Since December 2019, the coronavirus infection COVID-19, which originated in China (Wuhan), has acquired the character of a global pandemic and has spread to 114 countries, including Russia, Europe, the United States, etc. The SARSnCoV-2 coronavirus is now widely spread around the world and has infected millions of people. As of December 15, 2020, nearly 73.1 million people worldwide have been diagnosed with SARSnCoV-2, and over 1.6 million people have died from COVID-19 [1].

The virus caused a global economic crisis that affected all spheres of society. The pandemic has had a particularly strong impact on oil prices. The fall in prices has been taking place for several months, and only now, through the actions of not only the oil exporting countries, but also all the states that took an active part in the fight against the virus, so it was possible to stop the fall in oil prices. And it is necessary to understand the reasons for these events in 2020 [2].

Oil is rightly called the blood of the modern economy, and the 20th century is the century of oil and “hydrocarbon man”. In the modern world, the oil market is very huge and is in constant dynamics. In terms of perspective, it is valued at over all the raw materials markets taken together, and exceeds the volume of the gold market more than 10 times. Therefore, almost all oil-exporting countries carefully predict the future of the world oil market and try to protect their market from possible threats and undesirable consequences.

In the twentieth century the oil market has won key positions and has become critical for the development of human society and the prosperity of industrial countries. It is believed that even if alternative energy sources exist, the oil market will continue to have a serious impact on the global economy and maintain its position as a great and powerful industry [3].

Since the beginning of the year, the global oil market has been going through hard times. Oil prices around the world began to fall sharply at the end of the first quarter of 2020. This decline was primarily due to the rapidly spreading Covid – 19 virus [4]. As you know, throughout human history, like wars and socio-political shifts, infectious diseases have repeatedly changed the world political map and the world economy.

It should be noted that back in 2019, many economists predicted the onset of another global economic crisis in the very near future. Rather, a «super-crisis», during which food shortages and mass riots are expected, but no one could explain the reasons and probability of such a gloomy forecast.

However, no one was ready for the crisis caused by COVID-19. Indeed, wherever the coronavirus appeared, a host of large-scale problems arose, not so much medical as managerial and economic. This rapidly spreading virus has led to massive losses and socio-economic panic. So, many experts talk about possible losses of the global economy up to $ 350 billion [2]. Moreover, in these conditions — when individual industries shrank by 50-90%, supply chains stopped working, employees were transferred to remote work and self-isolation, and sick people were isolated — more and more questions arose about what impact the pandemic will have on the global economy. Due to the obvious psycho-social and economic problems, it became obvious that an analysis of the potential economic consequences of the COVID-19 pandemic is inevitable.

Since the theory of the coronavirus crisis (i.e. the crisis caused by the global pandemic COVID-19) is new and is in a stage of active formation, the purpose of the study is to consider some of the economic effects in connection with the COVID-19 [4].

As a result of the pandemic, COVID-19 strongly and abruptly reduced the demand for oil. In this regard, there is a danger not only for the main competitors-producers of shale oil in the United States, but also for high-margin oil producers from Saudi Arabia and Russia.

At the beginning of March, it was not yet clear what impact the COVID-19 pandemic would have on the global oil market and the international market as a whole. It was not obvious that the quarantine measures would affect almost all countries, that is, the entire world GDP. The crisis in the international oil market has the potential to intensify even more, the main reason is the filling of the entire volume of oil storage [4].

The fall in demand due to COVID-19 and the global economic crisis caused by it also accounted for the March failure of the OPEC + deal on production cuts. As a result, too much unclaimed oil has accumulated in storage facilities around the world. Even the new OPEC agreement, in which many more countries took part, did not have an instant effect — in the near future, the partners’ efforts will be aimed precisely at eliminating the market surplus. However, as analysts point out, there is still physical space in the warehouses, and even on the last day of trading, the suppliers did not need to sell the goods with all their might, at a loss to themselves. In addition, market participants somehow keep in mind the agreement of the largest manufacturers of the planet. The actions of the NYMEX management also raise questions. The rules of each exchange prescribe stopping trading in case of too much growth or fall — to cool the ardor of investors. In London, the session ended ahead of time, and in New York, for unknown reasons, it continued, despite everything, although both sites are part of the same financial group [6].

