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COVID-19 & Decreasing Oil Prices




Black Gold, Blood of an economy, etc. These are a few phrases given to the oil. Oil is one of the most fundamental parts of any economy. It has driven economies for ages and been at the heart of every economic activity in the world. Countries have fought many wars to influence the oil industry.

Oil has helped some small and weak states to develop into one of the world’s wealthiest nations. Oil also has created a crisis in the world’s biggest economy and compelled it to revise its foreign policies. This industry has created the world’s biggest company and one of the biggest empires. In the past decade, oil has given immense power to nations to manipulate things as they will. If a state possesses an oil reservoir, it has thrived and archived the unthinkable growth in a few decades, but possessing an oil reserve doesn’t mean a nation will prosper.

Many nations have fallen after having a mammoth amount of oil reservoirs. The nations have to use these reserves statistically. To accomplish this organisations like OPEC have formed but after so much effort prices of oil suffered a nosedive. So what went wrong with oil? Let’s try to find out.  This is my second blog on the series of COVID-19 and the World Economy.

Oil has influenced the world economy like no other commodities. It has been the centrepiece of many economic activities. Almost every sector in the economy depends on the oil or by-products of oil at some stage of its production, distribution or consumption. In some industries, it is difficult to start a business without oil. Thus if the oil is essential, then why is its value depleting? There cannot be a specific reason behind it, but coronavirus has a colossal impact on it. As per my opinion, COVID-19 has only a share of 70% in decreasing the cost of oil, 30% are other factors behind the fall.

COVID-19

Coronavirus has a lion’s share in reducing oil prices around the globe. Because of COVID-19 oil prices has registered a nosedive.



This problem has arisen because of a contraction in demand for oil in the world. Demand for oil in India has slumped by 70% in this lockdown.




The above image shows a million barrels per day. Figures showed world consumption had fallen in the early quarter of 2020. The first quarter is the time of coronavirus pandemic. Oil has been affected by COVID-19, now, let’s understand different sectors and their impact on oil prices. This decline in the cost has deteriorated because the nations which are the biggest importers of oil have been experiencing pandemics like China, India, etc.

Restrictions on Automobiles:-

As coronavirus started spreading its roots in society, most of the countries in the world have imposed lockdown. Lockdown has shown a positive impact on fighting COVID-19 but it hurts the economy. Due to lockdown, many business activities have stopped. Transportation between states and nations has partially or completely shut down. E.g. India has 10 million registered trucks and it is reported that almost 90% of those trucks are off roads and this figure is from only one country.
Now as goods were not able to transport to the consumers the producers have an excess amount of goods stored in their warehouse. Many factories have not received the supply of raw materials, which is necessary for the production, which has a direct relation with the productivity of manufacture.
The government has also put restrictions on private vehicles on roads. This has also impacted the sale of petrol across the nation. This results in the lower consumption of petrol and diesel in the country. In India, the demand for diesel has fallen by 24.3% and for petrol fallen by 16.3% approximately in March. The drop is the biggest this decade.

Restrictions on Firms:-

Firms that use the byproducts of oil i.e., oil and wax etc. are also forced to shut, thus not only petrol and diesel the total demand for oil has fallen. This is not only happening in one country but in almost every country that is facing the coronavirus crisis.

Restrictions on Airline Industry:-

Aeroplanes around the world have also stopped flying, this includes all passenger and freight flights. As the airline industry is one of the leading fuel consumption industries this has a mammoth impact on the oil demand. There are private jets which also have been grounded by the government along with helicopters. All these also have an impact on oil consumption of a country. The airline industry accounts for 6-8% of total crude consumption. Airlines have cancelled more than 200,000 flights, mostly from China. Let's take an example to understand it: A Boeing 747 uses 4 litres of fuel every second while in flight. If this flight lasts for 10 hours then this plane will burn around 150,000 litres.

Restrictions on Shipping Industry:-

As coronavirus has spread around the globe, many nations have put restrictions on ships docking in their docs. Like Japan & the USA has blocked docking of cruise ships. Diamond Princess and Zaandam and Rotterdam are the names of those ships respectively. The ships which have put restrictions include goods transportation ships, fishing ships and cruise ships etc.  On average, a large cruise ship uses up to 250 tons of fuel every day, i.e. 80,000 gallons (302,832.943 litres). Cruise ship almost takes a week to cross the Atlantic, so you can imagine the fuel needed by this single ship.
The other factors are the slowdown in the world economy.  The world economy was already facing a slowdown in the past few months which have a direct relation with the production process and demand for oil in the market. The oil price war between Russia and Saudi Arabia has only escalated into the current problem but we will talk about these factors in another blog.

Conclusion –

Impact of the COVID-19 on the oil industry and the oil-producing nation is significant. This oil price fall can be controlled if OPEC makes some concrete decisions without interference this fall, which may continue and could cause further damage to the industry as well as economies. Coronavirus The crisis is just one part of the crisis. The other part i.e. the economic crisis is still pending and can be worse than the current one. Thus oil-producing nations should come together and try to solve this issue mutually.
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