Question

1a. Can COVID-19 induced fall in oil prices act to break the global carbon lock-in?

b. Oil prices have become 'evermore' volatile. Ranging from as high as US$160/barrel, oil prices went low and with the impact of COVID-19, WTI crude sold for below US$0/barrel on 20th April 2020. Based on the case of one oil producing country in Africa and one from any other region, discuss the differentiated impacts of oil price volatilities on economies.

Answer 1

1.a.COVID-19 threatens survival of Homo sapiens, the modern human being. The tiny virus expanded its active presence across the continents, with impactful footprintin more than 175 countries. As on 27 March 2020, cumulative infections crossed half a million mark resulting in 24,361 people losing their lives. As the infectionsare rising exponentially, the situation is getting too scary day-by-day.

One of the linchpins of global economy is the petroleum industry, more specifically oil. The appearance of Corona virus in December 2019 in China and gradual expansionof the epidemic drastically brought down demand and price of the crude oil. On 31 December 2019 -- on the date of reporting of COVID-19 -- WTI oil future wastrading at US $61.06 and price dropped to $23.36 on 23 March 2020. More than 61 per cent fall in the price of WTI crude sends a message of demand imbalance.
It is expected that global oil demand may shrink by 15-20 million barrels for day (mbpd) due to Corona effect including extensive lockdown in oil consumingeconomies. The leading oil consuming nations including the USA are struggling to cope with corona spread. Oil demand in the USA may come down to 12.5 mbpd, awhopping reduction of 8 mbpd [2] --roughly 8 percent of global oil consumption in 2019; which could be sufficient enough to meet combined oil requirements ofMexico, Indonesia, UK, France, and Thailand.
The United States America-the largest economy in the world and the biggest consumer of oil finds itself at the top of the table of most COVID-19 infectedpatients. China, the 2 nd largest oil consumer seems to be on the path of recovery. Intense and rapid spread of COVID-19 forced leading European oil consumers likeGermany, Spain, Italy and UK to go for lockdown. It is observed that 84 percent of the COVID infections and 94 percent of human causalities through COVID-19happen to be in top 22 oil consuming nations. With combined GDP of $68 trillion these 22 countries contribute 79 percent of the global GDP. This means restrictedeconomic activities in these countries will certainly lead to economic slowdown followed by severe global recession.

COVID-19 has already impacted the price and trade of crude oil. Combined effect of price-war and COVID-19 resulted in Brent crude price reaching 17 years low. Afew analysts are expecting crude price to fall below $ 10/ barrel. A pessimistic analyst predicts for “negative crude price” 3 , which means the producers will paythe buyer to lift inventory from the well-head. If the “negative price” [3] theory becomes a global reality then the importing nations like India and China couldrecover from the COVID-19 effect earlier than the others. On the other hand, some of the oil exporting nations will go bankrupt sooner than later. To my mind,
both the theories will find difficulty to be part of reality.

Falling crude price has already created enough distress among the investors in upstream sector. The oil field service provider Schlumberger recently announcedcutting 30 percent capital expenditure [4] primarily due to aggressive cost cutting at the client end.
The global oil industry already entered a turbulent phase. Oil industry would need adequate support from respective governments in their country of operation ororigin for survival. In the short-run the oil companies can use their cash reserves to sail through the financial turbulence. However, in the long-run risky and capital intensive upstream sector would seriously struggle to remain efficient. Oil importing nations may enjoy low oil price whereas the exporting nations will haveto find their way to generate revenue from alternative mechanism. COVID-19 will seriously push oil industry to the Intensive Care Unit, where lack ofventilators will hurt the industry badly. During COVID-19 and beyond, policy makers must take care of oil industry as survival of oil industry holds key to revivalof economies.

b.The price of the main U.S. oil benchmark fell more than $50 a barrel to end the day about $30 below zero, the first time oil prices have ever turned negative. Such an eye-popping slide is the result of a quirk in the oil market, but it underscores the industry’s disarray as the coronavirus pandemic decimates the world economy.

Demand for oil is collapsing, and despite a deal by Saudi Arabia, Russia and other nations to cut production, the world is running out of places to put all the oil the industry keeps pumping out — about 100 million barrels a day. At the start of the year, oil sold for over $60 a barrel but by Friday it hit about $20.

Prices went negative — meaning that anyone trying to sell a barrel would have to pay a buyer $30 — in part because of the way oil is traded. Futures contracts that require buyers to take possession of oil in May are expiring on Tuesday, and nobody wanted the oil because there was no place to store it. Contracts for June delivery were still trading for about $22 a barrel, down 16 percent for the day.