Currently, a can of soda is more expensive than around 150 liters of gas. Last Monday, US oil prices crashed to -$37. To put it in a few words- oversupply is the culprit. Traders are running out of storage capacity- on land and in the sea. Some of them had to literally pay to get the it off their hands.This turned the prices negative, sending ripples throughout the world. However, this really began when the demand decreased due to COVID-19 global lockdowns and the situation escalated when the Saudi-Russian price war began. Saudi Arabia refused to make production cuts, flooding the world with more oil than it needed. Now, the world is grappling with the effects of a virus and a spiraling economy.
What Just Happened?
The immediate effects are visible. From being the biggest oil producer in the world to being crippled by the devastating effects of a deadly virus, the USA is still better equipped than most to recover from this blow, as it has other sources of income. But why would low gas prices be such a bad thing? That’s because the oil industry is at the heart of other industries, with 10 million employees involved in the USA alone. Its manufacturers like steel companies or entities that lend it that are also at risk. As it is, unemployment funds are running out in the USA due to the Coronavirus pandemic. We’re not sure if the government could sustain the unemployment that could arise from stalling the oil industry. In Asian countries and developing nations, people don’t even have the luxury of unemployment benefits, and are waiting on impending doom.
Who Is Most Affected By the Oil Crash?
Whereas cheaper oil does mean cheaper transportation and manufacturing, there are countries that depend on oil exports. Nearly 90% of Iraq’s revenue comes from oil exports, and it’s a means for the payroll of 4 million workers, pension and fund for the poor as well. In Canada, the oil industry supports more than 800 thousand jobs, generating $14.1 billion in revenue. It’s even worse for African nations like Nigeria, whose revenue from oil is also around 90%. Nigeria has already applied for emergency funds worth $7 billion. What seems like a golden opportunity to many is an indicator for famine and poverty for others.
Surprisingly, since the prices crashed, people have been finding ways to buy the oil when it’s so cheap.
However, things aren’t that simple. Unsuspecting retail investors who had invested in oil futures contracts got a rude awakening when they realized that they would have to pay to get the it off their hands if they hadn’t rolled back their contracts before they expired. Clients of brokerage firms in India suffered losses in millions. They’re currently petitioning to Indian courts, challenging the unfair settlement of negative pricing. We can’t expect the world’s economy to function normally, when major players in the supply-demand chain are chained by debts and losses.
Is There A Bright Side To The Oil Crash?
Russia has sustained most of the damage, with the ruble having dropped only by 2% on Tuesday. Russia’s hard currency reserves and excellent financial management plans made it well prepared for this. Saudi Arabia can also sustain the damage. But what about developing countries?
High oil prices can drive job creation and investment, and lower prices hurt the unconventional oil activity. But, the lower prices also benefit the manufacturing, transportation and other sectors where fuel costs are a primary concern. Major oil-importing countries like India, Bangladesh, China, Pakistan and Germany that thrive on industrialism could save billions on their oil import bill. China has been stockpiling on oil, with its imports having increased by 5% this quarter, and their storage capacity nearly full. In the USA, retail markets react more readily to supply-demand, and a decline in oil prices is a blessing for local factories and transportation industries.
Can We Survive This Crisis?
Storing oil is becoming a better business than selling it, but we don’t know how long that will last for. To cut it short, high- prices also mean reduction in demand. Low prices, on the other hand, affect the supply. We need a balance between both. Members of OPEC+ are already pledging to reduce production, and things may start getting back to normal once the Coronavirus lockdowns are lifted.
Author: Aalia Haris