Full tanks and dry markets: the coronavirus crisis has dealt an unprecedented blow to the oil industry.
(Keystone / Alessandro Della Bella)
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Within weeks, the value of crude oil fell to historic levels and even fell below zero in the United States. What will be the impact of this dizzying fall on international markets and will it also lower gas prices for consumers?
Oil prices have always experienced considerable ups and downs in recent decades, but the April collapse will certainly be remembered. In the United States, a few days ago, the contracts with delivery in May of West Texas Intermediate (WTI) – the crude reference value for the American market – even fell into negative territory. Sellers were therefore willing to pay buyers to get rid of the crude stocks they had on their hands.
A thunderclap of a few hours, limited to the complex American futures market, but which symbolizes the unprecedented crisis in which black gold has plunged. While until now, as in the 1970s, the oil crises were generally linked to production cuts and price increases, this time the markets are saturated and producers and traders no longer know how store excess crude oil.
WTI and Brent prices – which are used as a benchmark for Europe, Africa and the Middle East – are currently between $ 15 and $ 25 a barrel. We are therefore far from the oil prices recorded in recent years.
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Brent price chart
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Why has the price of crude oil dropped in recent weeks?
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Demand for crude oil continues to grow worldwide, but prices have already been set at fairly average levels in the past five years, due in part to the sharp increase in shale oil production in the United States. United States – which has become the world’s leading producer of black gold since 2017. The coronavirus pandemic has frozen demand extremely quickly since mid-March, bringing the markets to saturation.
Measures introduced in many countries to contain the spread of the virus have paralyzed air traffic in recent weeks, hampered road transport and slowed down industrial production. Oil consumption fell by almost a third in April compared to the start of the year, according to the International Energy Agency. Crude oil storage tanks have now reached their limit, which has forced producers and traders to store crude oil also in tankers, oil pipelines and containers of all kinds.
What made the situation even worse was the price war that broke out between Russia and Saudi Arabia in the first half of March. The conflict between these two large producers over extraction volumes has triggered violent chain reactions in the markets, causing prices to fall. The deal, which was reached in early April following pressure from the United States, came after flows of crude oil had already spilled into markets that could no longer absorb it. In order to push prices up, the major producing countries have agreed to cut production by almost 10 million barrels per day since May, but they continue to compete for market shares at a discount.
What will be the impact of this collapse in the price of crude oil?
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The drop in crude prices will also affect prices for gasoline, diesel, kerosene and other derivatives in the coming weeks. A positive effect, therefore, on the importing countries, particularly with a view to mitigating the impact of the economic crisis and boosting growth. The price of motor fuels affects the budget of many households and the profitability of many industrial sectors, as well as road, sea and air transport.
However, there are also several reasons to worry. The value of oil almost always reflects the state of the economy, but also the level of confidence in economic developments. In this sense, current prices reinforce fears of a deep recession that will not be short-lived. The collapse of crude oil will also have serious repercussions for a number of producing countries – such as Venezuela, Mexico or Algeria – which are already in a rather precarious economic situation. It also brings American shale oil producers to their knees, who are already struggling to survive at prices below $ 50 a barrel.
Oil with lowest prices may also slow the transition to clean energy. In recent years, in several European countries, renewable energy sources have become competitive with oil costing between $ 50 and $ 60 a barrel. Current crude oil prices and huge public spending on economic recovery could lead governments and businesses to freeze investments in renewable energy, at least in the short term. On the other hand, this new shock in the oil markets shows once again the volatility and vulnerability of fossil fuels, which could raise awareness of the importance of energy transformation in countries with sufficient financial resources. .
Why does the price of fuel not go down more?
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The price of gasoline and diesel has already been dropping since the start of the year, somewhat anticipating the crisis, but has not been cut drastically in the past two months either. Falling crude prices do not quickly translate into lower prices at the pump, as service stations sell fuels bought weeks or months earlier at higher values.
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graph on the evolution of the liter of petrol in Switzerland
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But even in the near future, we should not expect significant declines in Switzerland. The average price of petrol is currently 1.42 francs per liter. More than half of this amount is determined by various taxes – most of them fixed – which generate annual revenues of 5 to 6 billion francs for the state. More than a third of the cost is related to the costs of refining, transportation and distribution. Raw materials represent only 15 to 20% of the final price.
Given these elements, there is therefore not much room for downward adjustments, while the price of gasoline can above all increase – slowed at most by a drop in demand. Over the past ten years, the price of petrol has fluctuated between 1.40 and 1.80 francs at petrol stations. Rather high taxes and lack of access to the sea make Switzerland one of the most expensive European countries for petrol: currentlyExternal link, only Italy, Great Britain, the Netherlands, Norway and Greece have higher prices.
