The Sharp Decline in Oil Prices
In the month of March alone, oil prices plunged 50% reaching lows of $19, a price that hasn’t been met since 2002.
But what’s been causing this sharp decline?
There are two main things: the drop in demand caused by coronavirus, and the increase in supply as countries started to ramp up production.
With the drop in demand, supply would have to decrease in order to stabilize prices. However, when OPEC brought a deal to cut production, Russia declined. Saudi Arabia then countered back by increasing their oil productions, causing Russia to continue to increase its production. This increase in supply further escalated the drop.
A visual representation.
When two things shift at once, this is called a double shift. A shift in supply to the right would mean increase in quantity with a decrease in price, while a shift in demand to the left would mean a decrease in quantity and price. In combination the change in quantity is ambiguous, however the price still decreases.
What does this mean for consumers?
Travel should be avoided due to coronavirus, however, the drop in oil prices would allow for consumers to save more money. Overtime as gas stations refill on the cheaper fuel, consumers will benefit from paying less at the pump.
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