We live in a densely interconnected world. Soon after the start of COVID-19 in December 2019 the global economy reacted. The oil industry immediately felt the ripples. Economists continue to study the crisis and the oil industry, and their effects on each other.
Oil and COVID-19 – The early days
Oil prices have long had strong and immediate repercussions for the global economy. COVID-19 turned the tables on this classic macroeconomic fact. With sweeping travel restrictions the worldwide demand for oil diminished fast. The price of oil responded to the falling demand. A late February 2020 article in the Canadian Global News reported plummeting oil prices. US crude oil prices dropped from $60 per barrel on January 1 down to $44.76 per barrel by end of February.
In an effort to stimulate demand OPEC members further reduced oil prices. Among waning demand cheap oil flooded the global market. This rattled other nations dependent on oil exports. One case in point occurred in Western Asia. CNN reported in March that an oil price feud had erupted between Russia and Saudi Arabia. With the loss of oil income many smaller nations struggled even more to cope with the economic crisis.
Impact on renewables
Forbes reported in April that in the US and Canada the green economy created few jobs. The new jobs were not enough to offset the jobs lost in the oil industry. This indicates a glaring disparity between the decline of oil and the growth of its substitutes. The global economy is still too dependent on oil. It is too susceptible to oil prices. It is critical that we cure our economy of its addiction to oil.
We face a classic macroeconomic problem. The rate at which we adopt renewable energy sources is strongly influenced by oil prices. Financial education site Investopedia states that organizations such as the OPEC carefully control global oil prices. They use strategies such as ‘pricing-over-volume’. It involves controlling the global supply of oil to manage prices. This ensures that oil remains cheaper than renewable alternatives. For many governments it is simply not profitable to invest in developing the infrastructure for renewables. They are left with little choice than to go with the cheaper short-term solution of relying on oil.
Thankfully some nations continue research and development into renewable energy. Other clean sources of energy are also under research. Numerous governments have policies to subsidize renewable energy. ClimateCouncil,org.au reports that Uruguay produces 98% of its electricity from renewables. Costa Rica gets 95% of its power from renewable energy sources. These successes are proofs of concept for doing away with carbon based fuels.
The Mexico Oil and Gas Summit was held in late October 2020. Several important topics were discussed. These give us insight into how oil companies think. The topics included COVID-19, human resources, health, onshore and upstream activities, and the cost efficiency of onshore projects. Likely outcomes of this summit will include new oil exploration, new anti COVID-19 safety measures for oil workers, and the expansion of existing oil infrastructure.
Another notable event is the Abu Dhabi International Petroleum Exhibition & Conference (ADIPEC ) 2020. Its topics included the anticipated energy policy of President-elect Biden, period performance forecasts, and publicly shared corporate projects and targets. These events make it evident that oil corporations are highly strategic. They keep a close watch over political and economic developments with a view to preserving their business interests.
The demand for crude oil continues to fluctuate. The response from the oil industry will be twofold. Oil corporations will continue to control supply and fix prices to outdo the competition. Simultaneously they will invest in research to improve the efficiency of oil exploration, extraction, and transportation.
The global oil industry employs hundreds of thousands of workers, most of whom are migrants. The New York Post reported in October that the US energy industry cut 107,000 jobs in response to the economic crisis. However the situation of migrant workers in the Persian Gulf and other major oil producing regions is worse. These labor migrants send money online to support their families back home. Unfortunately many of these jobs are temporary or contractual. Those who can are leaving the oil sector to work in construction, manufacturing, and agriculture.
There is a long way to go before renewables begin to catch up with global energy demands. Meanwhile oil will remain important for years to come. The interplay between oil prices and the global economy is far from over.
About the author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.