economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...

, negative pricing can occur when

demand In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item ...

for a product drops or

supply Supply may refer to: *The amount of a resource that is available **Supply (economics), the amount of a product which is available to customers **Materiel, the goods and equipment for a military unit to fulfill its mission *Supply, as in confidenc ...

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 Waste (or wastes) are unwanted or unusable materials. Waste is any substance discarded after primary use, or is worthless, defective and of no use. A by-product, by contrast is a joint product of relatively minor economic value. A waste prod ...

such as garbage and

nuclear waste Radioactive waste is a type of hazardous waste that contains radioactive material. Radioactive waste is a result of many activities, including nuclear medicine, nuclear research, nuclear power generation, rare-earth mining, and nuclear weapons r ...

. For example, a nuclear power plant may "sell"

radioactive waste Radioactive waste is a type of hazardous waste that contains radioactive material. Radioactive waste is a result of many activities, including nuclear medicine, nuclear research, nuclear power generation, rare-earth mining, and nuclear weapons r ...

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 Electricity pricing (also referred to as electricity tariffs or the price of electricity) can vary widely by country or by locality within a country. Electricity prices are dependent on many factors, such as the price of power generation, gover ...

natural gas prices Natural gas prices, as with other commodity prices, are mainly driven by supply and demand fundamentals. However, natural gas prices may also be linked to the price of crude oil and petroleum products, especially in continental Europe. ...

, and oil prices.

Examples

Natural gas in West Texas

Natural gas prices Natural gas prices, as with other commodity prices, are mainly driven by supply and demand fundamentals. However, natural gas prices may also be linked to the price of crude oil and petroleum products, especially in continental Europe. ...

in the Permian Basin,

West Texas West Texas is a loosely defined region in the U.S. state of Texas, generally encompassing the arid and semiarid lands west of a line drawn between the cities of Wichita Falls, Abilene, and Del Rio. No consensus exists on the boundary betwee ...

, went below zero more than once in 2019. Natural gas is produced there as a byproduct of

oil An oil is any nonpolar chemical substance that is composed primarily of hydrocarbons and is hydrophobic (does not mix with water) & lipophilic (mixes with other oils). Oils are usually flammable and surface active. Most oils are unsaturated ...

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

Selected North American crude oil prices March 1 through May 13, 2020 (49941454556)

In March and April 2020,

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 During the COVID-19 pandemic, many countries and regions imposed quarantines, entry bans, or other travel restrictions for citizens of or recent travelers to the most affected areas. Some countries and regions imposed global restrictions th ...

. 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 West Texas Intermediate (WTI) is a grade or mix of crude oil; the term is also used to refer to the spot price, the futures price, or assessed price for that oil. In colloquial usage, WTI usually refers to the WTI Crude Oil futures contract tr ...

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 In the stock market, a short squeeze is a rapid increase in the price of a stock owing primarily to an excess of short selling of a stock rather than underlying fundamentals. A short squeeze occurs when there is a lack of supply and an excess of ...

, 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 Long may refer to: Measurement * Long, characteristic of something of great duration * Long, characteristic of something of great length * Longitude (abbreviation: long.), a geographic coordinate * Longa (music), note value in early music mens ...

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 Coronavirus disease 2019 (COVID-19) is a contagious disease caused by a virus, the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The first known case was COVID-19 pandemic in Hubei, identified in Wuhan, China, in December ...

levels, and the glut of oil is gone.

Electricity

When demand for

electricity Electricity is the set of physical phenomena associated with the presence and motion of matter that has a property of electric charge. Electricity is related to magnetism, both being part of the phenomenon of electromagnetism, as described ...

is low but production is high,

electricity price Electricity pricing (also referred to as electricity tariffs or the price of electricity) can vary widely by country or by locality within a country. Electricity prices are dependent on many factors, such as the price of power generation, gover ...

s 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 Ontario ( ; ) is one of the thirteen provinces and territories of Canada.Ontario is located in the geographic eastern half of Canada, but it has historically and politically been considered to be part of Central Canada. Located in Central Ca ...

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 Coal is a combustible black or brownish-black sedimentary rock, formed as rock strata called coal seams. Coal is mostly carbon with variable amounts of other elements, chiefly hydrogen, sulfur, oxygen, and nitrogen. Coal is formed when dea ...

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 Energy subsidies are measures that keep prices for customers below market levels, or for suppliers above market levels, or reduce costs for customers and suppliers. Energy subsidies may be direct cash transfers to suppliers, customers, or rel ...

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) 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 Wholesaling or distributing is the sale of goods or merchandise to retailers; to industrial, commercial, institutional or other professional business users; or to other wholesalers (wholesale businesses) and related subordinated services. In ...

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 (PTC) program and through the trading of

renewable energy credit A Renewable energy credit (REC) is a certificate corresponding to the environmental attributes of energy produced from renewable sources such as wind or solar. RECs were created as a means to track progress towards and compliance with states' Rene ...

s (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 certificates (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 Texas (, ; Spanish language, Spanish: ''Texas'', ''Tejas'') is a state in the South Central United States, South Central region of the United States. At 268,596 square miles (695,662 km2), and with more than 29.1 million residents in 2 ...

, a large buildout of wind energy has driven negative pricing in

ERCOT The Electric Reliability Council of Texas, Inc. (ERCOT) is an American organization that operates Texas's electrical grid, the Texas Interconnection, which supplies power to more than 25 million Texas customers and represents 90 percent of the st ...

, 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 trader A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing ...

s Sam Siegel and Vincent Kosuga bought up large quantities of

onion An onion (''Allium cepa'' L., from Latin ''cepa'' meaning "onion"), also known as the bulb onion or common onion, is a vegetable that is the most widely cultivated species of the genus ''Allium''. The shallot is a botanical variety of the onion ...

s and then flooded the market as part of a scheme to make money on a

short position In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. This is the opposite of a more conventional "long" position, where the investor will profit if the value of the ...

in onion

. 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 receipts 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 financial markets, a share is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of an ...

. In 1998, investors in Canada bought installment receipts for shares of Boliden Ltd. Investors made an initial payment of

CA$ The Canadian dollar (symbol: $; code: CAD; french: dollar canadien) is the currency of Canada. It is abbreviated with the dollar sign $, there is no standard disambiguating form, but the abbreviation Can$ is often suggested by notable style g ...

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 The Toronto Stock Exchange (TSX; french: Bourse de Toronto) is a stock exchange located in Toronto, Ontario, Canada. It is the 10th largest exchange in the world and the third largest in North America based on market capitalization. Based in t ...

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 models,

market data ''For market data as used in marketing, see marketing information system'' In finance, market data is price and other related data for a financial instrument reported by a trading venue such as a stock exchange. Market data allows traders an ...

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 The Black–Scholes or Black–Scholes–Merton model is a mathematical model for the dynamics of a financial market containing derivative investment instruments. From the parabolic partial differential equation in the model, known as the Blac ...

, 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 (as ...

for pricing options in order to account for negative futures prices.