Change is the only constant thing in the oil market. This refers to oil production, processing, and trading. Sometimes, the low oil prices boost the economy growth, while in the other cases, the drop in price can bring about quite unexpected outcomes.
The curercnt political situation and the general trend towards the decrease of oil prices receives different assessments on behalf of experts.
Some experts view it as a positive sign for economy, while others see it as a possible threat to some industries.
In this article, we'll present different expert opinions and views on the matter.
Let's get started!
The recent oil price changes
During the 2020 lockdowns, as businesses were in uncertainty and travel literally froze, the oil proces wend down below $40 per barrel, according tot he report from WEF.
Yet, asn teh activities recovered, the oil prices went back to $100 and remained so for a while. The reason for that was the full economic recovery, which exceeded the prepandemic levels. As the OPEC wasvbeen scaling up oil production slowly in the fearsl not to oversupply the oil market again, businesses had to wait in line for their supplies which kept oil prices at a comparatively high level.
Yet, the political changes and the new deals with OPEC change the situation a lot. OPEC countries are increasing oil supplies, while the US executive orders also shake the market. For the first time in several years, oil proces go down to $63.1 in April this year.
The anticipated positive effects of oil price drop
Crude oil and also petroleum products are the critical resource at a commodity market for a number of industries. Petroleum products come as an ingredient to a wide range of products from protective equipment, plastics, fertilisers amd chemicals through to medicaitons like aspirin, synthetic clothing, fuel for transportation and as a material to make solar panels.
So, the reduction in oil price can be viewed as positive, as th elower costs of products and delivery will be passed on to consumers, that liven the trade and give boost to business growth. At the same time, since oil is used in transportation, the costs of deliveries should come down, allowing a range of industries, such as agriculture, retail, logistics, and transportation, to decrease expenses and increase ROIs which will necessarily lead to economy growt.
Yet, while generally industry benefit from low oil proces, A range of experts suggests that the current situation with oil prices can turn into an unexpected oil market crisis.
Experts suggest current prices could create a future crisis
In the US, lower oil prices can meanless drilling and exploration activity. This is because it becomes cheaper to buy oil abroad than invest in oil drilling in the United States.
Harold Hamm, founder and chairman of Continental Resources, thinks the price drop puts American oil producers at risk. For various reasons, the cost of oil drilling, and subsequently, the cost of oil on the commodity market in the United States, is higher than in other countries.
This way, companies struggling to remain viable will lose the competition to more fortunate ones.
Scott Sheffield, the founder of Pioneer Natural Resources, stresses that the current market conditions, where production costs increase, will reduce oil prices dramatically for companies. He thinks that many companies are at risk of running out of inventory to keep the production level high.
The situation becomes difficult as oil trading is a critical revenue source for several states. It is worth mentioning that the US oil provides resources for the national manufacturing industry and the state's security. Therefore, if the price drop damages these areas, the effect can be extended to other areas.
The job market is also at risk. Currently the oil industry employs millions of professionals which will be left aboard as a the domestic production level decrease. Less activity will lead to layoffs and that can potentially hurt the local businesses that cater to these workers.
The other industries that will suffer when U.S. oil prices drop are banking and investment. Numerous different companies drill and service wells on the shale deposits. Many of these businesses finance their operations by taking loans and raising capital. If the oil price drops, investors and banks both have money to lose. If the new wells are no longer profitable and the companies dependent on drilling and service go out of business, there losses will only increase.
Summing up
Oil proces are dependent heavily on the range of economical and political factrs and as the oil industry is stricktly connected with the range of businesses the fluctuations in the oil market has an effect on all of the economy. For businesses, which feed the oil production with money, materials and job force, price plunge means the money loss and is equivalent to a crisis. Yet, other spheres, mainly those that use oil as a resource, will benefit due to lower expenses on supply and transportation.
