As the fears over the coronavirus outbreak increase, many other things are declining. Such is the case of company stocks, economic activity, travel, crude prices, and now the U.S. petrol prices.
The declining value of U.S. fuel is the result of lower demand in the domestic market, rising demand in the global oil market, and now also the oil price war between Russia and Saudi Arabia.
The impact of the coronavirus on the demand
The impact on the demand can be easily explained. Many public events have been cancelled and many people are being told to work from home.
The economy is decelerating. There is less movement in the streets and people are driving less.
Lesser travels will result in lower demand, which will further reduce gasoline prices for U.S. consumers.
The impact on supply is a bit more complicated. It began with the development of significant changes in the global market, which dissemination was eclipsed by the news of the COVID-19 outbreak and its spread across the world.
In February, the United States’ oil output hit historic highs, with more than 13 million barrels per day. The country was barely producing 5 million barrels per day a decade ago.
Keeping in mind that the U.S. is the world’s greatest consumer, it depended on foreign production, especially from OPEC members.
Now, it is the top oil producer worldwide. The nation is leading both supply and demand.
This is added to the coronavirus outbreak that first paralyzed China’s economy, which is the biggest oil importer. And then affected global economy.
Problems for Russia and Saudi Arabia
Another two large producers, Saudi Arabia and Russia, are not content with the situation. Both would like to see oil prices getting back to closer to $100 per barrel.
But when the Saudis proposed to extend the cuts, the Russians said no.
Saudi Arabia then responded by threatening to increase production and flood the market. The Russians warned they would do the same.
Thus, an oil price war began between the three largest producers,
For the U.S., this is a win-win situation.
Nevertheless, for shale oil producers in places like Texas and North Dakota declining oil prices could be catastrophic.
A game of strategy
The matter about shale oil explains Russia’s stance. Moscow wishes to end U.S. fracking, which threatens large producers’ control.
To this end, oil needs to be cheaper. Shale oil production is not profitable with an oil barrel under $50.
For its part, Saudi Arabia prefers a more expensive barrel, even if it means that fracking will take a significant market share.
Both countries depend on hydrocarbons to survive. For Russia, oil accounts for 30% of its gross domestic product and 40% of exports.
In the case of Saudi Arabia, it accounts for 50% of its GDP and 70% of exports.
But while the Saudis need oil at $85 in order to balance their budget, the Russians are content with a barrel at $45.
For now, the lower average for a gallon of unleaded gasoline in the U.S. stands at $1.82 in Tulsa, Oklahoma. The highest is $3.45 per gallon in Honolulu, Hawaii.
Drivers in Michigan pay 20 cents less than last week and 38 cents less than a month ago.
In Buffalo, New York, fuel prices dropped by 6 cents from last week.
Putting a tiger in your tank. That was the promise in a marketing campaign made by a U.S. oil major at the end of the 1970’s. Just before the first great crude crisis.
Now, Russia and Saudi Arabia are moving ahead with putting a price war in their tanks.
For more information, check Energía16