Impact of COVID-19 on Oil Industry

crude oil

Vibhavari Madki

Aug 8, 2020 — 5 min read

As everyone is aware of the COVID-19 situation the world is facing right now. On the brink of this cliff, we can just hope that everything goes back to normal. Into the list of unprecedented victims, the Oil Industry has been added to it successfully. The chaotic change in the prices of Oil during COVID-19 outbreak is like adding fuel to the fire.

The recent news about Super Contago(when the space to store the tangible products is running out due to excess supply) has shook the world inside out. This pandemic is going to be near about compared with the 2008 depression.

The surge in supply of crude oil was due to lack of demand across the world. The world implementing complete lockdown has brought the global Oil Industries to an acute dearth of available storage facilities. The sudden termination in the utility of the fuels has worsened the situation. Oil Industries were already under pressure from lower oil and fuel prices because of a warm winter even before the COVID-19 outbreak and the price war between Saudi Arabia and Russia.

For the first time in history, WTI crude oil prices fell below $0 per barrel and entered into the negative territory.

As there is no early hope of how to recover from this situation in the near future, the key issue of Oil inventory storage is likely to remain. If the Oil and fuels are stored at the pennies, the non-Saudi shale companies would have to pay to dispose the excess stock off. And as a result, they may have to further narrow the rate of production by shutting down their rigs and oil wells to avoid plunging into deeper financial troubles.

Reasons of decline in Oil Industry due to COVID-19

With history and the growing tension between the USA and Saudi Arabia regarding the Oil prices and the export business. The shale players were already tested with their limits even before the pandemic. COVID-19 is not the major reason why Oil prices are falling.

The world i.e. direct or indirect dealers in Oil market are either tested positive of COVID-19 or too cautious to take a physical step forward.
The interested dealers reside in an area which have been quarantined or are facing national lockdown.

Actual Effects on Oil Industries worldwide

Surge in oil prices can reduce demand for other goods because they reduce wealth, as well as induce sheer uncertainty about the future. The rise in Oil price can also suppress the growth of the economy through their effect on the supply and demand for goods other than oil.

Iran faced a decline in oil prices. The majority of revenue took a hit due to the unexpected outbreak of COVID-19. The price of Iran’s heavy crude plummeted to below $14/barrel down from $44 or more per barrel in February. It also had to allow it's buyers to come directly with it's tankers to it's refineries, plug in and fill up. Thus removing transit fee, insurance and whatever maritime indemnity from the cost of each barrel.

Iran and Iraq want to produce enough to satisfy their markets by offering to produce more to gain new markets, and deliver through their own agents. But the problem here missed is, an offer in the international market doesn't happen overnight.

Saudi Arabia cuts down the price oil in a day since the 1991 Gulf War, estimating the prices further could fall $20 a barrel. Whereas, Saudi Arabia needs oil prices at around $82 to balance the market.

Angola, Algeria and Venezuala are suffering the most by loosing around 85% of their oil and gas revenue this year.

The dispute between tow biggest oil producers which are Saudi Arabia and Russia has pushed the oil prices in four years.

China, the world's biggest oil importer, is now consuming much less oil and energy due to disruption in the manufacturing industries. Moreover, Countries would rather stock up the bottles of fresh water, poultry products, meat, vegetables, pharmaceuticals and other necessities rather than burning fuel.

Graph of oil prices over the passage of years

OPEC members and its allies finally agreed to make a deal to slash global output by about 10%. Therefore, the deal led to largest cut in oil production ever.

How does change in Oil prices affect India?

There are number of ways we can look into this due to the slump in oil prices.

Impact of Oil prices on Indian Economy

Almost 85% of oil is imported from the big oil industries. Low oil prices reduces India’s import bills and it can also give space to the government to increase fuel taxes, offsetting low direct tax collection. Furthermore, low oil and petroleum costs also bring down the energy prices, moderating the inflation rate. “India being a net oil import contributor tends to gain immensely from oil prices drop on its import bill,” Madhavi Arora, Economist.

Indian Economy has a possibility of getting a hike of 1.4% points GDP.

It is interesting to mark that the prices for retailers/investors have not been reduced since the government is using the buffer amount to fund its expenses. However, once the lockdown comes to an end, the government faces increased pressure to reduce the fuel prices for consumers.

However, the oil industries are in deep trouble due to terrific crash in demand. Dealers and Refiners imported a tons of crude oil before price crash resulting heavy inventory losses, with negligible sales revenue and repeating the cycle.

An add on to this fiasco, from a consumer’s point of view, is that reduced oil prices help in slowing inflation. Also, there are many possible ways to measure real oil prices, depending on which measure of inflation you use.