Global Oil Shock: Oil Pricing, Supply and Demand
Posted on Thursday 27 August 2020, 14:23 - Energy Crisis - Permalink
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We’ve come back to talk to you about the situation regarding energy, specifically oil and its supply and demand. So many of you rather gleefully asked what sort of conjuring trick we’re going to perform in order to come up with an energy crunch in this current situation. And you woke this morning to listen to the BBC news, where they stated that the price of US oil had fallen below zero, which is a situation that you’ve never actually heard before, and which did cause some confusion. You dug into it, and what it basically means is that producers are no longer being actually paid, but would have to pay themselves in order to have the product removed.
So, what sort of a trick indeed would need to be pulled off to turn this situation into one of shortage. One word really covers it pretty adequately, and that is ‘dislocation’. Looked at from a global perspective of course there is massive over-supply of oil. Demand has fallen dramatically due to large sections of the global economy no longer functioning as they did just a few weeks ago, resulting in an enormous glut of product, driving down the price. Not a situation that anyone might imagine would result in shortage, but this would be to miss the point. Shortage will occur locally where there is a mismatch between supply and demand. This will occur because events disrupt – in some cases completely destroy – refining and shipping capacity.
So this will have a very confusing impact on markets. There is going to be extreme volatility in a short while, and we don’t just mean from the point of view of the upheavals – seismic and volcanic activity – but volatility across every indicator. Nobody will have seen this coming.
This will cause violent fluctuations in price, and in fact it will cause the centralised mechanism for arriving at a price to fail in itself. It will be too blunt a tool to accommodate the regional and local issues which are going to arise.
The powers that be in the oil industry have been dysfunctional for quite some time. Only very recently the price was driven down by political in-fighting and by the attempts of some players to remove others from the market, by making various types of product unviable. Viable is an interesting word, because the viability of all sorts of activity is now going to come into question.
Let us suggest to you for example that various outlying destinations for travel will, over a short period of time, become unviable. Why should that be? Well, would you drive your car from there in southern England, to a destination in Scotland, if you weren’t sure you would be able to purchase enough fuel for your return journey? We can’t put it any more simply than that. Who would fly a commercial airliner to a destination where there is any uncertainty that sufficient supplies of fuel are available for the next leg of the journey?
This is really what we mean when we say ‘deconstruction’. The wheels are already set in motion to deconstruct the way that you live. It’s a very simple and effective circle where a fall in demand – it doesn’t need to be that great – drives a reduction in manufacturing or production, which may cause unemployment.
This will cause other consumers to re-evaluate whether they need to make a purchase or a journey – whether it’s indeed necessary – so they will lose confidence. That loss of confidence will then reduce demand further, so consumption unravels due to this sequence of events.
So you can see now that nobody will be required to pull a rabbit from a hat in order for there to be a fuel shortage during this time of glut.
We hope this is a useful insight on how the First Global Oil Shock will happen at a time when there is surplus oil in the market and price of oil is at an all-time low.