Sakshi Mishra (21BSP3294) - Batch of 2023

As we know, economic health has been damaged globally by the pandemic, and demand has fallen off a cliff. The big picture was that the oil demand completely collapsed due to this pandemic that paralysed economic activity during the summer of 2020, pushing the price of crude oil to $9.12 per barrel, which was the lowest since Dec 10, 1998. With commercial airliners grounding their planes, passenger vehicles staying unused and shuttered factories, demand nosedived within weeks.

The powerful oil-producing nations such as Russia and Saudi Arabia continued to pump out millions of barrels of oil even though demand was falling. This condition had led to a glut. With supply exceeding demand, the price had to drop inevitably. The Organisation of Petroleum Exporting Countries (OPEC) held an emergency meeting in February 2020 to calibrate its production for the rest of the year. It planned to cut the output by another 1.5 million barrels per day until the end of the year, which would have reduced the global supplies by 3.6%. The OPEC expected the pandemic to affect the oil demand adversely. However, Russia refused to accept this arrangement, as it did not want America’s shale companies to benefit from the policy of controlled supply. Even worse, there was a spat between Russia and Saudi Arabia, two of the biggest crude oil producers. Both sides ended up producing even more oil than needed. Saudi Arabia started a price war with Russia. They were making more relative to the demand, which led to a nearly 30% fall in crude oil prices. It was the sharpest fall in crude oil prices since the Gulf War of 1991.

US President Donald Trump intervened to arrange a deal and managed to get Russia and all other major oil-producing nations to agree to the cutback. However, the problem was that those millions of barrels of oil already produced were sloshing around the system, particularly in the US that caused the major price crash of oil two levels below zero. So effectively, producers were desperately seeking buyers, and they had to pay buyers to take the oil off their hands in the negative price territory. This situation was unprecedented. Oil prices always suffered during economic crises but never before had it fallen this low into negative territory.

The United States oil market created history when West Texas intermediate (WTI) prices, the best crude oil quality globally, fell to -$40.32 a barrel in trade in New York.

Lower crude oil prices reduce the burden for oil-importing countries like India, the world’s third-largest importer of crude oil and fourth-largest importer of LNG. There are, however, adverse consequences on the stock markets worldwide.

With 80% of its energy requirements met by imports from the international market, India stands to save ₹10,700 crores for every $1 drop in price. The price had fallen from $147 per barrel in 2008 to around $24 per barrel. There was no doubt that India would benefit from lower oil prices through a lower import bill and current account deficit.

The government decided to buy oil worth ₹5,000 crores at the current price of around $30 per barrel. However, this opportunity did not allow the Indian economy to gain full potential due to the lack of crude oil reservoirs in India and the Coronavirus outbreak that had halted most of the economic activities in the country.

Reducing oil prices may be a temporary situation as Saudi Arabia, and Russia cannot sustain low oil prices. Considering this, India used the situation wisely. Thus, the government took necessary steps to fill its reserves, as this opportunity may not occur again soon. Then over time, as the economy picked up momentum, the price of oil rose again.