2020 Oil Crisis

By: Chris Zhao

Do you remember when gas prices dropped during the midst of the Coronavirus? I do! In fact, I remember my mom getting so excited to get gas whenever our tanks were empty. So why was gas so cheap?

During the midst of 2020, oil prices “went negative for the first time ever” (Patti, 2020). There are many factors that explain the decreasing price of oil, but it all started with Saudi Arabia. Partly due to their disagreement in price with Russia — and partly to kill global competitors, the Saudis initiated a price war and flooded the market with excess supply. However, due to the pandemic, the consumption of oil was fragile. People were quarantined at home and, consequently used less transportation: they consumed fewer oil-based goods. As a result, as “demand dries up” (BBC, 2020) and supply continues to surge, oil lost its intrinsic value, and the price plummeted.

Usually, when suppliers notice that there is a low demand for a certain good, they decide to cut production to match the quantity demanded in the market. However, many oil extracting companies continued to pump oil because they had to make interest payments on debt” and couldn’t afford to cut production completely. So, as oil producers kept pumping more oil than the global market needed, oil reserves started filling up. Eventually, when there was no more storage space in the reserves, firms started paying people to take their supply. In simplification, if a firm pays their customers to take their product, the price turns negative because the company loses money. Similarly, in the case of the oil crisis, the price dipped below zero because firms had no space to store the oil and were forced to pay people to take the unwanted goods.

Overall, the fall in oil prices had a huge impact on our global economy. Many businesses faced the hardships of the pandemic, and the oil industry is just one victim who faced the bludgeoning consequences of the Coronavirus.

Domm, P. (2020, April 21). The oil industry shakeout is just beginning with more production cuts and bankruptcies ahead. Retrieved April 09, 2021, from https://www.cnbc.com/2020/04/21/the-oil-industry-shakeout-is-just-beginning-with-more-production-cuts-and-bankruptcies-ahead.html

Phillips, M., & Krauss, C. (2020, March 20). American oil Drillers were hanging on by a THREAD. then came the virus. Retrieved April 09, 2021, from https://www.nytimes.com/2020/03/20/business/energy-environment/coronavirus-oil-companies-debt.html

US oil prices turn negative as demand dries up. (2020, April 20). Retrieved April 09, 2021, from https://www.bbc.com/news/business-52350082