Economic impacts of the COVID-19 pandemic and oil price collapse

Economic impacts of the COVID-19 pandemic and oil price collapse

The recent collapse in oil prices in the global market was caused by a combination of supply and demand issues as well as uncertainty about the future, and has resulted in a crash in financial markets. But what are the reasons behind this collapse, and what impacts will it have on oil-exporting and oil-importing economies?

The demand side

Global energy market demand, such as for oil, natural gas, and coal, is declining as the impacts of COVID-19 spread around the world. This decline in oil demand has been particularly significant as oil is mainly used in the transportation sector, and business closures, declines in domestic and international travel, and the lockdowns and quarantines in many countries have all shrunk the demand for oil. A sharp decline in domestic consumption and a possible decline in new investments, declines in tourism and business travel, spillovers of weaker demand to other sectors and economies through trade and production linkages, supply-side disruptions to production and trade, and shifts in health care expenditure are only some of the channels through which the pandemic is affecting the demand side in the oil market.

Global oil demand has contracted for the first time since the global recession of 2009. Demand is expected to fall by a record 9.3 million barrels per day (mbd) year-on-year in 2020. According to the International Energy Agency, for Q2 2020, demand is expected to be 23.1 mbd below the previous year’s levels. Although the exact impact of the COVID-19 pandemic on oil demand will depend on how quickly the virus is contained through governments’ protection efforts and economic stimulus policies, it seems that the IEA’s (2020) projection is optimistic.

The supply side

On 5 March 2020, the Organization of the Petroleum Exporting Countries (OPEC) proposed a 1.5 mbd production cut for Q2 …continue reading