What’s Behind Falling Oil Prices?

October 10, 2020

With the United States’ presidential elections in full swing, Americans continue to benefit at the pumps as oil prices crash. Many ask, “Why are the oil prices suddenly falling so drastically? Do market forces have anything to do with it? Is it the Covid-19 pandemic? Or, as some politicians may want you to believe, is it a reality that goes beyond supply and demand? The answer might surprise you. 

 

Let us first provide a synopsis of last year’s oil prices compared to 2020. According to Brent crude oil, the barrel price of oil has dropped below $40 to $38.72. It dropped further with the announcement that President Trump tested positive for Covid-19. While low oil prices provides U.S. consumers some financial relief, it is spurring distress in the oil and travel industries. The flood of cheap oil on the world market in the wake of a spreading coronavirus and historically low oil prices drastically hinders US oil companies’ profitably. Reportedly, at least one million oilfield service jobs were eliminated this year. 

 

While the narrative is that oil prices during much of the last decade were over $120 a barrel, it is unlikely that we will see these prices any time soon. Gone are the days when oil speculators influenced the oil market according to their dictates. Gone are the days when the Organization of Petroleum Exporting Countries (OPEC), the world’s largest oil cartel, had substantive influence. The answer lies in geopolitics. At last June’s OPEC meeting, Saudi Arabia and Russia decided not to cut their production, thus leading to a price war. The outcome was a drop in oil prices even further in the global market. The Saudis’ aim was not to weaken Russia but rather to weaken or even kill the astounding U.S. shale oil industry. 

 

The picture is greatly different in China as it recovered from Covid-19. The Chinese citizens are traveling by planes in China; others are driving more. Yet, the Chinese government decided to purchase more oil and stored it for strategic reserves. As a result, the Chinese demand numbers look healthy.  

 

However, Geopolitics came into play again with the ongoing regional conflicts: For example, fighting between Armenia and Azerbaijan; tensions between Turkey and Greece; and ongoing chaos in Libya, among others. Trump's recent announcement that he and his wife have tested positive for Covid- 19 also affected oil prices. The announcement contributed to a 3.6% drop in Brent and U.S. crude respectively. 

 

The lesson is that the drop in oil prices is driven by politics as much as economics. While consumers in the United States welcome this shift, the situation is bleak for countries such as Saudi Arabia, Russia, Iran and Venezuela. The Saudis’ economic outlook for its consumers looks very bleak with the internal fighting among members of the royal family.  

 

What one needs to remember is that economic and political winds are always changing. Oil prices will eventually rebound at some point in the future. What is crucial at this unique juncture is for the U.S. government to re-evaluate major energy policies for supporting the domestic oil industry. 

 

Sadly, in a political climate characterized by self-serving interests, many such challenges could go unaddressed, to the detriment of our nation. Wisdom and sense of duty must prevail — and I hope sooner than later. 

 

 

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