New Delhi: Oil is bought in futures and one barrel of oil contains 159 litres. As the oil futures contracts were expiring Tuesday, West Texas Intermediate oil prices in US crashed to minus $37.
How does the price of a commodity go below zero and can people actually end up with more money after buying oil?
Approximately two-thirds of the world is under lockdown and this has resulted in a crash in the demand for oil. Oil demand in India has fallen 60-70 per cent due to Covid-19 restrictions.
Such a drastic crash in demand wasn’t expected and now the world is running out of space to store oil, President Donald Trump announced that US will buy 75 million barrels but that will be too little to shore up the oil prices.
Thus, in Oklahoma, the traders were willing to pay $38 to get rid of the oil they had and this is why the prices crashed to negative.
On 6 March, Saudi Arabia and Russia — two of the biggest producers of crude oil — discussed reducing oil production by 3 million barrels to shore up prices. However, the deal did not go through. Even if the deal had gone through, it would not have been enough to shore up the prices. In India only the fall in demand is 3 million barrels.
There are some countries in the world that punch way above their weight, and these include Iran and Russia. They are able to do so because they have crude oil. If crude oil prices fall, countries like Iran and Russia lose a lot of their geo-political power. At this point, Russia’s GDP is about half of India’s.
Also read: Oil price falls below zero dollar a barrel, that’s right – below $0
Can India benefit from low oil prices?
There is no consumption of oil in India regardless of the price. Everybody is sitting at home due to the lockdown and nobody can purchase oil.
There is no question of passing the benefit of low oil prices to consumers and at the same time, governments are not raising excise as nobody is buying oil. However, oil prices will remain low for a long time and India can benefit once the lockdowns are lifted and there is a demand for oil.
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