In the not too distant past, the United States reclaimed the position of the world’s largest petroleum producer for the first time in many years, and the oil industry was riding high with hopes of a bright future ahead. The oil industry is no stranger to the many twists and turns of the market, and has gone through a number of significant booms and busts, but never on a magnitude such as this. The pandemic has virtually wiped out the demand for gasoline, as the cars of laid-off workers sit in driveways, largely unused, and airplanes wait in fields amidst lockdowns, travel bans, and stay-at-home orders.
In this video, we are going to show you the factors at play behind this oil catastrophe, what it means for the global economy, and what’s to come for the future of the oil industry at large. We will also discuss how the world can emerge stronger and on the path to a faster recovery by implementing fundamental shifts in its existing economic systems.
Meanwhile, major US producers such as ExxonMobil and Chevron have also cut back on production. Exxon announced plans to reduce their spending by 30 percent, which comes out to around $10 billion this year, and Chevron will reduce their spending by 20 percent, or $4 billion.
This collapse will be felt particularly hard in Latin America, the Middle East, and Africa, where many countries boast economies that revolve around the export of oil. In Iraq, for example, 90 percent of government income comes from oil sales. Countries like Mexico, Venezuela, Ecuador, and Nigeria have already seen slumps in their national incomes. Especially given that many of these places have already seen their fair share of political and social unrest in recent years, the current crisis will only drive already dangerous situations to new lows.
Aside from hurting producers, the devastation of oil prices will also lead to many layoffs of workers within the industry and significant losses for investors. In the US alone, the oil industry employs nearly 10 million people.
The decline of oil prices also leads to risks of deflation as spending slows down monumentally. For example, commodity prices fell by 37 percent between February 20 and March 20, while metal and energy prices fell by 55 percent. When consumers are unwilling to spend, demand dries up, and they in turn wait for lower costs before making purchases. Producers are likely to respond by doing exactly that–dropping prices–and so begins a dangerous spiral in which consumers continue to wait and prices continue to drop, all without anyone actually making a purchase. This is what causes, as we have already begun to see, profits to disappear and business to crack under the pressure.
This is not to mention the tremendous debt that is held worldwide. Over the last decade, the total global debt has climbed rapidly, reaching a record level of $253 trillion. When the economies of individual countries begin to collapse one by one, this will become a major issue.
Deflation is one factor that makes it more difficult for poor countries to fulfill debt payments owed to international banks. In fact, deflation was a major catalyst for the Great Depression of the 1920s and 1930s. During that period, a slump in agricultural prices pushed farmers into precarious financial positions, making it difficult for them to pay off loans on their property. Many households had to default on their mortgages. Attempts to resume production, thereby creating much-needed jobs and products, often stalled, delaying attempts to jumpstart the economy and move towards recovery.
While we focus much of our attention on the health crisis, we are quick to forget the major economic collapse that are not far behind, especially as the effects of the pandemic, such as reduced travel and consumer spending, drag on. Our not so distant past, in the examples of both the Great Depression and the Great Recession of 2007-2009 should serve as a lesson to world leaders and economists now as they attempt to deal with new and unprecedented hurdles.
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