The Ramifications of COVID-19 on the Political Economy of Oil – by – Ayesha Jamil

Ayesha Jamil is student of MS-IR, Middle East Technical University, Ankara.

Oil is not like other products. It is distinct and unique because it is an indispensable element of modern-day living and culture. Oil investor Marc Rich mentioned oil as “the blood that flows through the veins of the world.” Oil is not just fuel for vehicles and aircraft; tens of thousands of petrochemicals, the enormous bulk of medications, electric power generation, and domestic heating systems all come from the petroleum industry.

It accounts for 58 per cent of the globe’s power spending. In his book, Daniel Yergin, a well-known energy historian, “The Quest: Energy Security, and the Remaking of the Modern World (2011),” rightly emphasizes the significance of energy and humanity’s acute unease in dealing with the anxiety and ambiguity linked with it.

Oil is the planet’s most precious traded product, gauged by the value. On March 11, 2020, the World Health Organization (WHO) announced COVID-19 as a pandemic. Since then, a substantial fall has been observed in the international crude oil markets. International oil sales went through a substantial recession in the wake of the novel epidemic (COVID-19). Subsequently, the prices became exceedingly unstable.

The epidemic crashed oil demand, dashed prices, and presented a substantial peril for ones engaged in oil extraction and processing. Oil markets were also profoundly affected thanks to the resulting Russia-Saudi Oil Price War. Although dropping of oil prices appeared to benefit the importers, the plunge in oil demand and the spurt of socioeconomic susceptibilities with the epidemic turned out to be the hidden edge of the iceberg as the oil price volatility tends to hurt the market.

Economists argue that considerable drop and surge in oil rates harms the government and consumer spending.

Ever since the inception of the Corona virus (December 2019), the impact has stretched to almost every segment of the global market, with significant implications on healthcare, travel, labour, production capacity, and many others.

As a direct result of the spread of the virus, crude oil prices deteriorated abruptly by around 50%, with the United States West Texas Intermediate (WTI) attaining negative prices by April 2020. It can be claimed that the Petro-industry usually adapts to elevated levels of instability; however, the primary reason behind this price fall was the utterly unparalleled disturbance in market rudiments that the COVID-19 pandemic instituted.

The coronavirus swiftly battered global demand for oil, plummeting the rates by more than 50 per cent since the beginning of the year. The sharpest decline appeared in March, after a futile congress among major petrostates. Per barrel cost of the Brent crude tumbled to $22.58 at the end of March 2020. This price turned out to be the lowest since November 2002. WTI’s price touched less than $20 per barrel in the short term, declining to the lowest level for 18 years.

The arrival of a global pandemic has thus, led to a recession in the crude oil markets with lower import requirements all over the world. The danger of global economic retrenchment has prompted looming downside risks in the oil markets.

Subsequently, shareholders owning the oil derived estates have been subjected to unfavourable oil price movements. The Covid-19 pandemic turned out to be a global shock affecting concurrent interruptions to supply and demand in an interlocked world economy. Viruses decreased workforce and efficiency from the supply side, whilst lockdowns, shutting down businesses, and social isolation disrupted the supply.

Talking about the demand, downsizing, and pay deficit resulting from illness, isolations, joblessness, and deteriorated financial projections shrank domestic spending and businesses’ financing.

The ambiguity regarding the duration and impact of COVID-19 has been posing a ferocious succession of stifling commerce and consumer confidence, thus leading to intensifying financial restrictions. Covid-19 has been unmatched in its international grasp and effect, creating tough challenges to policymakers and assessing and evaluating its immediate and unintended consequences within the international financial system.

Crucial trials for any monetary investigation of Covid-19 have mainly been how to classify this unique shock wave, how to interpret its non-linear paraphernalia, how to calibrate its cross-country spillovers, how to observe its global factors and how to enumerate and analyse the preliminary calculations provided its unprecedented nature.

The petrochemical industry was pummelled with COVID-19 lockdowns, constrictive transport, and intensely plummeting nearly all sorts of fuel demand. Global demand plunged from about 101 million barrels per day in December 2019 to 85 mbd at its low in the second quarter of 2020, and oil prices in the United States even briefly turned damaging as stowing bulk filled up.

In terms of energy, it was predicted by the economists and the analysts that Covid-19 was anticipated to diminish overall principal energy demand by 6% in 2020 as compared to 2019, the significant comparative deterioration since World War II and the biggest ever decline in absolute terms.

Thus, The oil market experienced “the double whammy of flagging demand and a record low price.” The future route of the oil market will alter in prodigious arrangement on both the strategic calculus of the global headship and the practical matters of funding management finances and long-term international transformation.

The world witnessed this negative impact on government spending in oil exporters such as Saudi Arabia, Nigeria and the UAE (mainly dependent on revenues generated through crude oil exports). On the other hand, a considerable rise in oil prices resulted in mounting inflation, existing account discrepancy and fiscal deficit in India and China, which chiefly import oil.

As humanity wrestled with a global outbreak and economic stagnation during the outbreak, the price war amidst Saudi Arabia and Russia influenced oil since March 2020. At the OPEC-Non-OPEC legislative summit on December 6, 2019, in Vienna, it was expected that Saudi Arabia and Russia would act on behalf of following rulings they mutually take.

However, while Saudi Arabia intended to execute a strategy of rising production that would cut the oil price, Russia chose the level of oil production to be lowered in expectation of higher oil prices.

Consequently, the oil markets, strewn like a sandcastle due to the recession and the epidemic, responded adversely to the crisis between the two. An accord had reached between them to disperse the friction in April 2020, but scars of reticence broadly indicate the core impulse under which the “oil war” kicked off. Time will tell how an industry traditionally thought of as resistant to change is adequately equipped to deal with this crisis or not.