Crude oil has been the talk of the town for the past few days. The once-prized commodity has seen a record low in its prices.
This is no ordinary slump in demand. The benchmark United States crude turned negative dropping as low USD -40.32 per barrel. In simple terms, the supply of crude oil is so much that producers and traders are running out of room to store and might pay you to get their hands off the oil.
The dumping of futures contracts has been seen as a major reason for the fall. However, the slump in demand is in need of more context. We need to turn towards the much-discussed oil war.
WHY DID CRUDE OIL PRICES FALL SO LOW?
Crude oil prices have hit the historic low as a result of the price war between Saudi Arabia and Russia. The world already had low oil demand when coronavirus hit, suspending all vehicular movement, air travel and industrial production. Demands for oil fell to record lows as a result.
However, Saudi was not happy with non-OPEC producer Russia selling the same amount of produce. It asked Russia to take deep production cuts. However, Vladimir Putin’s government did not budge from its decision.
This led the impulsive crown prince of Saudi Arabia in Mohammed Bin Salman to drastically reduce the price of Saudi Arabian oil. It could afford to do so because of its vast resources and huge funds. Oil was pumped into the market relentlessly. However, if the prices continue to fall, it would hurt the Saudis too who need $83 a barrel to keep its budget at an even footing.
The biggest loss will be for Shake Oil producers in the USA. They need at least $46 to $54 per barrel to cover production costs. Thus, they are far from profit.
This could lead to a massive economic downturn with the revenue coming to the state falling and people losing employment. That’s also the reason behind the sudden urgency shown by President Donald Trump in making a phone call and getting the two premieres Mohammed Bin Salman and Vladimir Putin on the table.
However, even though Saudi Arabia agreed to drastically reduce production by 9.7 million barrels a day, the situation is already out of control. It still wouldn’t mean cheaper petrol for you as its price is not just determined by crude oil. There are refinery and production costs along with government-imposed taxes. It is an all-out loss for the consumer. You have to face economic loss without getting cheaper petrol in return.