Question

Net U.S. energy imports have decreased every year since 2016. Last year’s change in net energy trade (crude oil, natural gas, coal, and petroleum products) in the U.S.—from 3.6 quads of net imports in 2018 to 0.8 quads of net exports in 2019—was the largest change in U.S. energy trade since 1980. How would the current low oil price affect the U.S. crude oil trade (import and export) in 2020? Apply the D-S (demand, supply) model.

Answer 1

The market for oil is rapidly changing. One of the core reasons of this is the fact, that demand across all countries has declined. The United States is bad hit today, by the Corona Virus and numerous economies are facing similar actions.

As countries remain closed, their demand for oil and petroleum products will fall rapidly. As a result of this, numerous countries will be able to substitute oil imports with local production as much as possible to keep fiscal deficits in check.

If we see the international prices of oil, we realize that they have already hit all time lows. The reason for this is simple, as people begin demanding lesser, it becomes less profitable for business owners which then have no choice but to reduce output as well as prices of the commodity.

In my opinion, due to the change in demand and falling prices of oil, both imports and exports of the United States will see a large dip. The international demand being negligible it is not profitable for oil producers to supply in the current scenario.

On one hand domestic demand can be met by local production, and on the other, global demand is hardly present. As a result, both imports and exports would see a rapid decline.

You may understand the same with the help of the following diagram:-

Here we can clearly see that the initial prices of oil gets reduced and revised over time. The same now becomes decreased price. Further, the Initial Quantity also becomes Revised Quantity and decreases.

The Demand for Oil can clearly be seen declining from Demand Curve 1 to Demand Curve 2 and the supply shift can also be seen.