Impact of the COVID-19 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 the price of jet fuel is closely linked to global crude oil prices. The pandemic induced a jolt to the world economy and the OPEC Russian oil war jacked down the global crude oil prices. In 2016 China became the largest importer of oil. In February due to 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 largest demand-side shock to the market since 2008–09 global recession. The OPEC Russia price war along with major international lockdowns led to a further drop in global crude oil prices. By 1 May 2020, the US had a near-record level of 535.2 million barrels of crude petroleum stockpiles. Refer to the US Bureau of Labor Statistics report. Restrictions imposed due to COVID-19 due to safety concerns example lockdowns and restricted travel led to 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 Q1The number of tickets sold (demanded) reduces as the prices of airline tickets fall. A drop in the fuel cost (due to oversupply) leads to an outward/ rightward shift of the supply curve 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 and the supply of the airline tickets increased from Q to Q1.

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

This part is just to explain the theoretical aspect of demand and supply equilibrium. In reality, scenarios could be different for countries 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.

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

The purpose of this exercise is to illustrate the demand and supply equilibrium concerning the cost of goods and services. An increase or lowering of cost of goods or a service always affects the supply curve leading to a shift in the supply curve. Note: People always confuse with the cost aspect here. An increase in Cost of goods is passed on to the consumer, leading to an increase in the selling price. (This is the assumption).  Cost of goods/service depends on input cost of materials, commodities, ingredients, work hours etc. 

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