The Impact of Global Pandemic on Oil Prices
Before pursuing this course, I already had an impression of the constituent elements of economic theory: demand and supply. I realized that there is so much more to Economics than my initial layman point of understanding, in as much as demand and supply are important elements of the topic (Bowen & Sosa, 2014). My basic understanding of economics was – prices decrease when supply increases and prices increase when demand increases. But supply, demand, and price are affected by other factors and forces of what we all understand as economics.
In the energy sector, there has always been an increasing energy demand, particularly in the oil and gas field. As technology advances, so does the industrial revolution and this combination only means an increase in energy demand, and fossil fuels like crude oil and coal best illustrate the source of this energy (Yang et al, 2002). While time is a highly significant factor in the field of oil and gas as even an hour delay adversely affects supply, so does crises that have an economic impact, because the energy demand will greatly reduce hence the demand for oil.
Such crises are the reasons why oil prices can drop down so low, even up to a negative state (https://theconversation.com/oil-crash-explained-how-are-negative-oil-prices-even-possible-136829). To better understand how crises affect the demand for energy hence the price and market for crude oil, I developed a demand and supply graph with an excess supply of oil in the market and an average of the current oil price, which is estimated at $50 per barrel here:
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On the onset of a crisis such as the Coronavirus, the prices of oil will greatly decrease due to excess supply of oil in the market, hence the supply curve shifts to the left. Coronavirus has caused the global economy to contract and prices of oil, together with other commodities have dropped.
With oil, in particular, the excess supply and decreased prices are caused by the fact that people have stopped traveling and factories have been shuttered. As this global oil demand reduced from 100 million barrels to about 29 million just a year ago, the land storage capacity quickly filled up because there was surplus oil. Other oil importers have stored large oil quantities in the hope that in the future, prices will become favorable again and that will mean a good return on investment.
Alberta oil and the West Texas Intermediate (WTI) are the main qualities of oil used globally with WTI used as the benchmark price for the OPEC countries. Oil prices have shifted even into the negative state because the production, transportation, and storage cost is now higher than the price of the benchmark oil (WTI). Also, in terms of ‘collateral damage’, the continuous war on oil between Saudi Arabia and Russia has disrupted Alberta’s oil production. But the combined effect of this war together with the novel coronavirus has demonstrated to be disastrous for Canada and the US.
In the limited economics that I have covered in the course, I was able to discover how other factors other than the conventional ones we already know, affect the demand and supply, for example, a global pandemic like COVID 19. In the future, I’m planning to look at other factors that have economic impacts in every sphere of life, not just in the income and price realm because I believe that this will help me in expanding my knowledge and to be able to think outside the box.
References
JOACHIM, O. I. (2017). Model of demand and supply factors affecting green commercial properties. Unpublished PhD thesis. Faculty of Geoinformation and Real Estate, Universiti Teknologi Malaysia, Malaysia.
Raut, R. D., Narkhede, B., & Gardas, B. B. (2017). To identify the critical success factors of sustainable supply chain management practices in the context of oil and gas industries: ISM approach. Renewable and Sustainable Energy Reviews, 68, 33-47.
Kubursi, A. (2020, April 21). Oil crash explained: How are negative oil prices even possible? The Conversation. Retrieved from: https://theconversation.com/oil-crash-explained-how-are-negative-oil-prices-even-possible-136829