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Coronavirus and global oil markets Oil prices have fallen from about $50 per barrel to $20...

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Economics

Coronavirus and global oil markets

Oil prices have fallen from about $50 per barrel to $20 perbarrel over the past two months, with most of that decreaseoccurring in the first half of March. The drop in prices is widelyattributed to the decrease on global oil demand caused by theCoronavirus/COVID-19 in combination with strategic and politicalsupply-side maneuvering by Saudi Arabia and Russia (who are thelargest exporters and the second and third largest producers,accounting jointly for almost a quarter of global production). Forthe purposes of this assignment, let’s focus on the role ofCoronavirus and global demand, ignoring the supply-side decisionsby Saudi Arabia and Russia.

2.1 According to economic theory, why would a decrease in futureoil demand reduce oil prices now?

2.2 Given the changes in oil demand and prices, is consumersurplus from gasoline consumption higher or lower today, comparedto a hypothetical world in which there were no Coronavirus?

2.3 Suppose that instead of a decrease in global demand, therewas an increase in expected future global supply. How would thisaffect US oil production and oil prices now and in the future?Would the US economy benefit or lose, overall?

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