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.