The Impact of COVID-19 on the Global Oil Market
The coronavirus has shocked several financial markets in the world. However, none of the markets have been shocked more than the global oil market. Barely 12 months back, oil was being traded at an average of $120 per barrel. The price had already fallen to about $60 per barrel in March 2020. Investors and consumers in the oil market were of the opinion that this price was the historic low, and there was very little chance of the price going any lower than $60. However, the coronavirus has made the oil market hit new lows. Within a few days, oil prices plummeted almost as much as 50% and were down to $30 per barrel. This is the lowest that these prices have been in the last seventeen years! The oil market has seen several highs and lows due to geopolitical tensions. However, the monetary damage caused by coronavirus is unique as well as unprecedented.
In this article, we will have a closer look at the economic impact of the coronavirus crisis. We will consider how it will impact the exporting and importing countries differently.
Oil Hits Historic Lows
The demand for oil is contingent on demand in other sectors. For instance, oil is consumed in huge quantities in the airline industry. However, the airline industry has seen a dramatic fall in passenger traffic. It is operating on less than 30% of its capacity. Hence, the demand for oil has also reduced to 30% of the original demand. Similarly, other travel and tourism activities also require a lot of oil consumption. Trains, buses, and vehicles deployed by tourists consume a significant amount of oil. Now, since tourism has also come to a grinding halt, there has been a significant drop in the demand for oil. Similarly, the transport of goods produced by the retail sector is another major consumer of oil. Nowadays, none of the goods apart from essential goods and services are either being produced or consumed. Hence, here too, the demand for oil has dropped.
Also, the coronavirus crisis is expected to be a long-lasting one. This is the reason that oil prices are expected to remain muted in the future. In the past week, two rivals viz. Russia and Saudi Arabia decided to collaborate and cut oil production so to reduce the supply and increase the prices. However, the prices barely went up, signaling that the oil market is looking at a persistent downturn.
Falling oil prices are impacting different countries differently. The same has been explained below:
The Impact on Exporting Countries
Oil exporting countries will see a dramatic impact on their national income. This is because countries that export oil have their whole economies built around this commodity. For instance, countries like Saudi Arabia and Russia derive a large proportion of their national income from oil sales. Countries like the United States have also become net exporters of oil in the recent past.
The unprecedented drop in oil prices will mean bad news for these economies. This is because a lot of subsidies and public expenditure will have to be cut since the revenues will drop rapidly. Hence, countries will not be able to support their citizens in times of crisis. Also, since the production is being lowered, the number of jobs will also reduce. The oil-exporting countries are likely to witness large scale unemployment. This is particularly true for companies in the United States which have borrowed heavily in order to develop the technology required to produce shale oil.
The Impact on Importing Countries
Importing countries are likely to reap benefits because of this drastic fall in the prices of oil. These lower prices would mean that significant amounts of wealth will be transferred from the oil-producing nations to the oil-consuming nations. This is because payments for oil imports consumes a lot of foreign exchange in most countries. Hence, a reduction in payments to oil exporters will leave the country with some much-needed cash.
There are two different ways in which oil importing countries can pass on the benefits to the common people. The first way is by inducing a direct price cut. This means that the government can lower the prices of oil in the retail market, just like they are being lowered in the international market. However, this method cannot be used to distribute wealth in a targeted manner. Anyone who buys oil at lower prices will benefit from the decline. The people benefitting may not be the ones most affected by the virus outbreak.
However, there is another method. Under this method, the government can hold the prices of oil constant. By doing so, it can collect the difference between the international prices and the local prices as tax. This tax can then be spent by the government in order to give relief to the population which has been affected the most. For instance, money collected via taxes can be used to finance the stimulus packages which are being launched to pay daily wage earners. This will help them tide over this extraordinary period with fewer resources.
The good thing is that most of the developing countries in the world are consumers of oil. Hence, they will benefit because of this collapse.
The bottom line is that a few oil exporters will suffer major economic shocks while the rest of the governments will be able to save some money. This money can then be used to finance the needs of people in developing nations.
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