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06-03-2020     3 رجب 1440

Negative Global Oil Prices in Midst Covid 19: Its Relevance and Economic Implications

May 21, 2020 | Rayees Ahmad  

 

The oil prices crashed globally due to the outbreak of Covid 19 pandemic. The decline appeared when the price of West Texas Intermediate, the US crude benchmark fallen below zero for the first time in history, later on the trend became positive. We have heard zero price, but negative oil price is so much awestruck figure for many people. Zero price means when consumers get a product at free of cost. While negative price has no relevance in economics particularly in corporate world. Corporate always look for profits what is called bottom-line in the corporate world. A famous phrase of Friedman that is "TANSTAAFL"-There Isn’t No Such Things As A Free Lunch. He said that nothing is free in this world even if something is provided free of cost. On 22nd April 2020,we observed that how various leading news papers of world made it headline that oil prices have fallen below zero i.e negative price. As per the logic of negative prices, it exists only when consumers get a product not only free of cost but will receive a credit amount from sellers. But the story isn't same in US crude oil market, where per oil barrel price fell below zero, due to amid deepest fall in demand in 25 years. In US oil market the negative oil price means that the oil has no demand but simultaneously there is excess supply of oil. Therefore the companies has to bear the storage cost of oil, literally this clears the meaning of negative oil prices. After the OPEC,US produces 10 million barrels of oil per day. Latest this oil supply has faced deepest demand shock both from internally and externally. During the Covid 19,global oil demand has decelerated, as transport has halted, traffic is seen nowhere on roads, oil run factories are shutting down ,that later on caused slacken of oil demand. In the amid lockdown, US oil companies continued to produce the crude oil from the wells to fill up remaining tanks of oil. As the tanks are filled up, US has left with surplus oil. A senior strategist Kit Jacks, explained this situation in a phrase, "too much oil, with nowhere to put it". US did a huge mistake of not cutting down the oil supply before. No enough storage was available for oil, therefore US oil companies were paying the cost to take the oil from wells to ports. The cost incurred from wells to ports is bearded by companies, that becomes reason of negative oil price.
I can put it another way", too much oil is chasing too few consumers". When producers are with enough supply of oil, but you face only few demanders of oil. This will lead a imbalance in the market equilibrium ie there is excess of supply. The economic implication of excess supply is that price will go down until the new equilibrium is not reached .Due to crash of oil prices, the US economy is hit by huge losses in terms of credit risks, banking risks and unemployment risks. Oil share prices have come down, that has hit investors in huge losses and made their credit at risk. This crash has made workers out of work in US, as oil companies are shutting down the business.
The question arises, why only USA faced negative prices, why not OPEC or UK? In UK the cost of taking oil from wells to the ports(or storage cost) is very low as compared to US, that is the reason UK didn't face situation of negative price. OPEC- organization of petroleum exporting countries is a form of cartel among five major oil dominant countries. Cartel is form of agreement between the major oil producing firms to decide price or quantity of supply collectively. Initially OPEC and its allies including Russian have agreed so wisely to cut down the oil output by 9.7% million barrels per day. This decision was so wise because they are nowhere left with surplus oil. This is how OPEC oil prices are still positive. Though the oil prices are positive but lowest in the decade.
No doubt low oil prices have created panic for oil producing nations because oil exports comprise a larger part of their GDP. If we look the other side of coin that is oil importing countries can take the benefit of low oil prices. Like India expends huge amount of foreign reserves on oil imports. Oil import is the major reason of increasing current account deficit (CAD) of India.CAD exists when import spot transactions exceed export spot transactions. Continuously increasing of current account deficit has made Indian economy so vulnerable that India has to borrow huge amount to bridge the deficit gap. Indian govt has not reduced the petroleum pricess yet but has increased excise duty recently. If oil prices are left to the market, then hardly 1 liter of petroleum will be sold at Rs 35 approximately. Therefore India has huge surplus of crude oil prices, which can be used to bridge the deficit gap or this amount can be used to give economic packages as India is facing tough challenges from Covid 19.

