the Shape of Oil to Come 2020 Crash and Author Rasoul Sorkhabi, Ph.D., CPG-11981
entire world is grappling with the coronavirus pandemic. The vast majority of professional people are working remotely from home. University and school classes have gone online. Business meetings are conducted through the Internet. The coronavirus pandemic has overshadowed every affair of our society, and rightly so. Nevertheless, there is also an economic crisis of global scale in the background. Millions of people have lost their jobs and millions more are uncertain whether they will still have their jobs by the end of this pandemic. The oil mar- ket crash is an alarming symptom of this weakened economy which hurts all people, whether affected by the coronavirus or not. The International Labour Organization (ILO) has called the economic fallout of this pandemic “the most severe crisis,” since World War II; they reported that 2.7 billion, or 81 percent of the world’s workforce of 3.3 billion people, had had their workplace fully or partly closed (ILO, 2020). The head of the International Monetary Fund warned that the world faced the worst economic crisis on par with the Great Depression of the 1930s (BBC, 9 April 2020). The petroleum industry employs tens of millions of professionals including geoscientists. It has historically financed university research projects and hired a large number of geoscience graduates. Therefore, the oil market crash adversely affects employment, university enrolment, and funding of geoscience fields in many countries. This article analyses the 2020 oil market crash in the context of oil economy and the mechanisms of oil market crashes, and also highlights the importance of the market stability for economic growth.
2020
When 2020 began oil prices were at about US $60 a barrel. By the fourth week of March, prices had fallen to below $20 a barrel. That was a 70 percent fall in less than three months. Such prices are far below the break-even points for producing oil in many countries. Obviously reduced economic activities, especially minimum transportation in a world of lockdowns, eradicated considerable oil demand worldwide, but the politi- cal feud between Russia and Saudi Arabia, with both increas- ing oil production in order to secure their market shares, was also an important factor in lowering oil prices. Nevertheless, the current market of low-price oil actually began several
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will go down in history as a year that changed the face of the world within
months.As I write this (April), the
years ago when US shale oil production kept increasing and triggered rivalry between the US and non-US oil producers.
Box 1. How many people work for the oil and gas industry in the USA?
According to the US Bureau of Labor Statistics there were 145,000 people directly employed in the upstream oil & gas industry in 2018. However, the petroleum industry’s impact goes far beyond the upstream activities; it also includes transportation, refining, storage, electric power plants, distribution, retail sale, management, and so forth. At the other end of this spectrum, a 2017 report by the American Petroleum Institute indicated that the total “impact” of the US oil and gas industry on the country’s employment (full time and part time) was 10.3 million jobs in 2015. The 2019 U.S. Energy and Employment Report (USEER), prepared by the Energy Futures Initiative (EFI) and the National Association of State Energy Officials (NASEO), reported that the traditional energy sectors in 2018 employed 6.7 million Americans out of a workforce of approximately 147 million. These sectors included fuels (oil, natural gas, coal and biofuels), electric power generation (coal, natural gas, nuclear and solar), transmission, distribution, storage, energy efficiency, and motor vehicles.
Oil Economy
Oil is a commodity and like every other commodity its market value is mainly determined by supply and demand. If supply exceeds demand, prices fall; shortage of supplies to meet demand increases prices. Disruptions in oil supplies are caused by physical shortage of oil in the upstream (exploration and production), midstream (transportation) or downstream (refining and distribution).
Because oil is a primary and strategic commodity, its market value fluctuations are also caused by speculation in “futures” (next few month) prices of oil traded on stock exchange markets, notably in New York (for West Texas Intermediate crude), London (for North Sea Brent crude), and Singapore (for Dubai crude). Market speculation is not necessarily based on physical availability of oil but often on geopolitical news, economic trends or uncertainties. Furthermore, because oil is often traded in US dollars, the exchange rate of the dollar against other currencies can affect oil prices. A strong US dollar
Jul.Aug.Sep 2020 • TPG 55
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