Pandemic and Petroleum Prices

Impact of the Pandemic on Prices for Petroleum Products 

Graph: U.S Bureau of Labor Statistics

We look at the Impact of the COVID-19 pandemic on prices for petroleum products as jet fuel prices are closely linked to global crude oil prices. The pandemic induced a jolt to the world economy, and the OPEC Russian oil war jacked up global crude oil prices. In 2016 China became the largest importer of oil. In February, due to the lockdown due to COVID-19, China’s Purchasing Managers’ Index fell nearly 49 percent, reaching its lowest level since it was first measured in 2005- the most considerable demand-side shock to the market since the 2008–09 global recession. The OPEC Russia price war and major international lockdowns further dropped global crude oil prices. By 1 May 2020, the U.S. had a near-record level of 535.2 million barrels of oil petroleum stockpiles. Refer to the U.S. Bureau of Labor Statistics report. Restrictions imposed due to COVID-19 due to safety concerns, such as lockdowns and restricted travel, fall in demand for air travel, keeping other factors constant.

The demand curve moves leftward, leading to a new equilibrium point Q1 as the equilibrium moves from Q to Q₁. The number of tickets sold (demanded) reduces as the prices of airline tickets fall. A drop in fuel cost (due to oversupply) leads to an outward/ rightward supply curve shift, keeping other factors constant. The supply of airline tickets increases as prices of airline tickets reduce at the new equilibrium. The equilibrium price of the ticket falls from P to P₁; the supply of the airline tickets increases from Q to Q₁.

This part explains the theoretical aspect of demand and supply equilibrium. In reality, countries’ scenarios could differ depending on the pandemic response, travel restrictions, social distancing norms, etc. Conduct a research project and find the price of airline tickets (commercial) in your respective countries over the time of the pandemic.

 

Fig: The demand-supply equilibrium – shift in the demand curve | The middle Road

Did the price of tickets change? Did they remain constant, go down or increase? Why?

This exercise aims to illustrate the demand and supply equilibrium concerning the Cost of goods and services. An increase or decrease in the Cost of Goods or Services always affects the supply curve,, leading to a shift in the Supply Curve.

Note: People are confused with the cost aspect here. An increase in the Cost of goods is passed on to the consumer, increasing the selling price. (This is the assumption). The cost of goods/services depends on the input cost of materials, commodities, ingredients, work hours, etc.