Email:----rayeesrashid07@gmail.com

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Negative Global Oil Prices in Midst Covid 19: Its Relevance and Economic Implications

May 21, 2020 | Rayees Ahmad  

 

The oil prices crashed globally due to the outbreak of Covid 19 pandemic. The decline appeared when the price of West Texas Intermediate, the US crude benchmark fallen below zero for the first time in history, later on the trend became positive. We have heard zero price, but negative oil price is so much awestruck figure for many people. Zero price means when consumers get a product at free of cost. While negative price has no relevance in economics particularly in corporate world. Corporate always look for profits what is called bottom-line in the corporate world. A famous phrase of Friedman that is "TANSTAAFL"-There Isn’t No Such Things As A Free Lunch. He said that nothing is free in this world even if something is provided free of cost. On 22nd April 2020,we observed that how various leading news papers of world made it headline that oil prices have fallen below zero i.e negative price. As per the logic of negative prices, it exists only when consumers get a product not only free of cost but will receive a credit amount from sellers. But the story isn't same in US crude oil market, where per oil barrel price fell below zero, due to amid deepest fall in demand in 25 years. In US oil market the negative oil price means that the oil has no demand but simultaneously there is excess supply of oil. Therefore the companies has to bear the storage cost of oil, literally this clears the meaning of negative oil prices. After the OPEC,US produces 10 million barrels of oil per day. Latest this oil supply has faced deepest demand shock both from internally and externally. During the Covid 19,global oil demand has decelerated, as transport has halted, traffic is seen nowhere on roads, oil run factories are shutting down ,that later on caused slacken of oil demand. In the amid lockdown, US oil companies continued to produce the crude oil from the wells to fill up remaining tanks of oil. As the tanks are filled up, US has left with surplus oil. A senior strategist Kit Jacks, explained this situation in a phrase, "too much oil, with nowhere to put it". US did a huge mistake of not cutting down the oil supply before. No enough storage was available for oil, therefore US oil companies were paying the cost to take the oil from wells to ports. The cost incurred from wells to ports is bearded by companies, that becomes reason of negative oil price.
I can put it another way", too much oil is chasing too few consumers". When producers are with enough supply of oil, but you face only few demanders of oil. This will lead a imbalance in the market equilibrium ie there is excess of supply. The economic implication of excess supply is that price will go down until the new equilibrium is not reached .Due to crash of oil prices, the US economy is hit by huge losses in terms of credit risks, banking risks and unemployment risks. Oil share prices have come down, that has hit investors in huge losses and made their credit at risk. This crash has made workers out of work in US, as oil companies are shutting down the business.
The question arises, why only USA faced negative prices, why not OPEC or UK? In UK the cost of taking oil from wells to the ports(or storage cost) is very low as compared to US, that is the reason UK didn't face situation of negative price. OPEC- organization of petroleum exporting countries is a form of cartel among five major oil dominant countries. Cartel is form of agreement between the major oil producing firms to decide price or quantity of supply collectively. Initially OPEC and its allies including Russian have agreed so wisely to cut down the oil output by 9.7% million barrels per day. This decision was so wise because they are nowhere left with surplus oil. This is how OPEC oil prices are still positive. Though the oil prices are positive but lowest in the decade.
No doubt low oil prices have created panic for oil producing nations because oil exports comprise a larger part of their GDP. If we look the other side of coin that is oil importing countries can take the benefit of low oil prices. Like India expends huge amount of foreign reserves on oil imports. Oil import is the major reason of increasing current account deficit (CAD) of India.CAD exists when import spot transactions exceed export spot transactions. Continuously increasing of current account deficit has made Indian economy so vulnerable that India has to borrow huge amount to bridge the deficit gap. Indian govt has not reduced the petroleum pricess yet but has increased excise duty recently. If oil prices are left to the market, then hardly 1 liter of petroleum will be sold at Rs 35 approximately. Therefore India has huge surplus of crude oil prices, which can be used to bridge the deficit gap or this amount can be used to give economic packages as India is facing tough challenges from Covid 19.

Email:----rayeesrashid07@gmail.com


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Owner, Printer, Publisher, Editor: Farooq Ahmad Wani
Legal Advisor: M.J. Hubi
Printed at: Abid Enterprizes, Zainkote Srinagar
Published from: Gulshanabad Chraresharief Budgam
RNI No.: JKENG/2010/33802
Office No’s: 0194-2451076, 9622924716 , 9419400056
Postal Regd No: SK/135/2010-2019
Administrative Office: Abi Guzer Srinagar

© Copyright 2018 brighterkashmir.com All Rights Reserved.