Question

Coronavirus and global oil markets

Oil prices have fallen from about $50 per barrel to $20 per barrel over the past two months, with most of that decrease occurring in the first half of March. The drop in prices is widely attributed to the decrease on global oil demand caused by the Coronavirus/COVID-19 in combination with strategic and political supply-side maneuvering by Saudi Arabia and Russia (who are the largest exporters and the second and third largest producers, accounting jointly for almost a quarter of global production). For the purposes of this assignment, let’s focus on the role of Coronavirus and global demand, ignoring the supply-side decisions by Saudi Arabia and Russia.

2.1 According to economic theory, why would a decrease in future oil demand reduce oil prices now?

2.2 Given the changes in oil demand and prices, is consumer surplus from gasoline consumption higher or lower today, compared to a hypothetical world in which there were no Coronavirus?

2.3 Suppose that instead of a decrease in global demand, there was an increase in expected future global supply. How would this affect US oil production and oil prices now and in the future? Would the US economy benefit or lose, overall?

Answer 1