The perfect economic storm
THE global economic structure has fallen headlong from the covid-19 pandemic into a challenging energy crisis.
At the outset, the losses from the developing crisis are already higher than the super-recession that began in 2007.
The oil price per barrel is set to hit an all-time high of 100 USD, which has multiple reasons behind it.
The world is recovering from the lockdowns of the pandemic and industries are putting people back to work but the same will not be possible for every country and it is feared that the incoming energy crisis will hit the developing nations much more than the developed world. It is a time of grave consequences as these are uncharted waters for everyone.
Economists are of the view that 2022 to 2024 will be the years that will need meticulous planning, co-ordination, diplomacy and integration to avoid massive economic catastrophes across the globe. The only way forward is to first understand the storm that is developing before us.
The current rise in prices is being observed in all three basic sources of energy, namely, coal, gas and oil.
For domestic and industrial consumption, these prices can offset each other. In the year 2020, due to shutdown of businesses and factories, the demand side dropped drastically, sending oil and gas prices to lose indexes.
In 2021, with the roll-out of vaccinations, the businesses began to open up. Economies were set in motion. China and the United States were the first to come out of economic lockdown.
Europe was slow to reach massive vaccinations levels but by start of September, majority of European nations were able to lift restrictions and allow factories to boost up production.
The revival in financial activity jump-started transportation and international trade and the requirement of gas and oil went all time high.
On the other hand, the supply systems were not able to meet the demand. The supply of oil is regulated chiefly by OPEC (Organization of Oil Exporting Countries).
With the surging demand, the oil rates and production were delayed. OPEC countries were slow to respond in order to keep the prices stable and some countries were welcoming the hiking prices to recover losses during the pandemic.
Further, as the production was boosted, the supply infrastructure began raising prices which further boosted the rates to a near 80 USD per barrel.
Many of the major companies that were engaged in supply of oil had cut short their machinery and personnel involved in the supply of oil as during the pandemic the demand was considerably low for more than a year.
This was the beginning of the storm from the angle of Supply and Demand. The second factor that is contributing to the current crisis is the failure of renewable energy sources.
It is not even winter but the infrastructure installed, particularly in Europe, towards wind and solar energy have proved to be inadequate.
The United Nations, IMF and the World Bank have invested billions of dollars in promoting renewable energy setups mainly in the developed world but with the coming of Winter, there is less production from almost all types of renewable sources, solar in general.
On the domestic side, the shortfall in energy availability from Solar was replaced with consumption of natural gas.
Europe relies heavily on supply of natural gas from Asia, Russia being the chief exporter. Over-consumption of gas and hike in its prices even before winter has further pushed the price of oil in the International market.
The usage of natural gas is unable to cope with the shortage of oil and so, there is an acute shortage of both gas and oil across Europe. 90% of petrol stations in the UK were shut in the beginning of October. It is an unprecedented turn of events.
Another basic commodity that is closely linked with consumption and prices of oil, gas, output of renewable energy is coal.
China is the largest consumer of coal and makes a significant portion of its electricity from coal.
The shortage of fuel and low production of energy from solar plants has sent an energy shockwave in China where multiple regions are now facing electricity shutdown. There has been no electricity load-shedding in China since 1975.
The consumption pattern in China will further exacerbate the prices of natural gas and oil as the coal required for production in thermal power plants will go short.
There will be two-fold effect of this shortfall, there will be a slow-down in the economic recovery and rates of natural gas for domestic usage will see an all-time hike. Coal factories in India have already been sealed off with now reliance on gas reserves.
There is a wind of shock and suspicion in the world. The United States is pushing for boosting the investment in Green Energies which have, as of today, fallen short of bridging the gap between energy demand and supply.
On the other hand, economic recovery from covid-19 requires enhancing investment in fossil fuels so that people are kept in jobs and losses from the pandemic are ameliorated.
There is also a wave of protectionism as developed countries are building walls to safeguard their interests instead of investing a collective tomorrow free from the environmental impact and existential threat that originates from global warming.
It is estimated that at current rates of consumption of coal, gas and oil, the world temperatures will reach catastrophic levels by 2040.
There is an urgent need for humanity to come to terms with this collective calamity and join hands to prepare.
Pakistan is also in the grip of international, regional and domestic economic storms. The international prices of oil and gas will further hurt the developing economy. Winter will increase the requirement of gas in domestic as well as industrial areas.
This could turn into a circular crisis leading to electricity shortages and shutting down of businesses. The prices will hurt the poor sections of society which will lead to more unrest.
The weakening worth of the Rupee and inefficient price controls between consumer rates and retail rates at the district levels is making the economic recession even worse.
On the regional level, the unrest in Afghanistan is having its own backlash. The relations between Pakistan and the US are strained and security needs to be beefed up.
There has been an influx of refugees as well which is another expense for the Government. Pakistan relies heavily on imports duties and taxes to run the federal government so hampering imports is not an option, if not, the value of Rupee will weaken further making the economic shock dig deeper into all sections of the domestic consumption.
An economic storm is in the offing, the whole world is in its grip and the only way forward is to get together.
National, regional and International co-operation and integration is the compulsory need of the day.
For humanity, just as in the case of the pandemic, this is the time to prepare and to sit together, this is the time for equitable distribution, now is the time to decide that the richer should not be getting richer and the poor should not be getting poorer.
—The writer is Chairman, Jinnah Rafi Foundation, based in Lahore.
