Why are the oil prices falling?
Team Veye | 20-Apr-2020
As the world braces for the deepest recession since the great depression, market watchers are evaluating another negative impact. Falling oil prices.
Eruption of coronavirus led some uncertainty in stock markets, due to the much lessened commercial activity, idled factories and numerous cancelled flights.
The pandemic led to a very steep fall in worldwide energy demand leading to a plunge in oil prices. There have been multi faceted concerns on oil demand amid coronavirus shutdowns.
The Oil prices have suffered the biggest fall since 1991 when American forces had launched airstrikes on Iraqi troops following their invasion of Kuwait.
What are the reasons for this price change? Has any other source of energy suddenly become more competitive? Whether the demand for oil suddenly decreased or supply increased abnormally. Or is it another instance of monopoly power of oil producers falling.
But there have been no major discoveries of oil or breakthrough in an alternative source of energy recently. Though, certainly, there has been a loss of monopoly power. There have been reports of tension between Saudi Arabia, the most important OPEC producer and Russia, the most important non-OPEC producer. Disagreements have surfaced on demand to cut the output to slow or stop the price erosion.
This time, the oil prices also fell due to the slowing of the world economy thus resulting in reduced demand for oil. Here, it would be worthwhile to note that demand for oil is inelastic. Mere one percent increase in output can lead to a ten percent drop in price. The enormity of this is apparent by the fact that just a three percent increase in output is needed for a massive thirty percent price drop.
Drop in oil prices further reduce economic growth. The oil prices directly affect the prices of other commodities whether petroleum related or not.
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