The oil price has been dropping recently and we could ay t is determinant on the low demand for oil as cars aren’t working as always, planes aren’t flying and even ships have remained at harbor and this is courtesy to the current pandemic affecting the world in general. Oil determine the larger part of most economic activities in almost all country from transportation to fuel for industries and its by-product used for plastic, chemicals, wax lubricant and other things. Oil didn’t drive the world economy until 1847 where the first commercial oil was drilled in Azerbaijan and in 1901, oil became the new gold displacing coal when it was drilled in south eastern Texas.
In this post, I would like to into why the price of oil has been dropping before and during the coronavirus pandemic.
Saudi Arabia and Russia Tension
In an attempt to create a standard price for oil in the oil market, major oil producing countries came together to form the OPEC. OPEC comprises of 15 nations and are responsible for 1/3 of oil supply to the world. The United States, China and Russia aren’t part of this organization and are independent of their decisions.
Why Russia and Saudi Arabia, you may ask? Well Russia and Saudi Arabia formed the OPEC plus alliance in 2016 but due to the oil production cut issues which Russia point at the United States were giving too much grounds and said every country should be allowed to produce as much as they can, after which Russia left the alliance. The government of Saudi Arabia has issued warnings to Russia over the pull from the alliance.
COVID-19 Effect on Oil
The global oil demand per day was estimated to be 99.9 million Barrels a day in 2019 but is said to be around 77.6 million barrels a day this year (2020). It is visible that with the outbreak of the coronavirus, the demand for all dropped to an all-time low since oil has an impact in virtually all sector in a country and since most countries are on a compulsory stay-home/lockdown/quarantine period, there is more supply than demand. No one is driving a car, no ship is moving and no planes are flying, could you remember the last time you saw a plane in the sky? That shows that the domestic demand for oil produce are dropping and at such there are more supplies than demands.
Lack of storage space
Crude oil is stored in tanks and on tankers, and when there are no demand for oil, the oil producing countries need to store their oil. Currently, about 1.2 Billion Barrel of storage space for oil globally but as at the current time, there are over 80 Million Barrels in floating storage tankers and there are no more space to store oil.
With the oil price dropping, many small oil producers will suffer as well as oil dependent countries like Iraq, Libya, Iran and Venezuela because they have been struggling with sanctions and conflict. Also, Nigeria will have to struggle as 90% of the revenue generated is from oil and gas, as well as the country is currently looking for buyers who will buy the 55 vessels full of crude oil, and they have been borrowing money from foreign countries. A few countries like Gabon, Oman, Angola and Suriname might not be left out.
The drop in demand appears to be around 20% but because we have a just-in-time delivery network with little capacity for storage, we are now in the crazy situation where oil has been produced and there is literally nowhere to put it. I just find it amazing that that is the impact with just a 20% drop in demand.
I think demand will increase again as the world slowing starts moving again the economy gets going. However, it is going to take time. The rich oil countries have more than enough money to weather the storm but some poorer countries that rely on oil are going to really struggle. I think it will take over a year to get back to full throttle again.
Also, I expect some of the more expensive ways of extracting oil like the shale oil will become economically unviable.
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Oil has become the major resource for geopolitics and it has determined economic prosperity. I am really sure that a lot of countries will have issues selling their oils to demanding countries because a lot of countries have stored oil before the recession and as well ordered for more oil. So who will be buying the overflow. Certainly, there will be a drop in oil price in the nearest future.
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Oil fluctuation like other crisis is fueled mostly by political manipulations. Tensions between few powerful international stakeholders often determine the price.
And there's also the issue of storage; Like you said in your second second.
I remember one of my pals jokingly said to me when the price of oil went unbelievably down; that now was the time we could come on, buy massive oil and emerge the next Bill Gates of oil, Lol. I was merely amazed at his silliness to think that we could actually turn billionaires so easily even if we had the money. Like dude are we going to clear out cans in the garage and fill them with oil or just keep em in the basement?😂
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Manipulation is the right word. A lot of stakeholders just do the manipulation when they want to show they are still in control.
For this, selling oil isn't as easy as it looks. First storing oil is a very vital thing as it is highly flammable even in its raw form. It smells really bad when stored and also it is almost impossible to sell a few barrels of oil. You need to have in thousands of barrels before it can be marketable. The bad part about oil is that unlike Amazon that charges you delivery fee, you have to transport the oil to the buyer yourself.
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In my opinion the prices will go up again, but not much, I estimate that between 10 to 20% at most. This whole crisis makes it clear that we should not be dependent on one type of resources (oil), and that we must diversify energy sources. In this sense, governments and countries are beginning to understand that it is very important to look for other ways to generate income, solar energy, electricity and the use of other resources are the future of humanity. As a species I think that we are one step away from evolving, and that everything is a matter of pandemic is educating us in the worst way how to develop new skills, new methods of doing things. I hope that the ingenuity of the different groups and communities comes out, because it is in these situations that scientists, doctors, architects, engineers, comedians, writers artists, old, young, children and everyone in general, we get the best out of each and I find it very necessary for us to go through this situation to learn to do things differently.This to me is a great teaching, and if we don't follow it, we become extinct as a race.
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Diversification is something that a lot of citizens have been clamouring about but the question is "who will buy what you are clamouring for" Dubai is using oil money for tourism because their population isn't that much, how many countries still need coal, tin, limestone and so on. It isn't easy to diversify.
For the market price, we can't predict but i can say that the price may fall further in the future.
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@tipu curate
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Upvoted 👌 (Mana: 0/20 - need recharge?)
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I never knew there were so many factors affecting the price of crude oil. Everyone just wanted to have a taste of the free crude oil money.
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Free crude oil money? Is there anything like that? Crude oil money can never be free provided the government still makes money from it.
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Hi @frederickbangs
Finally I've managed to find time to read some older posts and drop few comments.
It seem that you didn't read and reply to any comments, so let me just summarize:
Interesting read. I upvoted it already.
Cheers, Piotr
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I just got online today. I had to go out to help some people in my community distribute food to the physically challenged and the old. So i am just coming back online fully.
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Dear @frederickbangs
Finally I managed to catch up with old comments.
Thanks for being always so reponsive. Have a great sunday ahead,
Yours, Piotr
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