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Like it or not, oil is still the most important product in the world.
Oil prices can not only tell us what the global economy is now, but they also have a great impact on what may happen in the future. Right now, oil prices tell us that the world economy is facing a major crisis, and this crisis has yet to manifest itself in lagging economic data.
Last week, the price of United States crude oil futures contracts fell below $ 40 a barrel, and the abnormal price shocked the world. Although this price is very eye-catching, it is a bit misleading.
- The epidemic blockade affects oil demand, US oil prices. USA Fall to a negative value
Oil is traded in the form of contracts, which expire on a specific day of each month. When the contract expires, whoever has the contract must physically deliver the crude oil. Most people engaged in the oil trade have never seen and will never see a barrel of physical crude oil, let alone a barrel of crude oil for delivery.
Airlines and industrial companies can use oil contracts to manage or ensure that their fixed costs do not fluctuate significantly. Due to the lack of long-term storage capacity in the United States, the expiration date of the contract generally leads to unstable price fluctuations, and this fluctuation becomes extreme because merchants are willing to pay any price, otherwise they will have than keep a barrel of crude oil.
“Destruction of demand”
However, behind this strange and historical technical anomaly of prices, the fundamental problem is very real. Like any basic product, prices depend on supply and demand. Oil demand is a good indicator of global economic activity. And the current discussion about “demand destruction” is very popular: planes are grounded, urban roads are empty, and factories are closed.
To make matters worse, when the new coronavirus spread globally, there was an oil price war between Saudi Arabia and Russia.
Since then, although major oil-producing countries have reduced production, but demand collapsed, the rate of production reduction is not fast enough. The Brent crude oil price, a more representative international indicator of oil prices, has continued to drop, setting a 20-year low of $ 16, and was still above $ 70 at this time last year.
Are low oil prices good or bad? There is no direct answer to this question.
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Just as skyrocketing oil will trigger an economic recession, extremely low prices will also fuel the economic recovery. The sharp drop in oil prices is like a tax cut for large and small companies around the world. If the airline can survive and passengers can return, then they can block the largest single-spending fuel at a low price.
Similarly, logistics companies, florists, and supermarkets will also benefit from lower transportation costs, as as gasoline prices drop, consumers will have more money in their pockets.
Gasoline prices have moved towards 1 pound per liter and are expected to drop below 1 pound for the first time in nearly ten years. However, there is evidence that gasoline retailers want to try to increase profit margins to offset the sharp drop in sales.
Bad news for savers
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Oil is one of the most profitable industries in the world, and a large amount of dividends are paid into the pension accounts of ordinary people.
Cheap oil has the potential to help the economy recover faster and help prevent a recession from turning into a depression.
But it can be bad news for savers. Oil companies are one of the strongest money-making machines on the planet, and much of the money they earn goes directly to our pension plan. Among them, BP and Shell Petroleum accounted for almost a fifth of the dividend income of all British companies.
The bad news for oil companies is the bad news for pensions. In addition, they also pay a large amount of taxes to the national treasury.
Then there is the environmental problem. When oil prices are lower, the economic incentive to find alternative energy sources will decrease.
This is why world oil prices are so delicately balanced, and explains why oil companies and governments prefer stable prices between $ 40 and $ 60 per barrel. Too cheap is a threat to dividend income and tax revenue, and it also affects motivation to find green energy alternatives. Too expensive is a burden on the economy.
Now, this balance has been broken, which means that a very bad economic outlook awaits us.
