Introduction
Many forces contribute to the worldwide need for oil, from manufacturing to personal use. The price of oil is a leading economic indicator since it influences a variety of sectors and, in turn, consumer costs. Oil prices in 2020 have been unpredictable due to supply and demand variables. There is a tight relationship between economic growth and oil consumption. The need for oil and economic development is rising (Organisation for Economic Co-operation and Development, 2020).
The COVID-19 pandemic profoundly affected the world economy in 2020, leading to a sharp reduction in economic activity and a proportional decrease in oil consumption. The oil price spiked immediately after the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members decided to limit output in April 2020 to lower the global oil supply.
Review of Literature
The COVID-19 pandemic drove gasoline prices down in 2020. Jefferson (2020) states that the epidemic has affected oil supply, demand, and price. In reaction to decreased demand, oil corporations curtailed supply, lowering prices. Pandemic-related transportation and distribution issues have also lowered oil prices.
Iqbal et al. (2020) relate oil supply concerns to geopolitical uncertainty, production and delivery disruptions, and market changes. These variables strongly impact oil prices, thus oil producers should consider them when developing supply chain management plans. The authors suggest supplementing oil with alternative energy sources to ensure a consistent supply.
Reduced economic activity as a result of the pandemic resulted in reduced demand for oil, which resulted in lower gasoline consumption and a decline in demand for transportation fuels, as Cowan (2020) stated. As a result of this news, the price of West Texas Intermediate (WTI) crude oil fell to harmful levels in April 2020. Another concern was the availability of oil on the market. According to Malliet et al. (2020), due to the pandemic’s implications on global oil supply lines, OPEC and its allies could not agree on production curbs in March 2020.
According to the Organization for Economic Cooperation and Development (2020), the financial situation of oil-exporting poor countries deteriorated due to decreasing oil prices, which reduced revenue. According to Shehabi (2022), the pandemic and accompanying drop in oil prices caused a dramatic drop in GDP and employment in the Gulf oil sector. Wang et al. (2022) use a new technique based on a dynamic panel data model to assess the impact of the COVID-19 pandemic on US oil consumption. The outbreak significantly reduced oil consumption in the United States, notably gasoline and aviation fuel.
Theories
Economic Theory of Relevance
Since 2020, oil price changes have been best understood regarding supply and demand. According to the law of supply, as the price of an item or service rises, more of it is made accessible, and as the price falls, less of it is made available. However, the law of demand asserts that when the price of an item or service increases, demand lowers, and when the price falls, demand grows. For example, the COVID-19 pandemic resulted in an oversupply of oil in the market since it dramatically lowered global oil consumption. As a result, the price of oil fell precipitously as supply outstripped demand (Hidalgo, 2021). Oil production declined as it became less profitable for oil-producing countries to produce oil at these low prices. OPEC and other major oil-producing countries curtailed oil supply to preserve price stability in the oil market.
Supply Concept
Significant changes in the oil market have occurred since the COVID-19 epidemic broke out. Due to the pandemic’s effect on demand and excess from major oil-producing nations, oil prices crashed in 2020 (Mugaloglu et al., 2021). Since the beginning of 2021, however, oil prices have increased due to several supply-side issues. Suppliers are incentivized to increase output when oil prices rise since doing so boosts their bottom line. If oil prices rise, companies may find it more profitable to invest in oil exploration and development and more efficient oil extraction and refining technology (Esfandiari & Rezvani, 2020). As a consequence, there may be more oil available. Oil supplies are also vulnerable to changes in government policy.
Demand Concept
Energy prices dropped due to a pricing war between Russia and Saudi Arabia after the epidemic drastically reduced energy demand worldwide. Although the oil market has stabilized, the cost of this commodity is still susceptible to macroeconomic factors like changes in demand worldwide (Kilian, 2022). To analyze the movements in oil prices beyond 2020, an appreciation of demand ideas is essential.
As the price of a commodity or service rises, the quantity requested falls, and vice versa. The Law of Demand indicates that as the price falls, the quantity demanded rises (Esfandiari & Rezvani, 2020). This implies that the demand for a product or service decreases as the price rises. As energy costs grow, companies may look for ways to reduce energy use or switch to a cheaper source. Higher prices lead to lower demand, and this phenomenon may be explained by the elasticity of demand (Kilian, 2022).
If the demand for a good or service drops dramatically as its price increases, then its price elasticity of demand is high. For instance, if the economy is flourishing, there will be a higher demand for oil since companies and individuals will need more energy to power their operations (Hidalgo, 2021). As more people need access to transportation and energy, there will be a corresponding rise in the demand for oil.
Relevant Statistics
Since 2020, when the economy began recovering from the COVID-19 pandemic, oil prices have risen gradually due to increased demand. With the global economy picking back up, oil consumption has increased (Wang Q. et al., 2022). The increase in demand has a direct impact on the price of oil. It depicts the decline in world oil supply due to production cuts by OPEC and its allies. The price of oil has increased since there is now less of it. Geopolitical tensions in the Middle East have worsened the growing cost of oil. In addition to production cuts by OPEC and its allies and geopolitical worries in the Middle East, rising demand as the global economy recovers from the COVID-19 outbreak has been a significant factor in the continuous increase in oil prices since 2020.
Real-World Implication and Conclusion
Since 2020, the increase in oil prices has had a tangible effect on the international economy. The rising cost of oil has increased the cost of transportation and production, which has increased the cost of many consumer items. Consequently, inflationary pressure has been generated as firms have passed on the increased costs to consumers (Tischenko, 2019). As a result, the cost of living has risen, pushing more people into poverty and widening the gap between rich and poor.
Moreover, some nations have grown more economically vulnerable due to their greater reliance on oil imports and rising oil prices (Jefferson, 2020). The rising flow of capital into oil-producing nations has opened up new economic possibilities for those living there. Their economies are now more diversified, and they have been able to put more money into things like healthcare and education. In conclusion, supply and demand variables may account for oil price fluctuations since 2020.
Reference List
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Esfandiari, S. and Rezvani, M.H. (2020) “An optimized content delivery approach based on demand–supply theory in disruption-tolerant networks,” Telecommunication Systems, 76(2), pp. 265–289. Web.
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Organization for Economic Co-operation and Development (2020) “The impact of coronavirus (COVID-19) and the global oil price shock on the fiscal position of oil-exporting developing countries,” Policy Responses to Coronavirus (COVID-19) [Preprint]. Web.
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Tischenko, T. (2019) “Federal budget in 2018: Growth of oil and gas revenues, budget surplus,” SSRN Electronic Journal [Preprint]. Web.
Wang, Q. et al. (2022) “Impact of covid-19 pandemic on oil consumption in the United States: A new estimation approach,” Energy, 239. Web.