No matter the circumstance, oil is still the most prominent commodity in the world. According to its price, we can say what is going on in the world’s economy and predict future events globally. At this very moment, it tells us that the world economy is experiencing enormous challenges. Let’s see how the black gold prices shape societies with an accent on the influence of oil prices on the US economy.
The consequences of oil price fluctuations
Recession can be triggered by high oil prices as well as by the low ones. Massive dumping of oil prices can be seen as the massive tax cut on a global level. Businesses like retailers and supermarkets will benefit from the lower prices since their customers have more money in their pockets because they pay lower transportation prices and lower oil prices on the pump. However, we can see that petrol retailers aim to increase their margins to compensate for a big sales volume decrease.
A dump in oil prices is usually welcomed in gas-guzzling countries. The average American consumer burns about ten liters of oil per day in regular circumstances. On the other hand, the oil-producing nations can lead to the loss of thousands of millions in the overall economy.
Just like any commodity, the oil price is determined according to demand and supply. Demand is a proxy for the activity of the global economy. At this moment, we are witnessing demand destruction on an international level due to grounded planes, emptied cities, and shut down factories.
The biggest oil producers have cut their production so that the Brent crude price has continued to go down, reaching twenty years low in the last quarter. Just for the comparison, at this time in 2019, the price was 70 dollars.
What means the change in oil price for the US economy
Since 2018, the United States has become the world’s largest producer, with more than 12 million barrels extracted every day. The abundance of this supply posed a risk in the market for the major oil-producing countries. The Russians and Saudis imposed quotas on themselves to keep oil prices acceptable. This reduction in supply turned into a trap: the more they cut back on production, the more Americans produced.
After several months of continuous fall, American oil is in a ubiquitous situation: the value of a barrel was quoted, in New York, in April 2-020 was quoted below 0 dollars.
Since the oil is traded in futures contracts mostly by the airline companies and heavy industries, the dumping of oil prices means an even bigger crisis. Investors looking to get rid of their barrels were willing to pay to find buyers; the market is saturated. For the first time in its history, the barrel’s price is experiencing an episode of so-called “negative” prices.
This contradictory situation resulted from the oil crisis caused by the global Covid-19 pandemic, which caused demand to drop by 30% in a few weeks.
Oil price impact on the US unemployment rate
The oil and gas industries support approximately ten million jobs and are among the economy’s biggest generators. The oil sector also creates jobs in a range of other sectors.
According to analysis, more than 70 percent of jobs lost in 2020 due to COVID-19 may not return even by the end of 2020. The oil sector has become more sensitive to changes since the price crash in 2014, thanks to the short-cycle investments. In an optimistic scenario where the oil price would be at $35 per barrel, the rate of employment recovery would be no more than 3% by the end of 2020.
Low oil prices can help economies recover quickly from recession times and avoid the situation where the recession slides into economic depression. However, the biggest US oil companies are spewing their cash into pension schemes contributing largely to the retirement income and public budget. Bad news for oil companies means bad news for the security of pensions.
The oil price is a delicate balance of different interests. That’s why the US prefers a stable price of approximately$50 a barrel. At this moment, the balance is shattered, meaning many challenges for the US economy.