Global Oil Crisis due to Corona Virus

Global Oil Crisis due to Corona Virus discussed in detail

Daniel Yergin, expert of the global energy and the vice chairman of research firm “IHS Markit” while talking about the outbreak of the coronavirus pandemic, says, “No one imagined a crisis of this scope.” Like so many other industries, coronavirus has also impacted the oil industry remarkably. The oil market is facing such a historic oil crisis due to the current situation. Petroleum Industry that is providing more than 50% of the world’s energy is in crisis.  Oil is the global product, and its decreasing price is causing a significant recession in all the countries, especially those whose economy only based on the oil business. During the immediate lockdown, the areas where the access to the markets is not possible, the oil barrel price already fell below zero. Global issue and the oil crisis.

Corona Virus and January 2020 oil crisis

The crisis due to the coronavirus started at the start of January 2020 in China. China considered the most significant developing market for the world’s oil suddenly shut down due to the coronavirus. Due to this lockdown situation, the oil demand steeply declined by about 6 million barrels/day at the start of this year. According to the IHS market’s calculation, the storage space for the oil is full that resulted in the fall of oil prices and shutting down of the oil wells by the oil-producing countries. After spreading such devastation throughout the world, even the coronavirus outburst is not ending but moving into the next and more harmful phase.

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Corona Virus outbreak creates the threats of poverty and the and instabilities of the political structures of the countries from Iraq to Venezuela (Countries that are dependent on oil sales). And these countries are fighting with the dual crisis at a time, and the least remedy they thought could help is changing the policies of the country. These policies don’t seem useful to beat the present-day crisis. The countries like United States, Russia, and Saudi Arabia can produce oil at low cost due to the ease of oil exploration from their oil field.

Oil-producing countries

These countries are the largest oil-producing countries in the world but still are facing financial imbalance as the oil demand across the globe had a steep drop.  In other countries, oil is present at deep depth, and the oil is produced at a high rate. Therefore, they can’t afford to drill oil without any earning. And many companies deciding to shut their wells. The oil crisis is real.

This week the oil price in the USA historically falls below zero. This fall can be marked on the calendars as there was never such a decline in the oil sector observed ever in the world. It is supposed the oil producers must pay now to export their oil to different countries. This situation will force the USA to negotiate with other large oil-producing countries. Like Russia and Saudi Arabia to limit its oil production during these days. Jason Bordoff, professor of Columbia University and director of the Center on Global Energy Policy. He says that the energy of any country is not independent or dominant. Global issue and the oil crisis.

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Still, it is in link with the other countries. He added that the effect of the global market on the United States has exposed. Therefore, when there is an increase in the oil prices the United States feels pain, and when oil prices crash. Then the US needs to contact Moscow and Riyadh about this matter (As stated in the New York Times).

Corona Virus impact on economy

Corona Virus generated terror and doubt globally, targeting the world’s economy and stabilize the financial structure. Just after one and a half months of the first case of the coronavirus w reported by the WHO. The oil sector started facing the detrimental impacts of this pandemic attack. Saudi Arabia sells oil, that causes 20% drop in the price of oil on a global level in a day.

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Different companies have taken the steps and limited their activities during this time for their survival. OMV that is an Australian Petroleum company, states that Europe is not affecting by the rise in oil prices. Except for the cost of the kerosene on which their travelling and industries are dependent. To solve this issue and cope with their kerosene demand, they prohibited air travel to reduce their kerosene use. According to the report of the International Energy Agency, the prediction tells us that oil demand is going to decrease. It will decrease by about 90,000 barrels/day. Therefore, it counted as the most significant drop of decades. Global issue and the oil crisis.

Norwegian Petroleum Company

Equinor, the Norwegian Petroleum Company, reported the coronavirus in one of the workers on the offshore of North Sea. The spokesperson of the company had announced that their employer had sent to heir home. Therefore, is no new case has reported in the crew working on the rig. Equinor also told its downstream workers to work from home and restricted their travelling. Not only one company but all the other companies also limited travelling. Shell was the first company that announced this travel restriction, whereas Chevron Petroleum Company of the United States was first to assign work from home to their downstream staff.

These types of activities may control the death rate but cannot help in avoiding economic loss. But every oil company is trying to survive this dark period as much as possible by different preventive policies. Global issue and the oil crisis.

