PRICE WAR IN THE OIL INDUSTRY

On 8th March 2020 there was a price war between Saudi Arabia and Russia, which consequently caused 31% price drop (From $31.02 to $20 per barrel). The factor which led to the price war between the two countries is the drop in quantity demand for oil barrels due to the widespread of Coronavirus, subsequently Russia refused to agree with OPEC to stabilise/fix a price, clearly indicating a non-collusive oligopoly. The price war has caused the oil prices to drastically fall, and has also led to reduction in the world oil supply, which can have drastic effects on the economy because oil is an essential resource for the world, as oil is used for transportation, energy production, cooking and more, without these activities an economy will have major problems in functioning, for instance visualise an economy sustaining without electricity; communicating with other without electricity would become impossible, which can result in an economy down turn. Nonetheless, the reduction in the oil prices are causing the OPEC to make losses.

The fall in the oil supply has various benefits, some of which, include less pollution(water and air) and sustainability; as the consumption of oil has reduced it reduces the probability of oil spills; Oil spills which can have critical effects on the economy and marine life, for instance the BP’s Deepwater Horizon spills in 2010 caused significant damage to the marine life (decreased mobility, exhaustion, dehydration and overheating), this also had a major impact on fishing industry as it cost the fishing industry $94.7 million in 2010.

Nevertheless, The air pollution/emissions which are caused due to using oil has an energy source are also likely to reduce because the reduction in oil supplies may force countries which heavily rely on imported oil as a source of generating energy to use other clean technologies (solar energy, hydroelectricity, tidal energy) which are sustainable for the environment.

However, the effects of price war affect both the countries Russia and Saudi Arabia the price war which has resulted in the OPEC making economic losses, which may induce unemployment, hence result in poor living standards and falling GDP this is because OPEC is a very large contributor to the GDP of various countries, including Saudi Arabia (OPEC contributes to 87% of Saudi Arabia’s budget revenue). Nonetheless, the under allocation of oil can affect the global market as whole, including transportation systems (Air Crafts). Most importantly, the falling quantity of oil supplied, during the time of the outspread of coronavirus can have major effects on the stock market and economies around the world. Also, as oil is a primary commodity, and is essential for many activities in a country, a reduction in the oil supply will be miserable for the economies that are heavily reliant on oil supplies, the impact can be as a large as down crash in the economy. To maintain world economic stability, the government of Saudi Arabia/ Russia has to intervene to ensure that the differences between Russia and OPEC’s are resolved, or other actions must be taken to maintain world oil supply.

It is crucial to maintain world economic stability, either many countries may fall into economic recession, this is why it is important for the government of Saudi Arabia/ Russia has to intervene to ensure that the differences between Russia and OPEC’s are resolved, or other actions must be taken to maintain world oil supply.

Image Courtesy- Shutterstock.com/Thaiview

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