Oil is the core resource for meeting our energy needs and is likely to remain the most significant part for the rest of the century, despite growth of alternative sources of energy. Economists are not likely to deviate from the fundamental principle of balancing supply and demand equation to get market prices. The factors which affect either side of the equation of Supply v Demand will directly or indirectly influence the outcome. Every major event whether regional, global, or geopolitical during the last century has revealed structural deficiencies in the national economies of industrialised economies and major energy consumer countries. These deficiencies have caused surge or steep fall in oil prices during the transient periods. According to EIA Oil Prices update and report of 7 April 2020, “However, the influence of these types of factors on oil prices tends to be relatively short lived. Once the problem subsides and oil and product flows return to normal, prices usually return to previous levels.”
Impact of Covid-19 Pandemic
The impact of the latest event in the form of Covid-19 Pandemic has caused unprecedented fall on the demand side, without giving sufficient time for the supply side to react. The sellers willing to sell their oil future contracts by paying-to-sell for buyers to get paid to take delivery, is the first time in the living memory of mankind. The deficiencies exposed during this Covid-19 Pandemic are:
- Limited Storage Capacities of the Consumer Countries – thus inability to benefit from fall in prices.
- Refineries unprepared for interruptions in downstream flowlines.
- Airports and Aviation Fuel Storage terminals capacity built around monthly consumption needs with emergency reserves only.
- Inability to acquire or charter floating storage tankers (VLCCs and Super Tankers) in time to safeguard against drop in demand.
- Future contracts did not allow for transport times in the event forced to take delivery.
- Exposure of pandemic risks for non-user traders and speculators.
- Delay in shutdown or reduction rates of producing countries – not realising the indirect impact of endemic in one country with consequent chain reaction to become a pandemic.
The above deficiencies were not significant in the past events listed below, as a fresh reminder, with impact on global economies:
- 1942 – 1945: World War-2
- 1975 -1976: Closure of Suez Canal
- 1976 – Arab Oil Embargo
- 1981 – 1987: Persian Gulf Conflict
- 1991 – 1993: Invasion of Iraq
- 1997 – 1999: Asian Financial Crisis
- 2001: 9/11 Attacks on US Targets
- 2003 – 2005: SARS Epidemic
- 2009 – 2011: Global Financial Crisis
- 2019 – 2020: Covid-19 Pandemic – exceptional event with many more lessons to be learned
In addition to the above, the decisions of OPEC for cuts or increase in production quota do cause price fluctuations but does not significantly alter the consumer side of the equation.
One lesson learnt from the Covid-19 Pandemic is obvious that, going forward the strategic planners at national level and from investors community, should seriously develop storage facilities of oil & gas, while producers are steadily investing in new fields and E & P projects. The human element is the crucial component of any economy. Only through movement of humans, goods and services beyond basic needs will grow. Thus, energy prices cannot be in the driver seat of the economy any longer.
The drivers of economy post-pandemic period will change seat in some order or combination of the following:
- Movement of people
- Air and land transport
- Development of underdeveloped regions of Africa and Asia
- Belt & Road Initiative Staying on Course
- Lead role by Asian Infrastructure Investment Bank (AIIB) for supporting development projects
If author is permitted to make a prophesy, “the oil price will only add to the costs of the economy and continue to cause conflicts but will not be able to become a driver of economies in foreseeable future.”