science

Negative pricing

Negative pricing is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand Negative pricing rather than just read about it. In short: 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. This can happen because it costs money to transport, store, and dispose of a product even when there is little demand to buy it, or because halting production would be more expensive than selling a…

Key takeaways

Negative pricing belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Negative pricing to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Negative pricing from memory before moving on to harder problems.

Reference excerpt

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. This can happen because it costs money to transport, store, and dispose of a product even when there is little demand to buy it, or because halting production would be more expensive than selling at a negative price. Negative prices are usual for waste such as garbage 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.

Examples

Natural gas in West Texas Natural gas prices in the Permian Basin, West Texas, went below zero for the first time 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 several times per year; in effect, producers of natural gas pay others to take it away.

Oil in 2020

In March and April 2020, demand for crude oil dropped dramatically as a result of 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 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 (contracts for oil to be delivered at a future date). West Texas Intermediate (WTI) 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 described the situation as "the opposite of so-called short squeeze." In a short squeeze, investors who are short 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's 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 has disappeared. A trial for market manipulation is ongoing against Vega Capital London Ltd., a group of nine independent traders at Essex who bought oil futures with the expectation of profiting from a fall in the price of oil futures. The group is accused of coordinating their trading to artificially push down the price of oil futures. It is estimated that on 20 April they traded more contracts than BP, Glencore, and JPMorgan Chase at around 29.2% of the total volume in WTI crude oil futures with trade correlations between 96.2% and 99.7%. It is estimated that in total the traders made around $660 million in just a few hours. The trial is anticipated to last at least until 2025.

Electricity

… excerpt ends here. Continue reading the full article.

Illustrations

Worked examples

Example 1 — a first encounter with Negative pricing

Start with the simplest possible case. Write down what Negative pricing claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Negative pricing before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Negative pricing ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Negative pricing

In research: Negative pricing appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Negative pricing in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Negative pricing is common in secondary-school and first-year university syllabi. It links to neighbouring topics Electricity economics, Pricing, so understanding it makes those chapters shorter.
In everyday life: Look for Negative pricing outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

Affiliate

Preply — study more efficiently by working with a personal tutor. 50% off.

How to study Negative pricing in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Negative pricing means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Negative pricing out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Negative pricing in simple terms?

Why does Negative pricing matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Negative pricing?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Negative pricing.