Question

case:

Now because of COVID-19, the lockdown makes this industry highly shattered, Less movement of vehicle, less or no manufacturing sectors apart from few commodity, all these creates again a big dilemma in this industry.

Question:

-Show how the equilibrium price will change in oil industries the in relation to the fluctuation of prices

Answer 1

Sol:-

With lockdowns all over the world, there are very less vehicles on the road. Also, countries are not operating airplanes as 80% of all the airplanes are grounded and the industries are not operating or operating partially. So, demand for oil is falling which lead to a decrease in demand for oil shifting the demand for oil to the left from D to D’ which will lead to a decrease in price of oil from P to P’ and this decrease in price will lead to a decrease in quantity supplied decreasing the equilibrium quantity of output to Q’ from Q.

The oil and gas sector has suffered a tumultuous start to 2020 in the wake of Covid-19. Overall, the energy sector – a key pillar of many FDI strategies – is forecasted by GlobalData to face downward earnings revisions of 208% in 2020, with the shock compounded by the oil price crash.

Oil prices have decreased by around 50% since January 2020, with the US market reporting record lows. With countries on lockdown there is significantly less of all activity, and the demand for oil and gas has fallen spectacularly.

The International Energy Agency reported that oil demand is likely to decrease by 29 million barrels per day (bpd) in April 2020 and by 23.1 million bpd in Q2.

Thus, the sector has seen an imbalance of oversupply and less demand, further exacerbating the price crash. This has trickled down and impacted a number of sectors that usually pull FDI focus, including the chemical, plastic and automotive sectors.

This has also caused a liquid storage crisis, with many facilities reaching maximum capacity. On 20 April, for the first time in history, oil prices went below zero, when US price marker West Texas Intermediate was trading for May delivery at -$4.29. Oil storage has gotten so bad that producers are literally paying buyers to take the oil deliveries. Oil companies such as Shell and Exxon are making moves to counteract oversupply issues by delaying LNG project constructions.