Shah Fahad
THE world woke up to an apocalyptic crisis last
Monday that sent shock waves across the world’s
financial markets. This will not go down in the history of stock markets just as a bad Monday but a “Black Monday”. The stock markets around the globe came crashing down. Dow Jones Industrial Average shed 300 points, Nasdaq 625 points and S&P 500 226 points. These are the worst figures since the 2008 crash. The stock market had to use the “circuit breaker” and halt the trading to control the panic. The crisis triggered by the corona epidemic that slowed down economic activities across the globe but the dispute between Moscow and Riyadh over the issue of reducing oil production exacerbated the crisis, leading to the glut of black gold. The oil glut is not a new phenomenon and this is not the first time it has happened but it could be the first time where there is supply shock and demand shock, all together. OPEC decided to cut the oil supply by 1.5 million barrels a day to bolster the oil price, for that matter Saudi Arabia, the largest oil exporter agreed to cut their supply by the biggest share of the total OPEC oil supply cut. The move was aimed at persuading Russia, which is not a member of OPEC, to reduce oil production but Moscow rejected the offer.
This Russian defiance added to the political and financial woes of Saudi Crown Prince Mohammad Bin Salman, who is battling a revolt on political front and pumping billions of dollars into the kingdom’s economy on financial front to diversify the means of generating revenue. The Russian rejection has infuriated the Saudi ruling elite that has decided to not only increase the oil supply in the world market but also offer it at lower prices. It may be mentioned that Saudi Aramco was operating at 9.7 million barrel per day which will be raised to 12.3 million barrels per day by next month. This is 300,000 bpd more than the company’s own maximum sustained capacity of 12 mbpd. This led to a sudden upheaval in the oil market, badly affecting stock markets as well. The crisis has more economic ramifications for Moscow and Washington than Riyadh because the cost of drilling oil in Saudi Arabia is much cheaper than Russia and far cheaper than US shale. Mohammad Bin Salman wanted to play it hard and definitely, he knows that Saudi Aramco can sustain lower prices. Russia has reserves and can certainly devalue its currency too to handle the situation but the crisis has created concern among the policy makers who are holding emergency meetings to chalk out their strategy.
Joachim Fels, who is the Chief Economic Adviser of a large investment firm named PIMCO, told his investors that “the worst of the economy is still to come over the next several months”. Fels further told that there is a distinct possibility of a recession in the US and Europe during the first half of the year. In February the official figures of Germany showed that the German economy escaped recession twice during a period of 18 months. Marcel Fratzscher, President of the DIW (German Institute for Economic Research) told CNBC, “I am pessimistic about the German outlook because Germany could experience something like the perfect storm”. The effects of the consistent drop in oil prices have already started to impact medium oil producers in the US. Financial Times reported that the new fear in the market is that those medium size oil producers will begin to bankrupt on their loans because they cannot generate enough cash flow from the drilling at this price. The spread on Credit Default Swaps has increased significantly as the result of the current condition.
Despite the fall in oil prices, the tourism and other associated industries are not picking up for fear of Corona. The tourism-loving Chinese, who spend more than $250 billion a year on foreign trips for pleasure, have been confined to their towns because of the outbreak. Countries that used to earn a significant amount of their revenues from Chinese tourism have already taken a hit. Private or medium-sized companies in China are already in trouble because they cannot operate anymore. This situation has reduced the oil demand in the market internationally.
Richard Kozul-Wright, who is the Director of Division on Globalization and Development strategies in the United Nations Conference on Trade and Development (UNCTD), told that Coronavirus outbreak is likely to cost about $ 1 trillion to the global economy. According to him a “Doomsday Scenario” is haunting the economy which could only witness 0.5 percent growth, causing a “$2 trillion hit” to the global GDP, adding collapsing oil prices had been “a contributing factor to that growing sense of unease and panic”. This means that even if both the parties agree on cutting the oil supply, recovery will not be a piece of cake.
With a drop in oil prices, investors ran towards the Gold which reached a 7-year high price. Although on Tuesday the price of Gold in the future market came down because the level of panic in the stock market is also lower. The situation is changing rapidly but what seems imminent is a sharp recession, which in the opinion of some experts could be short-lived and different from 2008. But what is also imminent is that this long-time price war between Saudi Arabia and Russia is not going to end any time soon and it’s going to hurt countries like Iran, Venezuela and most importantly the US and Canada until Russia submits. While the world economy was already showing signs of a recession, the corona outbreak has added more problems to global economy, pushing the world into a deep state of crisis.
—The author is a Karachi-based freelance journalist.
