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The cascading economic effects of plummeting oil prices

The collapse of the global oil market reflects a broader drop in demand across all areas of the economy, as business activity during the pandemic remains near a standstill. What caused this historic decline in oil prices, and what does it mean for other sectors? The New York Times’ Neil Irwin joins Judy Woodruff to discuss a sudden drop in consumption and what might happen to the oil market next.

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  • Judy Woodruff:

    The historic declines in global oil prices continued today, with negative effects seen in stock markets around the world.

    The sharp collapse in oil prices reflects the broader drop in demand all across areas of the economy, as business activity everywhere remains at a near standstill.

    For a closer look at all this and whether oil's decline could be a harbinger of trouble to come in other sectors, we turn to The New York Times economics reporter Neil Irwin, who has been following all these developments closely.

    So, Neil, first question. Give us a little bit of background. What is behind this massive drop in oil prices right now?

  • Neil Irwin:

    So the simple story goes like this.

    We have been through this remarkable period over the last two months, when all types of oil consumption has collapsed. Airplanes aren't flying. People aren't driving. Use of energy products is way, way down.

    But for oil production, you can't flip it on and off like a switch. So oil has continued to be pumped from the ground, despite the drying up of demand. This means there's a glut. There's more supply than demand.

    That's become so extreme that, in Texas, in big parts of North America, we're running out of storage capacity to store all this extra oil, and that's how we ended up with negative prices for oil on Monday on the May futures contract.

  • Judy Woodruff:

    And how much of this, Neil, has to do with where this oil is, whether it's in the U.S. or it's in the Middle East or someplace else?

  • Neil Irwin:

    That's a big part of it.

    So much of the U.S. oil supply is landlocked, it's hard to get it on to oil tankers. There are oil tankers around the world really just sitting in the ocean, you know, holding large amounts of oil to keep it off the market right now. This is a very unusual time. This is a time in which Saudi Arabia and Russia have been making — been producing lots of oil.

    They have only recently agreed to try and pull that back., And again, demand is in freefall. No one is consuming energy at the rates they used to. And so, until that corrects itself, until this extra supply can work its way through the system, we're going to have extremely low oil prices, maybe not negative, but very low numbers.

  • Judy Woodruff:

    And what does that mean, then, Neil, for the broader economy? I mean, how much of an effect is it having? We see the economy hurting because of the slowdown everywhere.

    But how much specifically are — is this energy sector oil price issue affecting the rest of the global economy?

  • Neil Irwin:

    So, oil is the most economically important commodity in the world.

    And I think what it is telling us is something that really applies across all types of commodities and really all types of things that people buy, which is, there is a glut. There is a worldwide collapse of demand. And that means there's all this unused capacity out there in the world.

    It's true of oil. It's true of agricultural commodities. A lot of corn prices are down. It's true of things that are in the service sector, empty restaurant, empty hotels, empty airplanes. Runways at major airports are like parking lots, with airplanes sitting there not flying anywhere.

    That's a very unusual situation. And what it amounts to is a global deflationary force. It means, there is all this extra capacity sitting out there unused.

  • Judy Woodruff:

    And, in a nutshell, what's it going to take to get this right again?

  • Neil Irwin:

    Well, the truth is, the public health response and getting to a point where people can go back to their usual consumption patterns is the only way to really end this.

    I think the question is, what can the government do — and that's what Speaker Pelosi was just speaking about — to try to kind of grease the runway, make sure we can get through this period without undue personal hardship for individuals, so that we can then come out on the other end, when the public health dimensions are solved, and get back to business, return to jobs.

    But, that said, there's a lot of scarring happening. There are a lot of people out of work. Can you re-form those attachments quickly? That's really an open question, especially if this goes on a whole lot longer.

  • Judy Woodruff:

    Neil Irwin, we thank you. Always good to have you with us.

  • Neil Irwin:

    Thanks, Judy.

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