Markets panic as virus drags down oil price

Modern miracle: Since 1870, we have taken 135 billion barrels of oil out of the earth. © Edward Burtynsky

Does oil run the world? It looks that way to investors watching the value of shares dive in response to a shock drop in the price of oil. But why does “black gold” have so much power?

The latest victim of the virus? Oil. And it could be the most serious development yet, in a clear warning we are heading for a huge global recession.

Yesterday, fear seized global stock markets, as investors sold shares at discount prices. It was the biggest one-day fall since the 2008 financial crisis, with one analyst calling it “utter carnage”.

Early this morning, the panic looks set to continue for another day.

Why now? On Sunday night, the price of oil collapsed. Two months of Covid-19, quarantined cities, shut factories, and cancelled holidays has slashed demand for the fuel that powers the global economy.

And the world’s second-largest producer of oil, Saudi Arabia, has chosen this week to launch a price war with its main competitor, Russia.

Oil not only keeps society moving, but it also shrinks the globe. Fresh food from South America, cheap clothes and electronics from China are all possible because of the fast, interconnected, oil-fuelled world in which we live.

It is also used to make plastic, and thousands of everyday items – from phones to lipstick, to footballs and shampoo. Oil is everywhere. Where it is discovered, countries become rich overnight. Wars are fought over it. No wonder it is called “black gold”.

So, does oil still run the world?

Black gold

Some say this is just stock market jitters, with investors scared of losing their money. The price of oil has risen and fallen dramatically many times in the last century, and the world has not come to an end.

Others are less optimistic. The stark reality is that we live in a world that runs on oil and we cannot change that overnight. Silent factories in China and tankers full of unused oil may feel remote and unimportant right now, but they are early warning signs of harder times to come.

You Decide

  1. Oil is in all of our favourite things, including our clothes. Would you be prepared to give up fashion and only wear homemade clothes?

Activities

  1. List five things made of oil in your home. Then think of creative alternatives.

Some People Say...

“A century ago, petroleum – what we call oil – was just an obscure commodity; today, it is almost as vital to human existence as water.”

James Buchan, Scottish novelist and historian

What do you think?

Q & A

What do we know?
Oil is fundamental to the global economy, and markets are incredibly sensitive to small changes in the price of oil. So the biggest drop in oil price in 30 years is, unsurprisingly, causing alarm. Experts fear the combination of the coronavirus and cheap oil will hurt energy companies and oil-producing countries, making a global recession more likely.
What do we not know?
But the world is a complex place and we live in uncertain times. Whether the economy grows or falters depends on many factors. Will the coronavirus be contained or spread further? How will leaders, banks, and companies respond to the crisis? Will Saudi Arabia and Russia continue their price war? What about the environment and renewable energy? Whether oil is the most important factor, or just one among many, is debatable.

Word Watch

Oil
Petroleum is a natural liquid that, when distilled and refined, can be burnt for fuel, or used to make plastics, pesticides, and medicine.
Global recession
An extended period of economic decline across the entire world.
Stock markets
Also called a stock exchange, where investors buy and sell shares in a company, hoping to make money as the company grows. There are major stock exchanges in London, New York, Hong Kong, and Tokyo.
Carnage
Mass destruction.
Price war
Saudi Arabia and Russia are repeatedly cutting the price of oil so that it is cheaper than their competitors.
Discovered
The discovery of oil in the tiny state of Qatar transformed it into the richest country per capita in the world.
Wars
Between 1980 and 2003, Iraq fought a series of wars with its neighbours for the control of oil fields.
Jitters
Feelings of extreme nervousness.

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