Is oil truly worthless in a society without consumption?

Is oil truly worthless in a society without consumption?

/ Oil & Gas / Tuesday, 09 June 2020 13:45

COVID-19 has wreaked havoc on entire industries and placed the global economy in a less than favorable position. It has essentially given the entire world a reality check about our behaviors as consumers.

It could be argued that overconsumption has brought about greater pollution due to the heavy reliance of logistics and transportation on oil which inherently contributes to the current state of global warming.

The pandemic has made governments all over the world to issue lockdown and social distancing initiatives. This means that more people are working or learning from home and that numerous shops, restaurants and recreational areas have closed down. The global lockdown has led, for the most part, to a decrease in the consumption of oil.

The price of crude oil depends on many factors, some of which include demand and geopolitics. Due to this, the price of oil hit an all-time low towards the end of March this year.

The intergovernmental cartel of oil producers, OPEC (the Organization of the Petroleum Exporting Countries) reported that the future of the crude oil market is more uncertain than ever before.

HE Mohammad Sanusi Barkindo, secretary general of OPEC, published a statement which read, “The global oil market showed relative stability and ended 2019 on a positive note, despite economic headwinds and high uncertainties regarding ongoing trade disputes, Brexit and geopolitical developments throughout the year. At the beginning of 2020, there were signals that the economy would rebound from the slowdown in the second half of the previous year, with global economic activity, including global trade and industrial production, expected to pick up.”

Indeed, the social distancing measures which have left the global economy at a standstill have caused an immense impact on the oil market which led to a historic demand shock. In fact, by the end of the first-quarter of 2020, oil prices lost over two thirds of their value. By the end of March 2020, oil prices decreased to below $20 per barrel.

This brings to question the value of oil in a society without consumption. Does it become worthless or less worthy?

Globally speaking, crude oil is indeed at the very heart of the economy. While the demand for it has decreased tremendously, we still seem to rely on it for our essential services.

Logistics and transportation rely on oil and are also a key part of the economy and our lives in general. Logistics is heavily involved in how we receive the most essential of products to fulfil our needs and in times like these, medication, medical staff and food supplies are among the most important of essentials that rely on oil to reach us.

Whilst overconsumption is no longer an issue for the time being, our essential needs still need to be met and until a more sustainable alternative is adopted on a wider scale, our reliance on oil remains important.

The nature of the crude oil market is cyclical and this has been demonstrated throughout its history so it is no doubt that we will eventually see a rebound in the energy sector as soon as the pandemic-induced implications begin to subside. However, due to the volatility of this market, it seems that the future remains uncertain for the oil market. International oil analysts have not been very keen to forecast the future of this industry as the future implications posed by the pandemic are still unprecedented.

A global energy expert from the University of Oxford, Justin Dargin, commented on the matter by stating, “The most fundamental issue the oil industry currently faces is COVID-19, and it is much too early to conceptualize what its impact is and how it may metastasize. The disintegration of OPCE+ countries is a politicized supply-side issue that can be resolved by roundtables and diplomatic couriers. The potential collapse of global demand, however, is due to what is – as the insurance industry terms it- an act of God.”

OPEC’s secretary general commented on the current condition of the market and said, “Despite strong growth in non-OPEC production, the global oil market remained well balanced, owing to the strong conformity of OPEC and participating non-OPEC producing countries in the Declaration of Cooperation (DoC) of an exceptionally high 145% in 2019, which played a major role in improving oil market conditions and market stability.”

Dr. Fatih Birol, executive director of International Energy Agency (IEA) commented on the issue last month by stating that the pandemic has affected most energy markets, including but not exclusive to coal, gas and renewables but it had the most severe effect on oil markets “because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels.”

He added, “This is especially true in China, the largest energy consumer in the world, which accounted for more than 80% of global oil demand growth last year. While the repercussions of the virus are spreading to other parts of the world, what happens in China will have major implications for global energy and oil markets.”

The IEA stated that, on a global scale, it now sees oil demand at 99.9 million barrels per day which is down almost 90,000 barrels a day from 2019. Their February forecast predicate that global oil demand would actually increase by around 825,000 barrels a day in 2020.

Birol said, “We are following the situation extremely closely and will provide regular updates to our forecasts as the picture becomes clearer.”

Adding that, “The impact of the coronavirus on oil markets may be temporary. But the longer-term challenges facing the world’s suppliers are not going to go away, especially those heavily dependent on oil and gas revenues. As the IEA has repeatedly said, these producer countries need more dynamic and diversified economies in order to navigate the multiple uncertainties that we see today.”

At the G20 Energy Ministers Meeting earlier this month, which was held virtually, they discussed the current state of global GDP which is at negative 1.1%, a bigger contraction than that of the Great Recession of 2008 with global oil demand growth projected to decrease by 6.8 mb/d.

The oil market has hit an 18-year-low and the dire consequences of the unprecedented pandemic have left the futures of oil refiners, producers and even petrostates uncertain.

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