April 20, 2020 will go down in history as the first time the price of a barrel of oil fell below zero. A price war between Russia and Saudi Arabia, made worse by the unexpected impacts of the coronavirus, pushed the value of oil upwards in mid-February.
So how could this have happened? How is it possible that one of the world’s most demanded raw materials has a negative value?
While traders and economists will likely wrangle over the finer points of the crash in the years to come, it ultimately comes down to one thing: the producers. lack of storage facilities. The oversupply meant traders had nowhere to store the barrels of oil they were forced to take delivery of, prompting them to take drastic action and abandon contracts as quickly as possible.
5 lessons for small businesses from the 2020 oil crash
So what does all of this mean for small and medium businesses? In this article, we’ll look at five key points.
Lesson # 1: Taxpayer Guaranteed Loans for SMEs Were Granted to the Fossil Fuel Industry
A surprising finding that emerged during the crisis is the way in which taxpayer-guaranteed loans for SMEs were channeled to the big players in the oil industry. Texas-based Battalion Oil, for example, received a $ 2.2 million relief loan from the US government despite having gone bankrupt twice in the past four years.
Understandably, people are angry, with many believing that the money allocated to struggling businesses has instead been handed over to large, already struggling businesses.
A study conducted by the British newspaper The Guardian in collaboration with the investigative research group Documented shows that $ 113 million in loans intended to support small businesses has been diverted to oil companies.
Lesson 2: High risk investing is not for everyone
Many non-professional investors were eager to profit from the volatility of the oil market.
But was it a good idea? Futures trading, which requires a large amount of knowledge at best, became even riskier in the days and weeks following the crisis. And this applied at the company level as well as at the individual level.
The problem was not just the inherent instability of the oil market, which was arguably at its most chaotic. The main problem was that many of the long-term ramifications of the April crash had not made themselves known. And the industry is still likely to see more bankruptcies even now. Countries with economies heavily dependent on oil, such as Saudi Arabia and Russia, have remained in fairly poor shape, a situation made even worse by the coronavirus.
Lesson 3: Falling oil prices could actually be good news for the global economy
Many small and medium-sized businesses are wondering how the oil crash could impact the wider global economy and, therefore, their own trade.
Fortunately, all is not pessimistic. Some commentators have suggested that low oil prices could be a good thing, especially in the short term.
Falling import costs usually lead to faster economic growth, which is badly needed as the world emerges from the pandemic. In addition, oil is inextricably linked to the global economy, which will likely have a knock-on effect on the price of a range of products.
It is important to keep in mind that the long-term outlook for traders is more positive, and futures contracts that expire on future dates are sold at higher prices.
Lesson # 4: Diversified Small Business Assets Have Always Been a Good Investment Strategy
If, as a small or medium-sized business, you are heavily invested in petroleum-related industries, now is the time to diversify your portfolio.
The diversification of the corporate and pension investment portfolio has always been financially prudent. And if there’s one thing the coronavirus has shown, it’s that many supposedly safe investment opportunities carry much greater risk than previously thought.
A diversified portfolio is one of the best tools companies have for limiting risk. Investing in a mix of assets, such as stocks, real estate, bonds, commodities, etc., should be a priority as SMEs formulate contingency strategies for the future.
The coronavirus has also rekindled consumers’ interest in the ethical integrity of the companies they use, with the oil crash acting as a catalyst. Now is a good time to consider your value proposition for your business assets.
Lesson 5: Even Negative-Value Oil Doesn’t Lead to Free Gasoline
On a less serious note, many business owners and executives expected the oil crash to have a significant ripple effect on the price of everyday items like gasoline.
The consumer and business prices of petroleum-related products are not determined by the base price per barrel of petroleum. There are other costs involved including refining, distribution, packaging, etc. While slightly lower prices are likely, you shouldn’t count on pump stations offering free gas just yet.
If there’s one thing the coronavirus and the historic April oil crash have proven, it’s that good financial management is essential for small and medium-sized businesses. Many businesses will be closing their doors as a result of what has happened over the past few months. And even more will struggle to get back on their feet.
Contingency planning is the best way to prepare for unexpected crises. Companies that have built up large reserves and a diversified investment portfolio are more likely to survive downturns, crashes, pandemics, and any other negative event impacting the market. In addition, they will be in a better position to take advantage of new opportunities when things return to normal.