The lag effect on oil prices could prove a positive for world economies, helping to fuel a faster rebound after the virus subsides.
A Historic Collapse in Oil Prices
The price of oil per barrel plummeted by 67% during the first quarter of 2020. In recent weeks, prices continued to decline until reaching negative territory for the first time in history.
Last Monday, the price of oil fell from $18 to negative $38 per barrel in just a few hours. While falling prices were initially the result of a pricing war between Saudi Arabia and Russia, they have also been dramatically affected by the COVID-19 pandemic and the resulting lack of demand.
Why Lower Oil Prices Are No Longer an Obvious Economic Win
In the past, “the decline in oil prices...was a slam dunk positive for the economy. Now it's at best a wash,” said Mark Zandi, chief economist for Moody's Analytics, in early March.
While drivers, airlines, and other oil users may benefit from sharply lower prices, the oil industry will likely experience bankruptcies, loan defaults, job losses, halted capital spending, and other economic disruptions, he added.
The Potential Benefits of Lower Oil Prices
The delayed effects of falling oil prices could ultimately benefit economies worldwide and help fuel a faster recovery after the virus subsides.
The aviation industry, which has been among the hardest hit, will benefit from lower fuel prices. Other businesses may also experience lower operating and shipping costs.
Consumers are already seeing relief at gasoline pumps, although many are not yet commuting or traveling enough to realize the full benefit.
China’s Recovery Offers Encouraging Signs for U.S. Manufacturing
The return of Chinese manufacturing may be an encouraging sign for U.S. manufacturers. One positive indicator is the recent increase in refinery utilization as commerce and industrial activity begin to recover in China.
This follows two months of drastic reductions during the country’s COVID-19 containment efforts.
Reports from China also indicate that copper and steel inventories are beginning to fall as downstream manufacturers restart production. Domestic air travel within China has also begun to return.
Long-Term Manufacturing Investments Provide Stability
Efforts to diversify our economy have resulted in significant investments in manufacturing facilities.
Although navigating COVID-19 is painful both personally and professionally, the outlook for low oil prices will allow some manufacturers to add tens of thousands of jobs as plants reopen.
The long-term nature of projects such as world-scale plastics manufacturing, steel production, and other related industries provides some insulation from short-term fluctuations in market forces.
These long-term investments will help our economy remain as stable as possible throughout this global event.