The coronavirus has undermined energy demand worldwide, but especially in China, which is now the number one crude oil importer, consuming about 10 million barrels per day [2,4]. For the first time since the First Gulf War in 1991, the price of oil fell. According to experts, only quarantine in China reduces the annual demand for hundreds of thousands of barrels of «black gold» per day [5]. China’s experience in overcoming the coronavirus outbreak has shown that the «quarantine» of the Chinese economy has led to a significant slowdown in Chinese refining activity and accelerated accumulation of crude oil in the country’s storage facilities. If the world oil refining industry borrows the experience of China, the reduction in world oil refining may reach 14-16% by the end of 2020, primarily due to the shutdown of a number of refineries in the United States and Europe. Thus, the observed deterioration of the situation on the world oil market creates all the conditions for the resumption of cooperation not only between the OPEC + countries, but also with the possible involvement of other key oil-producing countries.

Oil is a commodity with low short-term elasticities of supply and demand. This means that the level of oil demand and the level of oil supply changes little depending on the oil price. Let us consider separately the low elasticity of demand and the low elasticity of oil supply.

The low elasticity of demand is due to the fact that oil and its derivatives — gasoline, diesel fuel — are used almost always, regardless of whether there is an economic crisis at one time, or not. That is, people simply have to pay more for a liter of gasoline, since they cannot refuse it. In general, it should be said that low elasticity of demand is one of the main problems of the oil market, which allows increasing prices even in situations when it is not so necessary. The way out of this situation may be alternative energy sources, such as cars that use electricity as fuel, but at the moment such technologies are too capital-intensive and not widespread enough to seriously compete with gasoline.

The elasticity of the supply lies in the fact that oil production and refining are very capital-intensive and long-term enterprises, and the rise or fall in oil prices does not affect them immediately, but only after a certain period of time. For instance, look at Figure 1.

Figure 1. Comparative dynamics of WTI crude oil price and the number of oil rigs in the United States and Canada, 2008-2020.

Source: International Energy Agency

This figure shows the trend of the price per barrel of US WTI oil and the number of oil drilling rigs. You can notice a trend in which an increase in oil prices leads to an increase in the number of drilling rigs. That is, the market seems to be reacting to changes in oil prices. But a change in the number of drilling rigs does not mean a change in production, it only shows activity in the field of field development, which affects the level of production in a few months, but rather in a year.

China, as a significant buyer of oil on the world market, is of course interested in a low level of import oil prices, but this situation does not provide unambiguous benefits to China. There are positive and negative points. Thus, the opportunity to purchase oil at a significantly lower price provides a major benefit to China, as well as to many other consumer countries, and will stimulate consumer demand and economic recovery.

The fall in oil prices in 2020 cannot be considered in isolation from long-overdue trends. Based on the experience of the 1998-1999 analogy, we can assume that oil prices will not be extremely low for long. The beginning of a potential Third Resource Cycle is now in question, since it is not clear which countries may be responsible for the demand for oil and other resources — the countries of the «golden billion», the countries of Asia, and the countries of the post-Soviet world have already passed the periods of rapid economic growth, and in Africa it is not expected. Therefore, the Third Resource Cycle may differ from the first two — it’s beginning may not be an increase in oil demand, but an extreme reduction in oil supply, when low-profit wells will be abandoned and investments in exploration will be radically reduced, which can further lead to an explosive increase in prices. During the high point of the Second Resource Cycle in 2011-2013, oil at comparable prices was more expensive than in 1980-1981 — the high point of the First Resource cycle. At the stage of price stabilization after a sharp drop in prices in 2015-2019 they were higher than during the period of stabilization after a sharp fall in 1986-1997. Therefore, we do not rule out that in the Third Resource Cycle, the price records of the Second Cycle will also be broken, since the long-term tendency of depletion of Earth’s resources is insurmountable. At the end of the first quarter of 2020 the situation in the oil market has adversely affected the countries’ economies. We can see a more detailed chart of the oil price level in Figure 2.

Figure 2. Weekly Brent, OPEC basket, and WTI crude oil prices from December 30, 2019 to December 2020 (in U.S. dollars per barrel)

Source: Statista 2021: OPEC; Bloomberg

It can be seen here that oil prices began to fall sharply in late February — early March 2020. At that time the price level of Brent fell sharply from 60 barrels per dollar to 23 barrels per dollar at the end of April. After that, the fall in prices stopped, and began to grow in anticipation of a new OPEC + deal to reduce oil production. However, after the failure of this deal, the fall continued to 19 barrels per dollar. The pandemic had an impact on the fall in oil prices not directly, but through the governments of different countries. There was a significant decline in oil demand due to government bans on travel, walks, and the suspension of the vast majority of firms. As we remember, all businesses except vital food stores and medical facilities. Universities, shopping centers, various firms — all of this was closed, plus a pass system was introduced in many countries of the world, which restricts movement on the streets. Taken together, all this has significantly reduced the demand for oil. In addition, until 2020, there was a large increase in the volume of oil produced per day. The surplus of oil on the world market in 2018-2019 can be seen in Figure 3.

