The ever-growing world that we live in, where inflation is a reoccurring phenomenon, especially in the oil industry, who would have thought that in 2020 no one would want to buy oil and the prices will crash down to negative. As life has become stationary for most people in the world, oil was still being pumped out, but with the spread of the coronavirus, international parties agreed to reduce the number of barrels being pumped out daily.
Before the world was brought to a standstill, the Energy Information Administration (EIA) estimates that the world consumed around 96.92 million barrels of oil every day. But with the spread of the coronavirus outbreak, a heavy blow has hit the oil industry. At the beginning of the outbreak in Wuhan, China, the rest of the world observed silently without looking out. As coronavirus spread to more countries, the amount of travel started to decline. Public transportation and airways were seen as red zones and people started to avoid traveling. By the end of March, most countries had sealed their international and domestic flights and imposed complete lockdowns. Airlines consume 30% of the total oil production, but since they were forced to reduce traffic, the demand for oil declined. Private vehicles and public transportation weren’t moving either, therefore, the demand from that sector decreased as well.
Thus, after the declaration of the coronavirus pandemic, oil consumption has decreased to 35 million barrels a day. In the United States itself, it was reported that drivers consumed the least amount of gasoline in nearly 30 years. The coronavirus pandemic has changed the dynamic with which the world functions and normal is never coming back again. For the oil and energy industry as well, new regulations have been put into place, and in this article, we shall study and analyze the impact that coronavirus has on oil.
IMPACT ON OIL EXPORTING COUNTRIES
The impact of the coronavirus is different for oil-exporting and oil-importing countries. For countries like Saudi Arabia, Iran, Iraq, and UAE, the consequences have a direct impact on their economies as they are primarily oil-exporting countries. Space is running out for them to store the oil and a major share of their economy is being hampered. According to a report published by Deloitte, inefficient, and highly leveraged companies may face a liquidity crisis and some of them might be forced out of business.
The impact on the whole of the industry also trickles down to the very minor stakeholders of it. With the coronavirus going on, the supply chain of petroleum and other fossils is being severely disrupted. In the present moment, when businesses might feel the option of laying-off workers and employees as the only ones, in the future when the restrictions are eased, it’ll be more difficult to hire labor.
The Organization of Petroleum Exporting Countries or the OPEC, has been taking active measures to reduce the production of oil, but many hindrances have been occurring. Countries like Mexico and Russia have been refusing to lower the production which brought the world very close to an oil war.
The impact of this crude oil war is being faced by the stock markets as well. Prior to all this engagement, the stock prices were tumbling down immensely and the oil war between Russia and Saudi Arabia had added on to it. On 9th March 2020, the stock markets globally experienced a great plunge in the price. The Dow Jones fell over 2,000 points, or 7.8%, exceeding the market prediction and becoming the largest point drop in its history. Italy’s FTSE MIB suffered the largest drop in percentage, with the index falling down by 11%. In the United States, the drops triggered circuit breakers designed to prevent stock market crashes, leading to a 15-minute pause in trading.
But even in the midst of the crisis, a few positives have emerged. It has led to countries coming together and collaborating globally to paddle through the situation. The OPEC and G-20 have come at an unprecedented agreement and are making continuous efforts to sustain the industry. Economists predict that in the future, decisions based on the oil industry will be taken with global consent and new measures to regulate the production and the supply shall be put into use.
IMPACT ON OIL IMPORTING COUNTRIES
The impact of the coronavirus on oil-importing countries is roughly positive as compared to oil-exporting countries. Countries like China, India, Italy, and Spain do not have to worry about the overflowing of storage units for the production of oil or the disruption in the supply chain. Due to the lockdowns being imposed and the decreased usage of oil, these economies are in fact being benefited.
Most of the countries that import oil have to pay highly inflated prices for them, but because of the decrease in the consumption of energy, these countries can work on reducing their payments and decrease their fiscal deficits. A minor drop in the price of oil in the international market can be equal to almost millions of dollars for the importing country. For example, every $4 decrease in commodity prices leads to about $5 billion in import bill savings for India. Most countries of the same economic capabilities as India can benefit from this decrease and save up their money to use in other investments or relief funds.
The United States, on the other hand, is facing problems from both ends, as it a large producer as well as a large consumer of oil. To add to the troubles of the government, it is an election year in the States and the pressure from the coronavirus pandemic and Washington’s ability to deal with the crisis can be a major point of conflict. The United States oil industry is hemorrhaging. With most oil companies pumping at an expense that far surpasses the current price of West Texas Intermediate Crude Oil Market (WTI), some shale companies such as Whiting and Diamond Offshore Drilling have already filed for bankruptcy, and hundreds more may follow. The Trump administration has been reviewing to aid these companies and even though nine storage units were also provided for them, the coronavirus crisis is hitting their markets hard.
WHAT HAPPENS WHEN THE CORONAVIRUS PANDEMIC GETS OVER?
As already mentioned, there will be a new normal in the future, which would differ greatly from the past and the present. As for the future of the oil industry, it will have to revamp its structure and make more meticulous and planned out decisions in terms of dealing with crises. The demand and prices will surely need more time to build back again. But this is an opportunity to reboot the entire system and prepare for any unprecedented times.
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An aspiring civil servant, a curious mind but also an avid binge watcher- Prerna is currently pursuing BA Prog in English and Political Science from Kirori Mal College. She belongs to Chandigarh but really enjoys the hustle of Delhi. Her favourite pastime is taking naps and recognises herself as a pro at it.