Covid-19 hits oil prices: Implications of great fall

Cheaper oil, despite the taxes imposed by the government, is going to have a cascading effect on the prices of different commodities because of the decreased transportation cost

International crude oil prices have been on the downslide since January this year, even before it a little bit, but the coronavirus pandemic has brought it to a level never expected in the 21st century. A few days back it reached the level that prevailed 21 years ago. Brent crude oil has been sold a little over $25 a barrel whereas the WTI prices came down to zero at one stage. This means that oil producing companies were prepared to supply oil free of cost to anyone who could afford to accept what was once considered a liquid gold.

However, the problem is that countries like India which still depend heavily on imported fossil fuel for running their economy have their storage facilities nearly full. They are just not in a position to bear more burden of oil inventories. Reports suggest that with very few buyers remaining in the oil market, many countries, members of the Organisation of Petroleum Exporting Countries  (OPEC), may be forced to shut down their oil producing facilities if the situation does not change for the better. That will mean they will have to wait for the oil market to revive again and reach the pre-lockdown level, which is difficult to correctly predict at this stage. The closed oil facilities cannot be revived so easily as it is a very costly affair, as experts have pointed out.

With the situation that prevails today, India, which depends on oil for over 85 per cent of its energy requirements, is bound to be a gainer, though marginally. India’s domestic oil production has been going down despite a clear-cut policy to increase the country’s oil resources. Even in the case of natural gas too, the country now imports 52. 7 per cent of its total gas requirement.

According to the latest available figures, India’s crude oil import bill declined by 9 per cent to $102 billion in 2019-20 with no change in the volume. This happened before the Covid-19 pandemic, towards the end of 2019, when oil prices nosedived on the falling demand. Since then India might have gained considerably as its oil bill would have gone down sharply with the oil prices nosediving to an unprecedented low level as a result of the pandemic’s impact on the global economy.

Cheaper oil, despite the taxes imposed by the government, is going to have a cascading effect on the prices of different commodities, including items like vegetables, fruits, food products and many other things because of the decreased transportation cost. It can help control inflation, which was earlier only going up and up.

But these are not normal times. The lockdown imposed because of the coronavirus pandemic has brought economic activity to a low level never expected under any circumstances. Despite the efforts to gradually open up the economy with lots of relaxations to restart industrial activity, there is little possibility of factories and other business establishments functioning at full capacity as was the situation before the Covid-19 pandemic put a spoke in the industrial wheel.

So, India cannot take as much advantages of the situation as it could in the normal circumstances. The country is already heading towards a kind of depression never seen before despite the thousands of crores of rupees being pumped into the system. How will commercial activity, including industrial production, come to the pre-lockdown level when migrant workers, in their lakhs, have left the cities for their home places (villages and small towns) with most of them taking the vow never to come back.

They have no love lost in the system which has robbed them of their jobs with little credible arrangement to infuse in them the confidence needed to make them feel to stay put with the hope of getting employment again as the lockdown gradually gets removed. Their arrival in villages is likely to cause a new crisis, hunger and a spurt in crimes because of joblessness of a massive scale.

Cheaper petrol and diesel may, therefore, not spur economic activity as it could in normal times because of the missing workers in cities. Most business establishments in India are labour-intensive and, therefore, these will not be able to run at full or near-full capacity in the wake of the labour shortage.

There is another major factor which may jolt the economy in India  the expected sharp fall in foreign remittances, mainly from the Gulf Arab countries. The shortfall is expected to be over 23 per cent to $64 billion in 2020, according to a World Bank report.

The sharp decline in the remittances are bound to be there owing to loss of employment for migrant workers in the Gulf, where lakhs of Indians work and prosper. Over 34 lakhs of them are in the UAE and more than 10 lakhs in Saudi Arabia.

The situation was quite different in 2019, when there was a 5.5 per cent growth in remittances which touched $83 billion. Oil exporting countries like Saudi Arabia have been passing through a very difficult period in the wake of the Covid-19 crisis. Their financial position is no longer what it was a year or so ago.

The Covid-19 outbreak represents the biggest challenge to the world economy since the Great Depression of the 1930s, as the lockdown measures imposed to contain the spread of the deadly virus have hit sectors like aviation and tourism beyond belief. No one knows how much time these sectors will take to get normalised.

The International Monetary Fund says it expects the global economy to shrink by 3 per cent in 2020. Lower oil prices also mean Middle East and Central Asian economies getting squeezed by 2.8 per cent this year.

According to The Guardian, London, Saudi Arabia is “facing an unprecedented budget crunch because of the collapse of the oil markets and the global economic turmoil”, reducing the oil demand considerably. Experts believe the situation for a long time is unlikely to be what it was in the past.

The paper quoted Bruce Riedel, a Middle East expert and a CIA veteran, now a senior fellow at Brookings in Washington, saying, “I have no doubt, this is the end of an era. The era of the Persian Gulf having all this money is over.”

The National, a reputed newsmagazine based in Abu Dhabi, UAE, recently carried an article by Gro Harlem Brundtland, a former Prime Minister of Norway and Director-General of the World Health Organisation, which said, “Unlike China, the wider Middle East region is only at the beginning of its Covid-19 ordeal. Gulf states, including the UAE, have been able to lock down early, and are fortunate enough to have generally well-funded health care, along with the sovereign wealth to provide significant support to their residents.” Yet what happens in the coming months is difficult to predict at this stage.

The expert further says, “The risks of inaction or an uncoordinated response are also evident. The collapse in the price of oil could profoundly transform the Middle Eastern economic model, amid warnings from the UN that the Arab region as a whole could lose as much as $88 billion in exports, with foreign direct investment forecast to fall by 45 per cent.”