Konstantin Sonin: "Oil: Spring 2020"

"In my opinion, too much attention is paid to the issues related to oil in the current Russian discussion. Of course, the price of oil is very important for the budget and for the economy as a whole - but it is almost impossible to influence the world oil price, and in this sense constant conversations about this are scared," the professor of Chicago University writes on his Facebook page.

“This simply means that instead of relevant issues - what expenses to reduce (capital, military, etc.) and how to support citizens in the course of combating coronavirus - practically not important things are discussed.

There is no question that what is happening with oil in 2020 is the events historical for this market. The price fell to levels to which it has not fallen for a long time. (Prices in the graphic are recalculated in the prices of this year.)

A drop in prices in any market can be caused by two things - a drop in demand and supply growth or a combination. If you can see what the volume of the goods sold, you can see which of the two reasons is more important. In the oil market, this, oddly enough, is not so easy to see, but it is quite obvious - that there is no increase in sales. That is, the main reason for the fall in prices is a drop in demand.

If the Americans stop driving by cars (and they drive less because of quarantine), then, of course, the demand falls. American motorists consume about the same amount of oil per year as the entire Chinese industry. By the way, from the same consideration it follows that as the quarantine is weakened (while it only intensifies), the demand will grow again and the price will rise.

The quarantine has an interesting reduction in American prices for political scientists, the investigation - the American president pronounces words about increasing oil prices. Usually - for decades - any American president struggled for low oil prices. Even now, when the United States has become a large manufacturer, it is hardly serious - the oil industry is 1.5% of the US GDP (although there is an electoral meaning in support of the industry for the Republican President). Moreover, President Trump loves imported duties.

Of course, an increase in the supply also reduces the price, but this contribution is hardly particularly high. The idea that with the help of increasing the offer can be removed by shale oil from business is so absurd that it is unlikely that anyone was seriously guided by decisions. (Sm. Schedule, which I have already recommended for analysis in the school lesson.)

So I continue to believe that refusing to participate in the additional agreements of OPEC+, Russia was guided precisely by the understanding that in the context of such a fall in demand - whatever do with the proposal, nothing will change. "