2020 OIL CRASH Box 2. The Shapes of Oil Market to Come When will the present oil crisis be over and when will oil prices return to normalcy? The question of “when” is, how-
the price of oil in January 2020, as the normalcy and follow these four scenarios. The V scenario forecasts that just as oil prices crashed very rapidly, within two months in early 2020, they will also recover rapidly as soon as the pandemic and lockdowns are over, and especially if oil production cuts by OPEC Plus hold true. The U scenario – the prolonged recovery – assumes that the pandemic and its economic impact will take a long time (probably a couple of years). The W scenario – the volatile cycles of ups and downs – assumes that the pandemic-economy nexus will fluctuate and that OPEC jump in oil prices for a limited period both because of major economic growth and limited oil supplies as a result of the oil industry’s downsizing during the pandemic. The L scenario is based on the thinking that once oil prices rise to close to $50 the renewable energy technologies will be commercially feasible and more attractive because of environmental concerns, political will and grassroots support to reduce the world’s dependency on the volatile oil. In this way, oil will enjoy a short-lived price comeback, but will never see its good old days again.
barrel – something unprecedented in the history of oil (Fig.3). The reason was that Oklahoma’s Cushing, the delivery route for WTI, already had full inventories and no spare storage capacity. Brent and OPEC Basket crude oils in Europe and Asia did not experience this historical crash because they could be shipped from numerous points worldwide (Fig.2). In New York, many oil traders, mainly speculators and hedgers, who had bought oil did not have the intention or means of keep- ing it, so they sold it at negative prices before the deadline to avoid the actual process of handling and storing crude oil. This exposed a dichotomy between “physical oil” handled by the oil industry, and “paper oil” traded by market speculators, and how the discrepancies between these two affect the world economy (Carolla, 2012).
Oil Market Stability
Once the coronavirus pandemic is over and economic activities and transportation are restored, oil consumption and prices will rise again. Before the pandemic, the world was using over 100 million barrels of oil a day. Russia and Saudi Arabia produced only 20 percent of the world’s oil demand; therefore, these two countries cannot control prices for long. But without collaboration among the major oil producers, OPEC, Russia, North America and others, the oil price vola- tility will continue for years with varying magnitudes and at times abrupt changes. International engagement in oil mar- kets may eventually be imperative for the US as the country progresses on its new direction of exporting oil and liquefied natural gas. Given the contribution of fossil fuel burning to global warming, the world must move toward clean, renewable energy resources as well as technologies to capture carbon. But hydrocarbons still account for 58% of world’s consumption (BP, 2019). A switch to other energy resources will not happen overnight. Oil companies are only producers not consumers,
www.aipg.org
and as commercial enterprises they will continue producing oil as long as there is demand for this commodity from people and industries. Perhaps, the world’s energy scene will change over time. But cheap oil and natural gas will discourage develop- ment of renewable energy systems.
Oil market stability is critical to the world economy. Oil price crashes harm not only oil producing companies but also banks, stock markets and all enterprises associated directly or indirectly with oil. Why does oil market stability require global cooperation? Because oil is not like other commodities; it is not like coffee, carpet or cameras. First, petroleum is a fun- damental component of today’s life and civilization (although we hope that this changes in the coming decades): transporta- tion fuel, tens of thousands of petrochemical substances, and the vast majority of medicines come from petroleum. Second, oil prices affect the prices of many other commodities; oil is intertwined with the world economy. Third, about 90 percent of the world’s oil reserves are owned by state companies in the Middle East, Africa, Asia, and South America; oil is mostly under government control and thus a big part of international politics. In a recent book, Bleyi (2020) has offered an analysis of oil prices as a “global institution” beyond the assumptions of a free and fair market.
Oil prices have always undergone slow or rapid changes ever since the oil industry began in the 1860s (Sorkhabi, 2017a,b): Oil shocks, rapid rises in oil prices, are periods of oil booms and windfall profits for the oil industry; oil busts (market crashes) benefit oil consumers for a brief period. Each oil boom or bust has had its own causes and consequences, and it is important to have a better understanding of these events (Carollo, 2012; Aguilera and Radetzki, 2016). Neither oil shocks nor oil busts are, however, ideal for the economy. The history of the past century shows that economic growth has usually occurred during periods of oil market stability when oil was neither too
Jul.Aug.Sep 2020 • TPG 59
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64
