Either of the above in their own right would have extraordinary effects on the economy but the perfect storm we are in has resulted in a shock wave we will be riding for many years to come.
Leaving any market after 45 years was always going to have an effect. Fortunately for the U.K we decided not to use the Euro and when we tied our currency this was short lived. Pricing of oils and fuels is defined by the dollar and hence, currency exchange rates were always going to be a factor. Had the value of the pound crashed then prices would have been driven upwards driving inflation and factory gate prices.
The pandemic has been the single largest effect on the oil industry since the OPEC crisis of the 1970’s which was precipitated by the Israeli war with Egypt and Syria. Whilst the pandemic did not affect the flow of crude oil, consumption dropped to such an extent that prices crashed on global markets with little or no demand from the aviation industry.
In 2020, aircraft of passenger fleets needed 4.18 litres of kerosene to transport one passenger over 100 kilometres. Whilst these values have been reducing with ever more efficient aircraft, the number are still enormous. Various examples are published:
|Fuel Consumption (Tonnes)
The problem with crude oil refining is the base oils used in everything from Marine Oils to simple lubricating oils is the base material. Base oils are a byproduct of the aviation industries need for fuels. Therefore, a reduction in fuel means a reduction in the availability of base stocks and hence a situation of demand out stripping supply resulting in increased pricing.
Group I availability was short throughout the first quarter of the year. Heavier grades, such as brightstock, sold out typically by the second week of each month.
Group II supply tightened in Q1 due to a combination of factors
Group III supply was short during the first quarter.
This was caused by ongoing supply from 2020 amid lower operating rates. Maintenance of production facilities from March compounded existing shortages.
The global economy has been dominated by the consumption of fossil fuels for the last 200 years. Coal, Oil and Gas are the main drivers with CO2 and a population explosion being the byproducts of our continued growth.
For growth to occur there must be consumption. If this cycle cannot be broken, then inevitably we will run out of base materials which in turn will cause a downturn on global economies with all the negative aspects such a scenario could bring. The pandemic has given the world an insight into a possible future if supply and demand of commodities are repeated. The need for fuels, marine oils, aviation, automotive will all continue even without the need for conventional oils and fuels for the automotive sector or indeed gas and oil for domestic consumption.
2021 and beyond will see a shift in global economies with countries such as India, Brazil, China, Russia, and parts of Africa increasing their consumption. Mature economies such as Europe, North America, Canada will diversify. Net consumption will still increase in a world of diminishing conventional resources hence inflationary pressures due to supply and demand are inevitable.
Will you be exposed if oil supplies dry up? Read our guide here to make sure your business is prepared.
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