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Have the Prices of Oil Collapsed?

Have the Prices of Oil Collapsed?

Friday, 24 April, 2020 - 06:30
Salman Al-Dossary
Salman Al-Dossary is the former editor-in-chief of Asharq Al-Awsat newspaper.

Our generation is destined to witness unprecedented historic developments. The world had not yet recovered from the coronavirus crisis and its impact on human interactions and behavior, before it was confronted with a historic drop in oil prices. For the first time ever, the prices plummeted below zero and entered what is called negative pricing after some contracts were priced at -37 dollars. Tankers loaded with oil barrels are now stranded at sea and have not moved in days.

The world was reminded that the chaos in the global oil markets is caused primarily by the drop in demand on crude oil after services and industries throughout the world have come to a standstill over the coronavirus. This has led to a 30 percent drop in demand in just a few weeks. Hundreds of millions of people are not leaving their homes for work, tens of thousands of factories have stopped production, people are rarely using their cars and travel by planes and trains has virtually come to a halt. After all this, have the prices of oil really collapsed and has the black gold become a thing of the past?

The observer does not need to be a genius to realize that the chaos in the global oil market is caused by the coronavirus crisis. This will not mark the end of oil, because the world cannot live without it. It does not take a genius to also realize that the drop in prices will be short-lived and that it will be connected to containing the coronavirus. True, no one can predict when it will be contained and it is also true that the gradual revival of the world economy will continue to result in increased supply and less demand. This is all a matter of time, even if it will be a long time.

I believe there are four main reasons that will help oil retain its label as black gold: first, the low prices will encourage great consumption and immediately raise strong demand. These are economics basics and do not need a miracle to happen. Second, any oil field in the world has estimated reserves and their production will gradually drop, which will eventually turn oil into depleted goods. Third, for the first time in 30 years, an American president has supported the rise in the price of oil in order to transform the US from a consumer to a producer that creates job opportunities for millions of people. Fourth, in light of the drop in prices, governments and oil companies will refrain from investing in new oil fields or even expanding and maintaining existing projects. Who will possibly invest in a sector that does not yield desired profits? This will lead to several efforts by exporters to strike a balance in the market.

The question remains over the world’s greatest oil exporter: Will it be severely harmed, as it is being claimed? Saudi Arabia will definitely suffer, just as other exporters are, but we should not overlook the vast foreign currency reserves it boasts. We should also take into account is low public debt compared to its GDP. The Public Investment Fund is also using the current crisis in the best possible way by seizing investments at low prices.

This all allows Saudi Arabia to stand on solid ground in withstanding the record drop in prices. Moreover, with such low prices, it will not struggle in meeting the global demand in the near future.

Some firm facts cannot suddenly be eliminated by tensions in the global economy.

Ultimately, those expecting the shock from the price collapse to last forever are ignoring that the world will eventually witness another shock, this time in the opposite direction, when oil prices will skyrocket. The world too cannot support such a rise, neither can it support the persistence of the current drop.

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