Figure 3. Excess oil on the world market in 2019-2020

Source: OPEC Annual Statistical Bulletin 2019

As we can see, in the years leading up to the pandemic crisis, there was already a large surplus of oil. In 2020, when the demand for oil fell and the supply remained at the same level, the surplus became simply huge. Then it was decided to hold a meeting of OPEC + to reduce the rate of oil production to stop its decline. However, the OPEC + meeting on March 6 in Vienna did not yield any results, the parties failed to reach an agreement  [2]. This has created an opportunity for oil sector companies to speculate on the international market. Large companies wanted to «knock» their competitors out of the market — low-margin producers, the main of which were companies engaged in shale oil in the United States. This strategy was essentially the elimination of excess supply from American shale companies.  Following this, Saudi Arabia declared a price war: an increase in oil production while prices decrease. It was a huge blow that drove oil prices even more severely. Here we can consider the reasons why it was difficult for countries to agree to reduce production volumes.

The main share of oil production falls on 3 states: the United States, Saudi Arabia and Russia. Reducing oil production by these countries would significantly help to reduce the overall oil supply. However, there are some pitfalls. First, let’s consider oil ownership. While in Saudi Arabia oil reserves are controlled by the state-owned company Saudi Aramco, in the Russian Federation and the United States the oil market is represented by private companies. That is, if in Saudi Arabia the state itself can reduce the level of oil production, then how can private companies be ordered to do it in the legal sense? Further, one of the pitfalls is the complexity of oil production and the closure of drilling wells in different countries. In Saudi Arabia, oil comes out of the subsoil under pressure from its own reservoir, so the costs of shutting in and reopening wells are minimal. In the Russian Federation, only 1 — 1.5 percent of wells where oil flows by itself. In the remaining wells, oil is produced using pumps at significant costs. Therefore, the  RF has a much more capital-intensive well closure process. Often, as experts note, it is cheaper to drill a new well than to open a closed one. Therefore, the requirements for reducing production volumes are also different for countries.

However, the decline in oil prices began to affect all countries too strongly. Then, despite all the above disagreements, the OPEC + countries managed to agree on a reduction in oil production, starting from May 1. The cohesion of Saudi Arabia, the United States and also Russia has led to an agreement on the regulation of the global oil market for a period of two years. This agreement was attended by 23 states and received support from the G20, which shows the deep involvement, responsibility and dominance of the three leading countries involved in oil production — Russia, the United States and Saudi Arabia. As a result of this agreement, Russia and Saudi Arabia will reduce oil production by 9.7 million barrels. per day, and the total reduction in production in the world could be about 19 million barrels [4].

The collapse has a more symbolic meaning. In the near future, a repeat of such dramatic events should not be expected, for one thing, by the summer most countries began to remove restrictions related to COVID-19 and restore production, which means creating a demand for fuel. But in the oil market, it is customary to pay great attention to psychology. Sellers and buyers closely monitor how prices cross important points, and the border after which the value becomes negative is the main one. In 2020, there were already short-term periods when oil companies’ incomes did not cover the costs, but this was due to the cost of delivering fuel to buyers, but now the net value has become negative [6].

However, in any case, the crisis situation in the world, including the global energy sector, carries a constructive beginning. So, in many analysts’ opinion, the search for new energy sources and the further development of traditional high-tech renewable energy sources (RES) will accelerate. The growing competition between traditional and alternative energy is positive, as it will lead to the abandonment of many capital-intensive long-term oil and gas production projects. In addition, the search for a new model of development in the context of decarbonization will accelerate in traditional fuel and energy sectors [7].

Thus, the OPEC + decision that was adopted on April 10, 2020 to adjust oil production by 10 million barrels per day, starting from May 1, 2020 to June 30, 2020, and then by 8 million barrels per day by the end of 2020 and by 6 million barrels per day until the end of April 2022 is the best option in terms of benefits and costs of the parties under consideration (Russia will be forced to reduce oil production from 2 million barrels per day at the first stage). The agreement is a necessary measure that should solve the problem of reducing the surplus of oil supply caused by the «pre-crisis» surplus of 1-2 million barrels per day and a excess of supply, which became a consequence of the «price war» of Saudi Arabia with Russia, of 4 million barrels per day, as well as to compensate for the decline in demand caused by the coronavirus pandemic. So, it can be said that the global oil market is subject to severe volatility, which can depend on economic, political, social and even biological factors. However, the coronavirus pandemic has only an indirect impact on this situation in the industry. A key role was played by the conflict of economic interests and the long-planned global crisis, which would have occurred without the intervention of the virus.