Oil Prices - Why Fall?

Why did crude oil prices decrease? 

In early 2020 oil prices suffered their biggest fall since 1991. On Friday 20 March 2020, crude oil prices decreased by 65% when compared to prices in early January of the same year. Two major events are responsible for this. 

Firstly, in order to contain COVID-19 travel restrictions were put, which significantly decreased world crude oil demand since early January. As the World Health Organization declared that COVID-19 is a pandemic, markets are expecting oil demand to decrease further. 

Secondly, there was a disagreement about whether to continue limiting oil production within oil exporting countries. As a result, the USA and the UAE decided to increase production (therefore increasing aggregate supply of crude oil) and further pressure other oil-producing countries with even lower prices and increased competition. 

Is it good or bad for our economy? 

It isn’t necessarily bad that there is a decrease in oil prices per se but it might have a consequence on slowing the world economy. However, in general, consumers benefit from lower crude oil prices as it results in a decline in gas prices at the pump. 

In general, a price cut in oil is good for any country that is a net importer of oil (meaning countries that buy oil). Cheaper oil means fewer expenses means a happier and wealthier population. Hurray! However, countries that are dependent on the production of oil, such as the USA or the Gulf countries, don’t benefit from the same price cut. Smaller prices equal less revenue equals a poorer population. Boo!

The USA's and the UAE’s decision to increase production and lower prices can hurt local companies and affect domestic oil industry workers in the short run but could also lead to increased demand and lower competition in the long run as other countries can’t match their low prices. Whether this was the right decision is for everyone to decide for themselves. 

Written by Aidana Assylbek; edited by Anuar Burkitbayev.