Guest Editorial: Will the Omicron Variant Lead to the Collapse of Oil Prices?

Abstract

With the Omicron variant continuing to spread around the world, will a drop in oil prices follow? Maybe, but probably only in the short term. Equity markets tanked Friday, 26 November 2021, on fears that the Omicron variant, first identified in South Africa, would sharply impact worldwide economic output. The nearly 1,000-point loss in the Dow wiped nearly $90 billion of value in Dow equities. Oil prices were particularly hit hard, dropping nearly 10% from Thursday’s close. That drop, however, was minor compared to what happened to prices in early 2020, when at the end of April oil prices had dropped nearly 70% in value. This was frightening and was a combined pessimistic response to fears of demand destruction due to the coronavirus and the price war initiated by OPEC and Russia to counter rising production from US shale oil producers. As a world economy, we had not faced a major health crisis since 2014 when Ebola fears gripped the world and in 2009 when H1N1 flu sickened 60.8 million and killed 12,469 in the US, according to the US Centers for Disease Control and Prevention (CDC). If we go back to the 1918 Spanish flu, Fig. 1 shows the gross US demographic impact of these pandemics. The 1918 Spanish flu infected about 28% of the US population but did not impact oil prices to any great degree. COVID-19 has infected about 15% of our fellow citizens but has caused nearly 125,000 more deaths because our population is about three times larger than it was in 1918. In our current COVID-19 pandemic, images of first responders desperately improvising to save lives, stories of grief-stricken children, and partners forced to provide remote comfort to isolated and suffering elders tested our confidence that there would ever be a “normal” American life in the future. How Did Oil Markets React? The pre-COVID price of oil (CLF) in late 2019 dropped by 73% to its low in April 2020. Fears of demand destruction due to COVID dropped the price from $63/bbl to around $40/bbl—a 36% drop (Fig. 2). Price pressure was further exacerbated by OPEC’s price war with Russia, with OPEC increasing its output by a factor of four during a short window going into and lasting through April 2020. This dropped the price of oil another 40–50%. Once OPEC ended its price war, the baseline price of oil was around $40/bbl. When Moderna and Pfizer announced their vaccines, and the CDC authorized their emergency use, prices recovered until late July 2021 when the US entered its third wave of increasing case counts and rising death counts.