What causes the low oil prices
When some oil prices turned negative at the beginning of the week, many consumers raised their hopes: will they get money out at the pump when they fill up? Many already suspected that this was not to be expected - and were still happy about the low fuel prices. What is less well known, however, is that low oil prices can have fatal consequences. An overview of the greatest dangers.
Problems in the financial system
Many US shale oil companies in particular have not only pumped huge amounts of oil in the past few years, but have also inflated themselves with debts. The fracking companies have raised a lot of money on the US bond market, and the volume of energy bonds has quadrupled in the past decade. US banks have also given energy companies hundreds of billions of dollars in loans. But with collapsed prices, it is no longer worthwhile for many of the oil companies to extract the raw material at all - which worries the company's financiers. "The small oil companies in particular are threatened," says Michael Dei-Michei from the Viennese energy consultancy JBC Energy.
Problems in the oil sector are likely to affect US regional banks, among others, which have become heavily involved in loans. At some of these regional institutions, every tenth loan dollar went to energy companies. Bank experts warn behind closed doors against being fooled by the label "regional bank". In the worst case, the imbalance of one institution could have a cascade effect in the financial system. The situation looks more relaxed on the bond market: there, the oil and gas companies will only have to repay a small portion of the bonds, at least this year.
High deflationary pressure
Decreasing prices? That sounds great to many consumers. Because then a lot will be cheaper in the future. Anyone who waits a month to buy a washing machine will receive an automatic discount. But that is exactly what can have disastrous consequences for the economy as a whole: When prices fall, many buyers keep procrastinating and thus choking the economy. Financial experts are therefore worried about the extremely fallen oil prices, which have had a major impact on the price level. As early as March, prices in the euro zone rose by just 0.7 percent; in February they had climbed 1.2 percent. Above all, the drop in oil prices relieved some wallets - and worries financial experts: "We see this crisis as a brutal deflationary shock for the markets," noted the fund company Carmignac in an investor letter. It is unclear whether the current pressure on prices will actually develop into a longer-term deflationary spiral in the end. In the past, experts were quite often wrong with their price forecasts.
The oil price is perhaps the most political of all prices - and has often been a geostrategic match in the past. Oil prices have never been as low as they are now in this millennium, and this is putting petro-states like Saudi Arabia and Russia under enormous pressure: The Saudis actually need an oil price of $ 86.5 to balance their national budget. Now the citizens could face severe cuts in social services that would test the loyalty of the population to the regime. "For both Saudi Arabia and Russia, the deep fall in the oil price is economically painful and politically associated with considerable risks," stated strategists from the Science and Politics Foundation. In plain language: some rulers might want to use foreign policy maneuvers to distract attention from the domestic political situation. But US President Trump also made people sit up and take notice on Wednesday afternoon: He threatened that his navy could destroy Iranian gunboats if the Iranians harassed American ships. After his tweet, oil prices rose.
Cheap oil harms the climate
The coronavirus not only makes climate demonstrations impossible, it also pushes the debate about climate protection into the background. The fact that the oil price collapsed as a result of the Corona standstill should now at least in some respects directly damage the climate. "When it comes to cars and heating, fewer people are probably thinking about climate-friendly technologies," says energy economist Claudia Kemfert from the German Institute for Economic Research. Because sometimes climate-friendly technologies are more expensive - and in the current economic situation, consumers are paying particular attention to prices. But such purchases would have a fatal long-term effect, as consumers often use heating systems and cars for many years. However, it is not to be expected that the cheap oil price will lead to significantly more car trips or vacation flights. On the one hand, this seems unlikely anyway due to the corona measures. On the other hand, the oil price rarely influenced the desire to travel in the past.
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