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The world is experiencing a fuel shock
Material posted: Publication date: 10-04-2020

In March 2020 the price of oil, already has a downward trend, fell by 30% in less than a week, bringing the total decline amounted to almost 50% from highs in early January [1].

Global decline in oil prices may affect not only the global economy but also geopolitics, and the future of transportation and combat the effects of climate change, especially in the case if there is a sustainable long-term cheap oil.

 

Source: https://www.macrotrends.net/2516/wti-crude-oil-prices-10-year-daily-chart

Oil prices were reduced as a result of major changes in supply and demand.

The decline in demand for crude oil and petroleum products as a result of the pandemic coronavirus currently noticeable all over the world, especially in China [2]. Isolation of millions of people have suspended the activity of plants, reduced delivery and transport of goods both within the country and abroad. This is a key opportunity as China is the world's largest oil importer and the main catalyst for global demand. The spread of the epidemic, the tightening of border controls, quarantine, declared in many countries, led to a global decline in demand for transportation, especially for air travel [3] further undermining demand for oil.

In early March, he terminated the partnership between OPEC and Russia. Amid falling demand for oil because of the epidemic of the coronavirus Russia and OPEC failed to agree on reducing oil production and started a price war in the oil market. The consequence was a sharp fall in oil prices and the ruble exchange rate.

OPEC and Russia were United in 2016 year to cut oil production and raise the price level in the market in response to shale drilling in the United States.

At the meeting on 6 March, the Saudis have proposed another reduction to counter the restrained demand resulting from the impact of coronavirus on the economy. Russia has said that instead it will increase production, the Saudis replied that he would go to the same measures. A few days later, the United Arab Emirates has said that they will increase production to record levels and will accelerate plans for capacity building.

Even without these enhancements, the glut of oil already existed. According to a report by the International energy Agency's oil market for March 2020 [4], the demand and growth of production of oil shale would leave the market with oversupply of more than 3 million barrels a day if OPEC did large cuts. This surplus now looks modest compared to what will likely be the year.

A similar situation in the fuel market has already occurred at the junction of XX-XXI centuries. In 1986, the Saudis have increased oil production to competition with increased production in the North sea and, more importantly, in the Soviet Union. The result was the inflow of cheap oil, which lasted until, while, since 2004, China's demand does not set prices much higher [5]. During this era of low oil prices, the United States had a low level of development of alternative energy sources; increases in consumption; the decline in the fuel market; the growth of oil import in the United States. In the same period was the American intervention in the middle East.

Could the same outcome happen again? No. But the era of ultra-low prices, for example, less than $40 a barrel, as they are now, can lead to a number of other consequences.

A number of possible consequences of the current trend in the fuel market:

  • Significant economic damage to oil-producing countries outside OPEC and Russia, such as Argentina, Brazil, côte d'ivoire, Malaysia, Indonesia, Azerbaijan and Kazakhstan
  • Major economic and possibly social upheaval in countries with fragile democracies such as Iraq, Algeria, Nigeria. Separately, the concern is Iraq, residing in a permanent state of conflict.
  • Cheap fuel could undermine consumers ' desire to save and a limited consumption of resources and use of alternative vehicles.
  • Cheaper fuel may become a possible obstacle for the production of electric cars and reduce the demand for them.
  • A significant reduction in recycling plastic as manufacturing new plastic will be cheaper waste treatment costs.
  • Low oil price may be especially attractive to less developed countries (transport, electricity, heating), which is currently undergoing modernization of energy and lack of income.

The current fuel shock, along with the pandemic is not yet over, the world can expect major changes. It can be assumed that the effects from excess excess oil will be varied, but is unlikely to be useful. Yes, there are some benefits for consumers, in that case, if fuel prices remain at the lowest level for longer than a few months. Food and fuel oil for heating, for example, will be much cheaper. However, cheap oil could benefit the world. There are many reasons for serving a sufficient basis to seek to move away from oil dependence.

 

Sources

  1. Brent Crude Oil 1st Front Month (ICE). Mode of access: https://oilprice.com/commodity-price-charts?1&page=chart&sym=CB*1&name=Brent%20Crude
  2. OPEC Tries to Head Off Oil Glut as Demand Saps Coronavirus. Mode of access: https://www.nytimes.com/2020/03/02/business/oil-price-opec-coronavirus.html
  3. Coronavirus is Spread Becomes a Global Crisis for Airlines. Mode of access: https://www.ainonline.com/aviation-news/air-transport/2020-03-06/coronavirus-spread-becomes-global-crisis-airlines
  4. Oil Market Report - March 2020. Mode of access: https://www.iea.org/reports/oil-market-report-march-2020
  5. Energy in China: Development and Prospects. Mode of access: https://journals.openedition.org/chinaperspectives/2783

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