The low fuel prices we’re experiencing may seem like a surprising silver lining to the pandemic, yet it’s not as beneficial as it may seem.
First, let’s get to why it’s so low. No one is driving so naturally, there’s very little demand for fuel. This then leads to a series of big price rollbacks –dropping by PhP 10 in just a little over three weeks (March 16 – April 6, 2020). But that’s just one half of the equation. The other major factor driving the price of fuel down is oversupply.
Saudi Arabia and Russia — two of the biggest oil producers in the world — disagreed on how to stem the price drop caused by the global lockdown. One (Saudi Arabia) wanted to cut production, while the other (Russia) wanted to ramp it up. In retaliation to Russia’s unwillingness to follow suit, Saudi Arabia flooded the market with more than 2.5 million barrels of crude per day, which further pushed the prices down. In the end, it hurt not only Russia, but all oil-producing countries, including the U.S. Bottom-line for us, low fuel prices. Yahoo! Well, not quite.
In ordinary times, low fuel prices would automatically translate to more money in our pocket that in turn, gets spent over the weekend at the malls, or traditionally during this time of the year, in some vacation out of town. But these aren’t ordinary times. Instead of boosting the economy, our spending has ground to a halt (save for essential items) and businesses are suffering (especially SMEs) with major layoffs in the offing.
When stores aren’t making any money, loans aren’t getting paid, which means these loans could default. This will make banks risk-averse and hold off on approving loans that are needed to restart businesses.
Without profit, the share price of oil companies will go down, which will drag the average profit of the entire stock market into the red. When that happens, everyone’s share price drops.
Nobody has been going to fuel stations too, which means Treats, Select, and other at-station convenience stores aren’t enjoying any business. Right now, these fuel companies are already out on a limb with all the fuel subsidies for the ‘Free Ride for Health Workers Program’. While they have CSR (corporate social responsibility) budgets specifically for times like this, it puts a mighty strain on funds that could affect other longstanding CSR projects in various communities around the country.
Emerging automotive tech is going to take a hit as well. As massive budgets get downsized or put on hold, research for more sustainable sources of energy will slow down or stop. And with pump prices so low anyway, people won’t mind paying for fossil fuel. This will worsen the already terrible traffic conditions and increase tailpipe emissions tenfold. The biggest losers will be the EV (electric vehicle) market and automakers who’ve lined up launches in the next three years.
On a global scale, it’s scarier. Studies have shown that a 10% decrease in the price of oil caused by reduced demand leads to a 0.2% reduction in world GDP (gross domestic product). The price of Brent crude oil (the global benchmark) in February 2020 was US$ 55.70. It was down to US$ 21.57 by April. That’s a 61.27-percent drop.
The good news is the overproduction has finally stopped. Saudi Arabia and Russia have reached an agreement in early April 2020 on cuts necessary to stop the drop. Will that be enough to stabilize the price of oil? Will that help consume the current oversupply? Only time will tell. First, people need to start moving around again: which means flying, driving, and commuting. That’ll only happen when the threat of COVID-19 is gone.
For now, be happy that fuel prices are low. So fill ‘er up when you can, but know that if the current scenario continues to drag on, we could be in for a major recession.
By Eric Tipan