Oil price war amid the economic slowdown

Dr. Nufazil Altaf Ahangar

In the last few weeks, we have seen an unprecedented worldwide quarantine, complete shutdown of the world’s economies and the loosest stock market drop. Despite the world talking about the consequences of COVID-19 in terms of community spread, melodramatic drop in GDP and the protective measures to be taken, the important part of this crisis has not been spoken much. Here I would highlight a vital part of this crisis and perhaps a significant one for the world to look into. What I would be talking about is the “oil price war” that has gained some heat recently.

The United States, Saudi Arabia, Russia, China, Iran, Canada, and Iraq are the world’s largest producers of oil. It is well known that oil has always been called liquid gold and has been a chief determinant of the country being rich or poor. Nevertheless, oil prices suffered the biggest fall of 64 percent in the last 12 weeks that is almost the same price drop of 2014-2016 that led Venezuela’s economy to enter a crisis. However, the price drop of 2014-2016 took around 72 weeks to hit the bottom rock but this time it took just 12 weeks, implying that we are living through the sharpest decline in the price of energy commodities like oil in history.

How did this price drop happen?
The first major reason for the drop in oil price was because the demand for oil began to dry up amid a global pandemic (COVID-19) and subsequent shutdown of world economies. Approximately 2/4th of the world’s oil extraction goes into transportation vehicles like planes, busses, and cars, but since there is almost no travel, the demand has fallen by over 90 percent. As we learn from basic economics that when the demand falls, the price decline follows. Now moving to the second reason and perhaps the most important one, early in the month of March 2020, leaders from countries like Saudi Arabia, Russia, China and a handful of other country leaders met to decide how much oil should be produced during this lockdown.
Saudi Arabia that is currently the world’s largest producer of crude oil wanted every oil-producing nation to cut production in order to maintain price stability. Most of the countries agreed to Saudi Arabia’s idea except Russia that was hoping that other countries will cut the oil production thereby making their oil expensive than Russia’s and in turn they would be able to attract more buyers. Of course, oil giant Saudi Arabia did not like the move by Russia, they decided to launch the ultimate oil power play. They decided to increase oil production by 30 percent in one day and also announced to cut prices to preferred customers. This became the prime reason why the price drop happened and why oil markets collapsed in the past few months.
Whom it will hurt the most?
We are hardly going to see any oil price stability amid the oil price war and at the top of it a global pandemic. So, it is largely true that it is hard to see any winners. For sure oil-producing nations are going to lose a lot of money regardless their market share but they can plunge it back in times to come. However, some states/provinces in these oil-producing countries are going to be hit very hard. For example, a small province in Canada called Alberta which was famous for its agricultural activities until they found “oil sands or Leduc No.1”. These oil sands are the world’s largest oil reserves that ignited the oil boom in Alberta and this province became the backbone of Canada’s economy. Over the last few months this province has seen an economic collapse, this is because one out of every 10 citizens of Alberta works in the oil industry. Due the fall in oil price many oil producers are failing to keep up with the challenges and are going towards bankruptcy. This might cause a loss of billions of dollars and hundreds and thousands going unemployed. Alberta is just one province among the oil-producing nations, there are many such provinces and their collective collapse is going to result in huge unemployment and a significant fall in GDP.

What impact it is going to have?

Large oil-importing nations like India, Germany could get low energy bills. In fact the oil price plump is likely going to cause of relief to these economies amid the slowdown caused by the coronavirus. This might also result in the shift to using of other efficient sources of energy like solar and hydro but oil industry is going to be hit hard.