The collapse of the oil price When the Covid19 pandemic started to have a real impact on the global economy in the first quarter of 2020 the world price of oil collapsed. On 1 January, the oil price was at just over $60 a barrel and by the end of March, it was $21, a fall of 65%. The governments of oil-producing countries, directors of energy companies, market traders and economists watched in awe as the oil price fell and even turned negative at one stage. The fall in the oil price was particularly significant to oil-producing countries such as Russia. [Paragraph 1] The last time oil prices fell as sharply was in 2008 following the global financial crisis. The key driving force in both 2020 and 2008 was the falling demand for oil. As countries around the world went into lockdown both industrial and consumer demand for oil decreased. [Paragraph 2] The market for petrol (gas) has been significantly affected by the fall in the oil price. Table 1 shows how the fall in oil price has affected the price and quantity of petrol (gas) sales in Russia from January to June 2020. [Paragraph 3] Month Price $ Quantity of petrol (gas) billion units January 3.52 6.1 February 3.41 6.0 March 3.09 5.6 April 2.84 5.2 The fall in petrol (gas) prices was certainly good news for Russian consumers, but they found it difficult to benefit from the lower oil price as government regulations limited the movement of people during the pandemic. The lower oil price also led to lower production costs for businesses. This was particularly true for industrial sectors where oil is a significant cost such as energy, transport, petrochemicals, and plastics. [Paragraph 4]As a net oil exporter, Russia has been hit particularly hard Chart 1 Russian economic growth 2020 by the fall in oil price. Russian crude oil exports fell to less 2.1 than $75 Bn in 2020 which has a fall from $125Bn in 2019. 1.4 This was Russia's lowest oil export revenue for 10 years. Chart 1 shows the quarterly Economic growth rate of the Russian economy from the last quarter of 2019 through to the end of 2020. [Paragraph 5] -1.8 The fall in the oil price in 2020 may have implications for -3.5 the renewable energy sector. Fossil fuel energy and renewable energy are substitute goods. The growth of the renewable energy sector over the last few years has seen a -7.8 significant switch in resources from fossil fuels to Jan 2020 Jul 2020 Jan 2021 renewables. Although the fall in oil price might slow the growth of the renewable energy sector in the short term, in the long term the transition to wind and solar power seems unstoppable. [Paragraph 6]Answer the following questions a. Define the term demand. (Paragraph 2) [2] b. Using the price and quantity data in table 1 calculate the: (1) Percentage change in the price of petrol (gas) from January to April 2020. [1] (ii) Percentage change in the quantity of petrol (gas) sold from January to April 2020. [1] (iii) Price elasticity of supply of petrol. [2] (iv) State whether the price elasticity of supply of petrol (gas) is elastic or inelastic. [1] C. Using a demand and supply diagram explain the impact the falling oil price might have had on the market price and quantity of the petrochemicals market. (Paragraph 4) [4] d. (1) Using the data in Chart 1, outline the phase of the business cycle the Russian economy is in during the last three quarters of 2020. [2] (ii) Explain the impact the economic growth rate in Russia in the last three quarters of 2020 will have on the Russian government's tax revenue. (Chart 1) [4] (ili) Using an AD/AS diagram, explain the impact falling oil export revenues might have had on Russia's GDP. (Paragraph 5) [4] f. Using a PPC diagram, explain the change in resource allocation in the energy sector as the market for renewable energy grows and the market for fossil fuels declines. (Paragraph 6) [4] g. Using information from the text/data and your knowledge of economics, discuss the consequences for different stakeholders in the Russian economy of a fall in world oil prices. [15]