Two minute read. Written by Prakriti Panwar, a grade 11 student.
Who would have thought that amidst the spread of a deadly virus, there would bloom another crisis so impactful that it would lead to an indirect war of trade and economics? The oil demand has hit its lowest in 25 years, the international market is in turmoil and the oil market is going through a significant and dismal change.
Owing to the Covid-19 pandemic, most people are now confined to their houses, resulting in a low demand of oil due to a steep drop in travel by road and air.
So, what’s the problem?
The problem is that there is no place to store the oil that has already been produced. Oil has to be produced to a minimum level or threshold because regardless of the variation in demand, it is essential to supply people with it and hence, production in such a situation continues. The supply is high, but the demand has never been lower- a rather bookish economics concept, coming to life. However, other than the pandemic induced lock-downs in various nations, there is another reason to this steep fall in the oil prices- the oil war.
The low oil prices are severely affecting countries in the Middle East and North Africa (MENA) regions since they are the main producers and exporters of oil, mainly due to the tensions between Russia and Saudi Arabia- the two vital producers and exporters of oil. In a meeting, Saudi Arabia, along with The Organisation of Petroleum Exporting Countries (OPEC) and a few non members such as Russia, suggested all nations to cut back their oil prices, in order to stabilise the oil market-which was a fairly rational option put on the table.
When Russia refused to cut back production, Saudi Arabia used a ‘shock and awe’ strategy to show its ability to increase production and to convince other nations to agree with them. This hasty decision was followed by a 30 percent crash in the market. However, the strategy worked. Russia and Saudi Arabia finally reached to an understanding and decided to cut back production. This decision is now criticized as ‘too little, too late’ since it has already caused the damage it had to.
What interests us is that while oil producing nations are suffering in an uncertain field, countries such as India, which import 80 percent of their oil from producers, are somewhat benefitting from this drop in the prices. Since there are two sides to every story, this remains a topic of constant debate among economists.
Crude oil is a common raw material for fertilisers, a drop in the oil prices might lead to low fertiliser costs, thus helping farmers prosper. This would be possible only in an ideal situation where all dues have been cleared. The government was to clear its dues to fertiliser companies in April, but has obviously gotten delayed due to the tight budget during the worldwide slowdown.
Though it may seem practical for India to buy oil now that the prices are low, a weak currency and exchange rate will actually result in extra expenditure and loss. Moreover, the negative prices may even influence some companies to shut their oil wells and rigs down to prevent further losses.
What companies and oil producing nations are now looking for is a way to somehow get rid of the oil by selling it rather than figuring out a cheaper way to store it since storing oil is an expensive affair. The only way to do so would be to store the barrels temporarily in oil tankers at sea, which is a costly method.
Since the issue of storage and low demand are the main factors affecting the crisis, slowing down production until demand flows back to normal is the only option which seems viable. However, we as readers, at best, can only leave the major decisions, solutions and statements up to our leaders and policy makers.
Written by Prakriti Panwar
Prakriti is fifteen years old. She studies in Navy Children School, Mumbai and just finished her board exams.
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