Imtiaz Rafi Butt
COVID-19 pandemic has exposed the governance systems of the world. Capitalism, authoritarianism, the free market, international trade, world healthcare, etc., have been brutally evaluated to be grossly ineffective. The first direct impact of the virus came as a shock to medical facilities. Super powers like China, European Union and United States have come to terms that, instead of making bullets and missiles, they should have been stocking up medical supplies and ventilators. With this realization, many other revelations are in the offing. The oil industry is now the second causality in the global market. For the very first time in human history, the price of black gold aka oil, stooped to negative, which actually means, the supplier is ready to pay the consumer to take the oil away. It not only lost its worth, it is, as of now, a problem for the one in possession of oil, as the storage cost are higher than its price in the market. How did this happen? What are the causes behind this disaster? What impact will this have and what will happen next? These are crucial questions that will test the heart and soul of leaders and nations around the globe. The world will never be the same again and needs to change its old ways.
To comprehend the present oil crisis, we need to look at two factors, the impact of the pandemic as it spread in December and the dynamics of politics between OPEC countries. Firstly, the pandemic caused huge lockdowns around the world. These lockdowns thrashed the global demand for oil and oil related products by over forty percent. The steep drop in demand caused a direct drop in prices. As more and more industries, airlines, shipping companies, automotive sector, offices began to close down; there was further decrease in the requirement vis a vis demand for consumption of oil. Particularly, shutting down of factories in China was a large factor. As storage firms and oil companies got filled with backlog of supply, they decreased prices even further leading to the present crash in the oil market. Halting transportation sector like cars, buses and trains coming from closure of schools and offices, further reduced the consumption of fuels. Due to drop in demand, there was a sharp decrease in profits coming from oil and oil producing countries like the Arab states and Russia jumped in to secure dwindling profits. That’s what gave rise to the price war.
The OPEC countries, also known as the oil cartel nations, set the price of oil in the International markets through control of supply and production. As profits from oil fell in the international market, OPEC nations individually, without any consultation or arrangement, reduced the prices to capture market share. Russia and Saudi Arabia in particular took an aggressive stance. Russia walked out of deliberations and refused to cut down production of oil. As a result, within a period of two weeks, the price per barrel of oil fell by over forty dollars. Such a crisis has not been seen since the Great Depression of 1930s. The 6th OPEC plus meeting was held in April. The meeting was concluded without a proper agreement.
Saudi Arabia took another hard position and lobbied along with Kuwait and Bahrain to dictate terms, which Putin evaded defensively. As more and more oil got pumped and shipped, while enough was not selling. Consequently, the price of oil fell in the negative. Finally, the United States jumped in to regulate the crisis as it owns large oil corporations around the world were losing capital. Millions of jobs would have been lost in the US if the scenario had continued. This time, the US threatened Saudi Arabia with the withdrawal of military support if an agreement with Russia was not reached. Within a week another conference was held in which Saudi diplomats agreed to common terms with Russia. In short, it was agreed to keep prices of oil stable in the market through control of production so that jobs in the oil sector are protected and large firms around the world don’t file for bankruptcy. Even though the situation is being carefully handled to avoid a disaster, the present crisis means different circumstances for different countries.
According to economists and experts, the current oil crisis is a blessing for countries whose economies are reliant on import of oil. Countries like China, Pakistan and India will benefit from this crisis. To the extent, that this crisis and the benefits it will bring in terms of bridging the trade deficit will off set the costs associated with tackling Coronavirus domestically. The highest value on the Pakistan import bill is oil and then a major part of that import goes to energy production. If handled correctly, Pakistan can permanently eliminate the circular debt and the trade gap associated with oil. China, on the other hand, relies on countries like Iran for oil and gas supply. With diminishing prices, China will be able to boost its exports and improve its competitiveness in the international market. Manufacturing industries which require excessive amounts of oil and gas supply will be able to enhance manufacturing. But that is dependent on the easing of lockdowns, which have already started. The same situation is not true for other countries that have invested heavily in oil and gas corporations or are exporters of the same.
Countries that are exporters of oil and gas will take a massive financial blow because of COVID-19 and dwindling demand for fuels. It will take a considerable time before economies of the world can resume their activities and buy oil of the same magnitude. The World Bank predicts that oil producing countries like Saudi Arabia, Iran, Bahrain, Kuwait and Qatar will be incurring heavy debts if the current trend of oil continues. Diversification is the only life line for them but it might be too late for that kind of venture. The United States Government has always attempted to monopolize the oil sector of the world powered by invasions like the Iraq war of 2003, and through collaboration with Saudi Arabia. Negative growth for oil means a huge blow for so-called petro-dollars.
The US businesses have invested their entire portfolios on oil supply lines and if they sink, the investment of the US treasury and the businesses will sink to the bottom along with the fall of the black gold. Only this dilemma, explains the threat that the US sent to Saudi diplomats if they did not cut down production of oil to control stable prices of oil. As an extreme measure, the US Government decided to withdraw military installations from Saudi Arabia citing the reason that Iran is no longer a threat to the US in the region. The power shift is more imminent than ever before. 20 million people have lost their jobs in the US alone and more are to follow all over the world. After the oil sector, stock markets crashed all over. The banking and development sectors are hanging by the thread of aid. These are unprecedented times. The old world is gone and now it is up to us to decide, whether we will try and cling to obsolete methods or we will adopt a new outlook and strive for a better world.
—The writer is Chairman, Jinnah Rafi Foundation, based in Lahore.
