These days one can find prices of crude oil have dropped down drastically in the world all over. This is due to the sudden change in the demand pattern due to imposition of lockdown and a state of inactivity almost all over the world due to the Covid-19 pandemic. But how will it impact us ??? Let's have a discussion.
The market price is determined by the forces of demand and supply. Soon after Covid-19 outbreak the demand simply crashed but the supply was still very high.(this was because the 3 major oil suppliers- U.S.A., OPEC countries and Russia failed to reach a consensus to reduce the supply).
as a result the price fell below average.OPEC-The Organisation of the Petroleum Exporting Countries is a cartel formed by 13 countries to decide the production quantity so that each country can earn a respectable amount of profit. But Russia did not follow the rules and started to increase the production than the agreed amounts. As a result Saudi Arabia to give competition to Russia also increased its production leading to plummeted prices.
Oil is actually an asset and not a liability. But the problem that has created it a liability is that oil is stored in reservoirs but due to no demand the storage places is already full and there is no more space left to store the oil in case the extraction continues in some of countries. Also the suppliers has to pay huge rent for the storage. As a result the suppliers are willing to give this oil away at least prices so that they can get rid of the rent amounts and penalties. As a result of which the oil prices have simply crashed.
Probably this does not matter the consumers because the government would prefer to keep the benefits with themselves because of the current state of economy where the GDP has fallen. As a result this can be a source of profits for the government and would help increase their exchequer.
I tried to explain the reasons in the most simple way..
Hope you understood it..
The market price is determined by the forces of demand and supply. Soon after Covid-19 outbreak the demand simply crashed but the supply was still very high.(this was because the 3 major oil suppliers- U.S.A., OPEC countries and Russia failed to reach a consensus to reduce the supply).
as a result the price fell below average.OPEC-The Organisation of the Petroleum Exporting Countries is a cartel formed by 13 countries to decide the production quantity so that each country can earn a respectable amount of profit. But Russia did not follow the rules and started to increase the production than the agreed amounts. As a result Saudi Arabia to give competition to Russia also increased its production leading to plummeted prices.
Oil is actually an asset and not a liability. But the problem that has created it a liability is that oil is stored in reservoirs but due to no demand the storage places is already full and there is no more space left to store the oil in case the extraction continues in some of countries. Also the suppliers has to pay huge rent for the storage. As a result the suppliers are willing to give this oil away at least prices so that they can get rid of the rent amounts and penalties. As a result of which the oil prices have simply crashed.
Probably this does not matter the consumers because the government would prefer to keep the benefits with themselves because of the current state of economy where the GDP has fallen. As a result this can be a source of profits for the government and would help increase their exchequer.
I tried to explain the reasons in the most simple way..
Hope you understood it..
No comments:
Post a Comment