Brent Crude, a crude oil company that sourced it’s oil from the north sea has suffered a historical drop in the rate of oil prices. The cost of a barrel initially became $22 for the June contract and then dropped to $16. Such low rates of crude oil prices threaten the existence of many smaller companies which could go bankrupt, if the rates do not increase.
The President of United States, Mr. Donald Trump declared that he would protect jobs in this situation, however, with decrease in demands and halting of production, many would end up losing their jobs. It affects the entire global economy as stocks across countries have started to fall.
Pros of Historical Low Rate of Brent Crude
- Reduction in import costs for other countries:
The countries that import oil from the United States of America will now be able to do so at lower rates. With the decrease in Brent Crude oil prices, the cost of importing that oil will definitely decrease. This is actually very beneficial as due to the COVID-19 pandemic, many countries are facing an economic crisis.
- Beneficial for companies not in the oil industry:
When Brent Crude observed a historical low rate in crude oil prices, other companies from different industries stood to benefit. Since different sectors contribute to the US economy, a drop in crude oil prices, allow other industries to move in and raise capital. The companies belonging to these industries can become more profitable and might even be able to create jobs.
- Low retail price:
Since the price of crude oil has decreased, retail prices of oil should also decrease. The oversupply of oil will definitely lead to retail prices being slashed. This is also because there is limited storage space and distributors will want to exhaust their stock as soon as possible.
- Increased availability of crude oil:
After the price of crude oil lowered, there has been an oversupply of oil. The supply of crude oil, after the major drop in the price, is almost overwhelming. This is because production of crude oil continued even after a very low rate was observed. Therefore, now there is a large amount of crude oil available for supply even though demands are decreasing.
- Decrease in current account deficit:
The countries which have deficits in their current accounts stand to gain from the low rate of crude oil prices. Decrease in prices of Brent Crude will lead to a decrease in the current account deficit for many countries who are already dealing with an economic crisis.
- Decrease in Inflation:
Several countries that are now facing inflation will observe a decrease in those rates. With crude oil prices dropping, import costs will drop as well and in the long run, there might be a chance for inflation to be reduced. This will also lead to strengthening consumer confidence.
Cons of Historical Low Rate of Brent Crude
- Suspension of drilling or exploration projects:
After the rate of Brent Crude oil plummeted, drilling projects and oil exploration projects stopped. This was done to halt production due to lack of storage facilities. However, this also means that all those who worked in those projects had to deal with immediate loss of livelihood.
- Oil company mergers:
Since Brent Crude is facing an historical low rate in crude oil prices, smaller companies might have to go for mergers. Distributing or trading companies will not be able to continue if this situation persists and there is no demand. A merger will become inevitable if they are unable to survive in the current conditions, especially if the crude oil prices drop any further.
- Oil company closures:
Very small companies that deal with oil distribution or trading might not even be able to go for mergers and might have to consider complete closure. If the rate of Brent Crude oil lowers even more, these companies will fail to continue and will have to shut down.
- Reduction in investments:
There are many people who invest in oil and these astonishingly low rates of crude oil have affected their confidence. People will no longer feel safe about investing in these shares. New investments are going to stop which will definitely affect the oil industry and the entire economy, if situations worsen.
- Recession in the service sector:
There are many people who work in oil drilling projects and explorations. There are also many involved in the delivery of barrels and in distribution. After the low rate of Brent Crude and decrease in production, this entire service sector will have to face recession.
- Lack of storage:
As the prices fall, there remains an oversupply of crude oil. But there are very few storage facilities available for keeping the barrels. Even after heavy production cuts are introduced, there are still too many barrels which need to be stored before the demand for crude oil is restored.
- Low economic growth:
The oil industry contributes to a major part of the economy of the United States. The low rate of Brent Crude will have a negative impact on the economy and it will definitely stunt economic growth. With low investments, slashed prices and widespread recession, the economy is bound to suffer.
There are many intermediary sectors which work with the oil industry. Workers from these sectors will face unemployment issues and might find it difficult to get other jobs as the overall economy takes a hit. As smaller companies merge or close, lower ranked employees will end up losing their jobs.
Since the United States of America depends a lot upon the crude oil industry, this historical low rate is rather dangerous. The only way to recover from this crisis is by getting the demand back and initiating supply. A steady demand and a fully functioning supply chain is the only thing that will help. However, with the world battling a pandemic, that too seems to be a difficult task.
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