The past few months have been characterized by numerous events that have ultimately affected the economic outlook of the global economies. One notable economic factor is the current energy prices and production in the United States. The main event leading to these new energy prices and production is the historic agreement between the United States and other leading producers of oil to stabilize the market. As such, the members of the Organization of the Petroleum Exporting Countries (OPEC) struck a deal to slash the production of oil by 9.7 million barrels per day (Duffy & Disis, 2020). The deal was part of the efforts meant to stabilize the economy that has been significantly affected by the current global pandemic. The world is currently experiencing a demand crisis of oil, and so the deal was part of the initiatives that would likely solve the crisis. Therefore, it is essential to highlight some of the changes witnessed since the event occurred, how it relates to some of the topics discussed in class, and, most importantly, the economic implications brought about by this event.
Several circumstances led to this historical event. It is, therefore, crucial to look at how the situation was when the deal occurred. Due to the lockdown in most parts of the world, various industries that rely on oil were affected. Such industries include the transportation industry, tourism industry, and the oil industry, all of which have been affected by restrictions on travel, work, and social life. Consequently, the world experienced an unprecedented collapse in demand for oil (Riley, 2020). At the time I started following the event, this reduction in the demand for oil had persisted for over three weeks and counting. The OPEC+ deal has changed the oil prices since it has control over crude oil prices. However, this influence on the global oil prices may only be short term, since numerous factors affect the prices of crude oil in individual nations within OPEC+.
The deal relates to the topics discussed in class and is an ideal illustration of some of the real-life applications of economic concepts. The OPEC+ deal is an application of the laws of demand and supply. The interactions between buyers and sellers of the oil products determine the prices. If supply goes up, then the price goes down. The oil market situation is a manifestation of how supply surplus can lead to lower commodity prices. Reducing the supply until a time when there will be demand for oil is an action that depicts the application of the law of demand and supply learned in class. Moreover, the issue of price control is also well handled through the deal. The action to reduce production, thereby reducing the supply, is an action meant to stabilize the market through price control.
All the events happening now have impacted the economy in one way or the other. Similarly, the greatest cut ever agreed by the world’s top oil producers has affected the economy in several ways. First, the OPEC+ deal has impacted energy prices and production significantly (Whipple & Andrews, 2020). Through the agreement, crude oil posted its first weekly gain within four weeks. Before the deal, oil prices had gone down by more than 55%, which is the worst price plunge ever witnessed in decades (Turak, 2020). Worse still, the price plunges would have gone lower had the deal not been made. It would, therefore, be accurate to state that the agreement impacted the oil prices. Moreover, the deal had a direct impact on the oil companies, as they had to reduce or close production. Such companies include Chevron and Exxon. Chevron reported that it would shut down approximately 400,000 barrels of daily production.
The other element that has been affected since the implementation of the OPEC+ deal is the number of rigs drilling for oil. With all the leading producers of oil agreeing to cut down the production of oil, the number of rigs drilling oil has also reduced globally. In the U.S. alone, there was a drop in the oil rig count to 325, a decline that continued for seven weeks straight. The negative impact of the reduction, however, is the loss of jobs related to oil drilling. With the deal to cut oil production in place, economic aspects such as unemployment will be affected. A projection of 240,000 jobs in the oil industry will be lost as a result of this historic deal. Noteworthy, many jobs have been lost due to the ongoing pandemic, and measures to mitigate the economy, such as the OPEC+ deal, are necessary.
Additionally, the response to the low crude oil prices through the deal had an impact on domestic “associated gas” output. Almost half of the gas production in the U.S. is “associated gas,” which is a byproduct that comes from drilling oil (Eberhart, 2020). Consequently, a reduction in the production of crude oil will result in a similar decrease in gas production. The long term effect of this is the projected recovery of gas prices in the United States.
In conclusion, the events that are happening currently have an impact on our lives and the economy at large. One such event is the deal that was made recently among members of OPEC+ to reduce the production of oil in a bid to stabilize the market. The deal relates to some of the topics studied in class, including the laws of supply and demand. Some of the economic impacts of the deal include effects on energy production and prices, unemployment, and gas prices.
References.
Duffy, C. and Disis, C. (2020). OPEC+ reaches deal to cut oil production by 9.7 million barrels per day. Retrieved 5 May 2020, from https://edition.cnn.com/2020/04/12/energy/opec-deal-production-cut/index.html
Eberhart, D. (2020). Higher Natural Gas Prices Could Lead Recovery Of U.S. Energy Industry. Retrieved 5 May 2020, from https://www.forbes.com/sites/daneberhart/2020/04/08/higher-natural-gas-prices-could-lead-recovery-of-us-energy-industry/#1cc327e47902
Riley, C. (2020). U.S. faces an ‘unprecedented’ decline in oil production. Retrieved 5 May 2020, from https://edition.cnn.com/2020/04/15/business/oil-prices-us-production/index.html
Turak, N. (2020). Oil prices may now be at a bottom after historic OPEC deal, U.S. energy secretary says. Retrieved 5 May 2020, from com/2020/04/15/oil-prices-may-now-be-at-a-bottom-after-historic-opec-deal-us-energy-secretary-says.html”>https://www.cnbc.com/2020/04/15/oil-prices-may-now-be-at-a-bottom-after-historic-opec-deal-us-energy-secretary-says.html
Whipple, T., & Andrews, S. (2020). The Energy Bulletin Weekly: 4 May 2020 – Resilience. Retrieved 5 May 2020, from https://www.resilience.org/stories/2020-05-04/the-energy-bulletin-weekly-4-may-2020/
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