As reported by the Financial Times, “West Texas Intermediate, the U.S. benchmark, traded as low as -$40.32 a barrel in a day of chaos in oil markets. The settlement price on Monday was -$37.63, compared to $18.27 on Friday. Traders capitulated in the face of limited access to storage capacity across the U.S., including the country’s main delivery point of Cushing, Oklahoma”.
Strange! Oil was a precious commodity, and the U.S. was always dominating oil trade all over the world. The U.S. has taken a few irrational and extrajudicial steps to maintain its control over oil prices in the past. Starting from the toppling of the legitimate government of Mohammad Mosaddegh the Prime Minister of Iran in 1953 by CIA of the U.S. and MI6 of the U.K., Iraq War, Libya War, Syria, Yemen, Afghanistan, etc., are in the same series of actions with only one objective, to control the oil industry. CIA’s operations in Latin America, Africa, Asia, etc., are linked to the oil industry. Oil is traded in dollars, and indirectly the beneficiary of oil trading was the U.S. diplomacy, which also revolves around the oil industry.
With the outbreak of COID-19, and rapid spread all around the world, Coronavirus Cases:
2,482,577 and death toll reached: 170,484. The U.S. is the worst hit by pandemic with confirmed cases reported 792,938 and a death toll of 42,518. (Statistics may change over a period of time). As there is no cure, medicine, or vaccine yet, the only option left is keeping social distance and practice hygienic habits. Most of the countries have imposed comprehensive or partial lockdown, resulted in fewer movements. Flights are suspended, trains are canceled, and almost the transportation sector is halted. The industry is closed down, and demand for oil is reduced to a significant amount. With the start of spring, the weather has been becoming warmer, and heating demand is also reduced. All these factors resulted in the oil demand to a bare minimum.
Oil-producing nations on 12 April 2020 (Sunday) unwillingly agreed to the most significant production cut ever negotiated in an unprecedented coordinated effort by Russia, Saudi Arabia, and the United States to stabilize oil prices and, indirectly, global financial markets. The immediate impact is witnessed a price hike in oil prices temporarily. Oil-producing countries were keeping storage of unsold oil and reached saturation of storage capacity.
It is the third major crisis in the oil industry. The first occurred in 1973 when Arab members of OPEC (Organization of the Petroleum Exporting Countries) decided to quadruple the price of Oil to almost $12 a barrel. Oil exports to the United States, Japan, and Western Europe, which together consumed more than half the world’s energy, were also prohibited. OPEC’s decision was made in retaliation for Western support of Israel against Egypt and Syria during the Yom Kippur War (1973) and in response to a persistent decline in the value of the U.S. dollar, which had eroded the export earnings of OPEC states. Although the oil embargo was lifted in 1974, oil prices remained high, and the capitalist world economy continued to stagnate throughout the 1970s.
Another major oil crisis occurred in 1979, a result of the Iranian Revolution (1978–79). High levels of social unrest severely damaged the Iranian oil industry, leading to a substantial loss of output and a corresponding rise in prices. The situation worsened following the outbreak of the Iran-Iraq War (1980–88), which further added to the level of instability throughout the region. In 1981 the price of oil was stabilized at $32 per barrel.
The current crisis termed as third in series is even more severe. Although all of the oil crises were due to different reasons, the impact on the global economy might be the same. Due to low oil prices, some of the oil-producing companies may not survive long as the cost of production varies from region to region, country to country, company to company. Generally speaking, the cost of production is low in the Middle East and may last longer.
In the U.S., oil prices crashed into negative domains for the first time in history, as the evaporation of demand caused by the coronavirus pandemic left the world awash with oil and not enough storage capacity — meaning producers are paying buyers to take it off their hands. Negative prices are the latest indication of the depth of the crisis hitting the oil sector after lockdowns imposed in many of the world’s major economies have sent crude demand tumbling by as much as a third, leaving the industry facing what Jefferies analyst Jason Gammel called “the bleakest oil macro outlook” he had ever seen.
In view of the current situation of COVID-19, it seems the next few months the demand for oil may not pick up significantly, and the oil crisis may not recover soon. The future of the oil industry seems gloomy, and the global economy may suffer further.