By KIRBY ROSS, Phillips County Review
During the final week of March 2019, the price of a barrel of oil was running around $60, and we had $2.50 a gallon gasoline.
Fast forward a year later to the final week of March 2020. A barrel of oil is now bouncing around the $20 mark.
The last time oil was this low was in 2002.
So what’s going on?
A perfect storm of events, that’s what.
Just as coronavirus stories were leaking out of China earlier this year and were being called a “hoax” in some quarters, the Organization of Petroleum Exporting Countries (OPEC) was meeting to set prices.
Keep in mind that one thing had nothing to do with the other.
With worldwide oil prices already on the slide due to American companies’ success in using fracking to tap into hard-to-access petroleum deposits, most members of OPEC expected the meeting to be routine in setting the quotas that keep oil production in check, resulting in artificially-high prices.
Basic supply and demand economics — OPEC keeps supply low, so demand is drives prices up.
At the OPEC meeting Russia dropped a bombshell which took the producers by surprise — it announced it was going to refuse to adhere to the quotas being imposed on it.
Russia, seeking to drive oil prices down to financially injure U.S. oil interests who are utilizing fracking practices, has decided to dramatically increase its own production. In addition to wiping out fracking, at the same time Russia hopes to grab a larger share of the world market.
If their gambit is successful, under normal circumstances oil prices will soon rebound and Russia will make a killing with the combination of increased share and higher prices.
Saudi Arabia, angry at Russia for defying OPEC quotas, has responded by dumping millions of gallons extra onto the world market, attempting to increase its own market share and put Russia into a huge financial squeeze itself.
As the Saudis gambled, they are calculating they can better handle a prolonged oil price war than Russia can.
So with prices skidding downwards, the Coronavirus pandemic, which had been lurking unnoticed and hovering in the background, is now exploding.
The perfect storm of events has now hit.
With coronavirus emerging just as the Saudis and Russians started trading punches with each other, the world economy is going into a tailspin, resulting in a massive decline in demand for oil.
So now, Russia and Saudi Arabia are competing with one another to see who can dump the most oil on the market to try to grab share from one another, combined with a huge decline in demand for that oil as a result of the world economy taking a nosedive, now there is no place to store the large glut of it.
With no place to store it, and with more oil flooding the stream of commerce every second, price is diving diving diving.
Right now the price of oil is floating around $20. Oil observers predict it will go even lower. Possibly much lower.
The last time there was $20 oil, gasoline cost around a buck and a quarter a gallon.
Gas is not there yet this go around, with retailers holding up prices in order to pocket profits for as long as they can before competitive forces make them reduce it.
But prices are poised to drop, and drop deeply.
One dollar gasoline, and maybe even lower, is now possible as the triple whammy of Russia, Saudi Arabia and coronavirus do their thing.
Kirby Ross is editor of the Phillips County Review. Republished with permission.
Image by andreas160578 from Pixabay