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Omar Shaban Ismail · Sama News Agency · 2020
Omar Shaban argues that the collapse of oil prices far below zero was natural and predictable: demand had fallen sharply over the previous three months as production, transport and tourism stopped, while wells kept pumping until storage tanks and tankers were full. He stresses that the collapse exposes the danger of relying on oil exports alone, and that oil states with consumption-driven economies will face large deficits and cut their contributions to international organisations, their spending on foreign interventions and their arms purchases. He expects oil producers in the United States, Norway and elsewhere to press for the economy's return to normal, hastening the move to living with the coronavirus.
Omar Shaban, April 2020: oil’s fall below zero reflects collapsed demand and will push states to hasten the move to living with COVID-19.
I wrote weeks ago that the world would not be able to endure this paralysis that has afflicted the economy in most of its organs, and that it would seriously seek to move from the state of stagnation, isolation, and shutdown caused by coronavirus to a stage of coexistence with it. The collapse of oil prices to well below zero is natural and expected. Such a collapse occurs when supply swells while demand declines sharply. Demand for oil has fallen very significantly over the past three months because the wheel of production, transportation, tourism, movement, factories, cars, and other activities has stopped. Meanwhile, oil wells cannot simply be shut down by their nature, in addition to the high cost of stopping them, so they continued production in the hope that life would quickly return to normal. Storage facilities and tankers filled up with oil for which no buyer could be found (a state of severe recession). The producer seeks to dispose of it in order to reduce the storage cost, whether in warehouses or on tankers. It often happens that a commodity is offered for sale at a very cheap price or at a loss in order to get rid of the cost of holding it.
It is in the interest of oil-consuming countries to buy large quantities for delivery sooner or later, as far as their storage capacities allow. This enormous decline in oil prices will later reduce the cost of producing thousands of goods. It has often happened in the past that the growers of a certain commodity dumped large quantities of it into the sea to preserve its supply so that its prices would not collapse. The matter is not new.
The collapse of oil prices confirms the danger of relying only on oil production and export. Diversifying revenue sources is a necessity in order to avoid such shocks. Oil-producing countries whose public budgets depend to a large extent on revenues from oil sales, and which have adopted patterns of luxury and non-productive consumption, will be exposed to major financial crises, and the deficit in their budgets will balloon. Their trade balance will suffer a major imbalance because of the widening gap between import and export items. Oil states will not be able to spend generously as has always been the case; they will significantly reduce their contributions to the budgets of international and UN institutions, or spending on their external interventions, both military and humanitarian. Some wars will stop or their pace will decline because spending on them has stopped. Spending on arms purchases will decline greatly. The citizens of these states must tighten their belts from now on because of the austerity that their governments will impose on them.
What happened with oil will have strategic repercussions on international relations and local politics. The magnates of oil production in the West—America, Norway, and others—will pressure their governments to accelerate the return of the economy and life to normal as much as possible.
The shock of the collapse in oil prices will push the affected countries toward a rapid exit from the coronavirus crisis.
Topic: International Economy — oil prices · COVID-19 · oil-dependent economies — Text © Sama News Agency — archived here with attribution to the source. — Original source