NOURNEWS -
The market and the economy in industrialized countries, especially in the West, are different from what we think of them.
In fact, in these countries, the market is largely dependent on supply and demand, and governments are always trying to play the role of a balancing agent. If there is a lot of production, they will demand a lot with their programs, and if there is a lot of demand, they will be able to develop and increase production. But the government itself is not going to enter the market directly and buy or sell or store and the like.
Elements in price determination
Accordingly, oil prices in these countries, as a consumer and very common commodity, are subject to supply and demand, in other words, demand has a very serious impact on determining oil prices. That's why in the summer, when travel increases in Western countries, especially the United States, and the demand for gasoline increases, this high demand usually leads to an increase in oil prices, while in winter there is no such demand.
Therefore, in winter, with the decrease in oil prices, more oil is stored. This is the first and most important factor in analyzing the situation of international oil markets.
Another factor in analyzing the situation of oil prices in the world is paying attention to the oil production industry from unconventional sources. Unconventional resources are resources that, unlike conventional oil resources that are beneath the earth's crust, are usually located at or below ground level, but extracting oil from them requires time-consuming and costly processes.
This issue is of concern in the United States and Canada today, and during the time of the previous president and the current president, huge investments have been made to reduce the cost of extracting oil from unconventional and competitive sources of conventional oil. About five years ago, the United States was able to make the process of extracting oil from unconventional resources economically viable and competitive with oil, and now the cost per barrel of oil from unconventional resources is between $ 35 and $ 45.
Corona and oil markets
Given that the markets of free economy countries are based on supply and demand, it remains to be seen what changes have taken place in this equation at the time of the Coronavirus outbreak.
On the one hand, there is the issue of supply. It should be noted that the supply of oil is done by two groups of countries. A group of non-industrial oil-rich countries, such as the countries of the Persian Gulf, whose main income comes from the production and export of crude oil. These countries have oil, but they don't need it, but they prefer to use it for us and gain credible foreign currency in exchange for selling oil.
Although oil markets have always fluctuated and experienced many ups and downs, the outcome of oil markets has always been positive, and these countries are confident that they can continue to rely on oil exports for a long time to come. This has severely linked the economies of these countries to oil revenues, so they have to continue to produce and export oil under any circumstances, otherwise they will suffer severe economic losses.
The second group of oil suppliers are industrialized countries that need access to crude oil to meet their industrial and consumer needs. These countries, which are both producers and consumers, have invested heavily in the discovery and production of oil so that they can be independent in providing this vital and strategic material, and given that they usually have a free market-based economy and this investment has been placed on the private sector. The cessation of oil activities in these countries means a very serious damage to many investments, and as a result, waves of widespread bankruptcies and the creation of unemployment.
Given these explanations, it can be concluded that although the outbreak of crises such as the Corona can have some effect on oil production and supply, these factors cannot stop oil production and supply, this is because the economies of non-industrialized oil-producing countries and the large investments made in the oil-producing developing countries do not allow production to stop, especially for a relatively long period of time.
But on the other side of the equation lies the question of demand or consumption. We can summarize oil consumption in two main parts. The first is the fuel used by cars and planes, and the second is the oil used by industries and factories, which is used as a raw material or energy source. Today, with the outbreak of the Corona crisis in the West, both factors have been greatly affected.
On the one hand, with the implementation of quarantine policies by governments and the obligation to stay at home, the streets have been emptied of cars and sufficient travel has drastically reduced gasoline consumption. On the other hand, the need to prevent rallies that has led to a reduction in factory activity, and the lack of people leaving their homes has left many factory products without customers.
This means a huge drop in oil demand in Western markets, which will have two consequences.
The first consequence is to store oil. Because, firstly, oil has no customers and secondly, its price has decreased. The point here is that oil storage is possible for a certain volume. Explaining that natural or man-made reservoirs that can store oil, including strategic reserves, and operational reserves and commercial reserves, have been prepared in accordance with the natural trend of global markets and existing capacities, and their capacity is limited and clear. So it is possible to store some oil in these reserves, but then all the reserves are filled, a situation that is now almost there.
The second consequence is a drop in oil prices. According to the previous explanations, the production of oil by the producers is such that it is not possible to stop production for a long time and in large quantities. As a result, the supply of oil in the market, although it is possible to increase or decrease, but it is not possible to stop.
Accordingly, when the common consumption and demand of the market disappears unpredictably, the supply of oil in the market without customers will lead to a sharp drop in prices. Of course, it should be noted that this reduction in prices is a natural thing, but the economy of industrialized countries requires the use of artificial methods to prevent the reduction of oil prices to such an extent that the exploration and extraction of oil in these countries is out of business.
Therefore, Western governments, especially the United States government, which has invested heavily in oil extraction from conventional and unconventional oil resources, must now do everything in its power to mobilize all the means at its disposal, keeping the oil price floor at a level higher than the cost of oil extracted in the country, which requires oil prices to remain in the $ 30- $ 40 range.
Future prospects for oil prices
With the prospect of a continued coronavirus outbreak over the next year or two, until the definitive cure is discovered, one can expect the conditions for social distancing, and the banning of communities and unnecessary traffic, to continue.
Although this situation will be less severe in the industrial and factory sectors, it is more tangible in terms of travel and personal and family travel. However, it should be noted that the ban on the use of public transport and the recommendation of health centers to use their own vehicles can increase fuel consumption to some extent. However, it seems that the overall decline in gasoline and other petroleum products that occurred with the onset of the Corona outbreak will continue to be less severe.
Of course, reducing consumption in the long run will also lead to a reduction in production and a reduction in supply, but this process is time consuming, while global oil markets are heavily influenced by political and non-economic decisions.
However, declining economic growth in countries, especially industrialized countries, declining traffic and travel, the continued, albeit incomplete, corona prevalence and dependence of oil-producing countries on oil revenues are factors that will keep oil prices in the $ 25- $ 40 range for the next two years.
* PhD in Law and Oil Contract Specialist
NOURNEWS