After 5-days of significant loss, oil prices made a comeback on Wednesday with prices increasing by just over 2%. Reports suggest that the 2% jump, reflecting greater confidence in the market, could be a result of news that scientists have successfully developed a cocktail of drugs which can be used against the rapidly spreading coronavirus. These reports were however, quickly down-played by the World Health Organisation who said no such remedy had yet been created.

Whilst the coronavirus has still largely been contained in China, the global economic impact from any fallout in China will be significant. The falling price of oil is a perfect example. China is by far the world’s largest importer of crude oil, and with the Chinese economy coming to a standstill as it grapples with containing the virus, the daily consumption of crude oil across the country has already slumped by around 20%. This is the result of factories, offices, and shops delaying reopening after the Chinese New Year holiday, internal travel restrictions, and quarantines of cities with millions of people inside.  

In addition to the loss of demand from Chinese producers, the demand for jet fuel has also taken a big hit as travel restrictions have been put in place by many major airlines, cancelling all flights to and from the Chinese mainland. Whilst China will be sure to feel the major impact from the outbreak of the deadly coronavirus, the oil price slump in the last week is a strong indicator of just how integrated the global economy is, and how any shock to the world’s second largest economy, is likely to be felt by everyone, in all corners of the world.

THINK LIKE AN ECONOMIST!

Q1. Explain why the demand for oil has decreased from China.

Q2. With the use of a diagram, show the impact of the events described in the article on the market for oil.

Q3. Analyse the impact that the spread of the coronavirus is likely to have on the global demand for oil.

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TheCuriousEconomist

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