Reference no: EM133241037

The price of oil went negative! What does this phenomenon have to do with elasticity?

Give me your thoughts on the discussion of elasticity in the article and your own personal experience with elasticity and how responsive you are to price changes for various items.(150 word minimum)

It's The Oil Demand, Stupid! And Uncertainty Makes It Worse

By Michael Maher & Anna Mikulska 

For oil markets the 2020 story is not as much about supply as it is about demand, or rather its lack. To be sure the oil price war between Saudi Arabia and Russia rocked the markets. But soon it became clear that there is not enough demand for the additional volumes that either country wanted to produce. Hence, the relatively quick end to a Russia/OPEC standoff. Even so, an oil price decline followed because of the continuously steep oil demand drop. While in recent days we have seen prices nudge up a bit on the basis of positive economic forecasts, we are all still largely unsure whether the latter will actually occur much less when oil prices might return to the $50-60 range from before the pandemic.

The uncertainty is driven by the fact that the economic downturn has not been caused by a typical economic weakness but rather by external factors: a pandemic and governments' response to the pandemic, neither of which conform with past economic recessions or recovery efforts. Those factors make modeling of the economic future extremely problematic. Forecasts of economic activity and oil demand, whether national or international, are flying blind. As the joke goes, models are really good at forecasting recovery from the previous recession; from a current one, not so much. 

Hence, rather than trying to give you a forecast that may either overstate or understate the damage that COVID-19 may inflict on the U.S. and global economy, we want to highlight what to look for as this pandemic progresses, recedes, or oscillates. We also underscore the high level of uncertainty surrounding any type of economic predictions, including two significant unknowns:  1) how quickly and at what pace GDP growth will return leading to a rebound in oil demand and 2) whether responses to the pandemic have led to structural changes that permanently affect oil use.