite of an economic good. A 'bad' is anything with a negative value to the consumer, or a negative price in the marketplace. Refuse is an example of a bad.
A bad is a physical object that lowers a consumer's level of ha ...
*
Negative interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
References
Further reading
* {{cite news , title=MCX negative oil futures pricing mess: Jury out on contract law , url=https://economictimes.indiatimes.com/markets/commodities/news/mcx-negative-oil-futures-pricing-mess-jury-out-on-contract-law/articleshow/75324865.cms , access-date=3 April 2021 , work=
The Economic Times
Electricity economics
Pricing