The world awoke to the largest drop in oil prices in 29 years today as Saudi Arabia, the world’s second largest oil producer, seemingly instigated a price war against Russia.
The huge drop in prices, from $41 per barrel on Friday to a low of $27 on Monday morning, was due to the collapse of an alliance between OPEC and Russia who had been cooperating to limit the supply of oil since 2017.
In the midst of the ongoing chaos in the oil market caused by the coronavirus, particularly due to weak demand from China, OPEC and Russia had been negotiating to cut oil production further in an attempt to support prices.
When Russia refused to entertain the idea, negotiations quickly broke down, and OPEC has since made the move to both slash prices and boost oil output. It would seem that this is a strong flex of OPEC’s oil producing muscle, and an attempt to take back control of the market for crude oil which has been significantly eroded by both Russia and the US in recent years.
THINK LIKE AN ECONOMIST!
Q1. What is meant by the term price war?
Q2. Explain why demand for oil has been falling since the start of 2020.
Q3. Discuss the winners and losers in the global economy of a large reduction in the price of oil.
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