April 20, 2020 will go down in history when the price of a barrel of oil fell below zero for the first time . A price war between Russia and Saudi Arabia, exacerbated by the unexpected effects of the corona virus, caused the value of the oil to skyrocket in mid-February. <! – ->
So how could this happen? How is it possible that one of the most sought after goods in the world has a negative value?
While traders and economists will probably argue about the subtleties of the crash in the coming years, it ultimately boiled down to one thing: the producers ran out of storage space . An oversupply meant that dealers nowhere had to store the drums of oil they had to pick up, which led them to take drastic measures and drop contracts as quickly as possible.
5 lessons for small businesses from the 2020 oil price crash
<! – -> What does all this mean for small and medium-sized companies? In this post we will look at five important points:
Lesson 1: Taxpayer-backed SME loans went to the fossil fuel industry
An amazing discovery made during the crisis is the way taxpayer-backed loans for SMEs have been passed on to major players in the oil industry. For example, Battalion Oil, Texas, received a $ 2.2 million loan from the United States government, despite having gone bankrupt twice in the past four years.
Understandably, people are angry, and many think that the money that is being made available to companies in difficulty has instead been given to large companies that are already struggling.
A review conducted by The Guardian newspaper in collaboration with the Documented investigative research group shows that $ 113 million credits were diverted to oil companies to support small businesses.
Lesson 2: High-risk investments are not for everyone
Many nonprofessional investors were keen to benefit from the volatility in the oil market. <! – ->
But was it a good idea? Futures trading, which at best requires a lot of knowledge became even more risky in the days and weeks after the crisis. And this was true at company level as well as at individual level.
The problem was not just the inherent instability of the oil market, which was probably the most chaotic. The main problem was that many of the long-term consequences of the April crash had not made themselves felt. And the industry is likely to see even more bankruptcies now. Countries with economies that rely heavily on oil, such as Saudi Arabia and Russia, were in fairly poor shape, and the situation was further exacerbated by the corona virus.
Lesson 3: Falling oil prices could actually be good news for the global economy
<! – -> Many small and medium-sized companies have wondered how the oil crash could affect the global economy and, consequently, their own trade.
Fortunately, it is not all doom and darkness. Some commentators have suggested that low oil prices could be a good thing, especially in the short term.
Lower import costs usually lead to faster economic growth, which is urgently needed if the world emerges from the pandemic. In addition, oil is inextricably linked to the global economy, which is likely to have a negative impact on the price of a number of goods.
It is important to remember that the longer-term outlook among traders is more positive and futures contracts that expire at future dates will be sold at higher prices.
Lesson 4: Diversified Small Business Assets Have Always Been a Good Investment Strategy
If you, as a small or medium-sized company, are heavily invested in oil-related industries, now is a good time to diversify your portfolio.
The portfolio diversification of corporate and pension investments was always prudent from a financial perspective . And if there is one thing that corona virus has shown, it is that many supposedly safe investment opportunities pose a much greater risk than previously thought.
A diverse portfolio is one of the best tools companies can use to limit risk. Investing in a mix of assets such as stocks, real estate, bonds, commodities, etc. should be a priority as SMEs formulate future emergency strategies.
Coronavirus has also revived consumer interest in the ethical integrity of the companies they use, with the oil spill acting as a catalyst. Now is a good time to test your value proposition in relation to your corporate assets.
Lesson 5: Even oil with a negative value does not lead to free petrol.
Taking it less seriously, many company owners and managers expected that the oil spill would have a significant impact on the price of everyday items like gasoline.
Consumer and business prices for oil-related products are not determined by the basic price of a barrel of oil. There are additional costs, including refining, distribution, packaging, etc. Although slightly lower prices are likely, you should not expect pumping stations that offer free gasoline.
If there is one thing that both the corona virus and the historic oil crash in April proved, it is the fact that good financial management is essential for small and medium-sized businesses. Many companies will close due to events in the past few months. And an even greater number will have trouble getting back on their feet.
Contingency planning is the best way to prepare for unexpected crises. Companies that have large reserves and a diverse investment portfolio are more likely to survive downturns, crashes, pandemics, and other adverse market events. They are also better able to take advantage of new opportunities when things return to normal.