Impact of coronavirus on economy

Major Impact of Coronavirus on Economy

Coronaviruses are a gathering of related infections that cause maladies in well-evolved creatures and winged animals. In people, coronaviruses cause respiratory tract contaminations that can go from mellow to deadly. Mellow diseases incorporate a few instances of the basic cold. There are yet to be immunizations or antiviral medications to forestall or treat human coronavirus diseases.

Impact of coronavirus on economy:

The catchphrase of the coronavirus emergency has immersed almost the whole world. It conveys extreme ramifications for nations’ populaces and economies are a vulnerability. The IMF as of late distributed the World Vulnerability Record for 143 nations from 1996 onwards. The deadly coronavirus brings with it the third and greatest economic shock of the 21st century after 9/11 and the financial crisis of 2008.

The first signs of the epidemic’s effects on China’s economy are far worse than the initial predictions. The official data reveals a widespread slowdown in its economic activity. It signifies the virus caused a 20% GDP decline in the first two months of 2020. Earlier in March, the US stock market took only 15 days to plunge into bear territory. Which is a 20% drop from its peak, the US GDP by an annual rate of 6% in the first, and between 24% and 30% in the second quarter. The coronavirus (COVID-19) outbreak has already brought considerable human suffering and major economic disruption.

Adverse Consequences of epidemic coronavirus on Global Economy:

There are various factors which are greatly affected by Coronavirus:

1 – Obstacles in Global Supply Chain and Economic Development

The adverse consequences of these developments for other countries are significant, including the direct disruption to global supply chains, weaker final demand for imported goods and services, and the wider regional declines in international tourism and business travel. Risk aversion has increased in financial markets. The global economy has become substantially more interconnected, and China plays a far greater role in global output, trade, tourism and commodity markets

2 – Becoming Developing Countries More Depending

The emergency is relied upon to hit laborers in low-and center pay nations especially hard, where the portion of those working in casual parts, and who accordingly have restricted access to satisfactory wellbeing and social security, is higher.

3 – Unexpectedly , Fastly Increase in Unemployment Level

Underemployment is also expected to increase on a large scale, as the economic consequences of the virus outbreak translate into reductions in working hours and wages Self-employment in developing countries, which often serves to cushion the impact of changes, may not do so this time because of restrictions on the movement of people (eg service providers) and goods, the financial consequences are likely to resemble those of a moderate recession (higher unemployment, lower earnings).

4 – Developing Countries to Suffer the Most

The crisis is expected to hit workers in low- and middle-income countries particularly hard, where the share of those working in informal sectors, and who therefore have limited access to adequate health and social protection, is higher. To make matters worse, the expected massive job losses among migrant workers will likely have knock-on effects on economies that heavily depend on remittances. Furthermore, the containment measures in advanced economies have already started impacting less developed countries through lower trade and investment.

Globally Economic Impact of Coronovirus:

  • ­The economic impact of the coronavirus pandemic that has wreaked havoc all over the world could be even worse than that of the Great Depression. In the first two months of 2020, the global economy slowed down by 20 percent.
  • The IMF expects the global GDP to fall by 3% in 2020 while the World Trade Organization has warned that the volume of international trade could shrink by up to 32%.
  • The International Labour Organisation, on the other hand, has indicated that 195 million jobs could be lost worldwide.
  • By March, analyses of Chinese services and manufacturing sector slumped to record lows, its automobile sales sank a record 80%, and China’s exports shrank by some 17% in January and February combined, as new orders plummeted to their lowest levels since the global financial crises.
  • Likewise, earlier in March, the US stock market took only 15 days to plunge into bear territory, which is a 20% drop from its peak. Markets have now come down 35% with credit markets clogged and credit spreads spiked to 2008 levels. 
  • Japan and Europe particularly, given their high dependence on trade and feeble fourth-quarter performance, are likely already in recession. The Organization of Economic Cooperation and Development (OECD) projected that the pandemic outbreak would depress the global GDP growth from 2.9% to 2.4% for 2020.
  • Pakistan will inevitably impact by both the global and domestic developments arising from the spread of the virus. The economy was recovering earlier slowly under the umbrella of an IMF program. Now, the process of growth will hamper seriously leading to a massive rise in unemployment, poverty, and hunger.

How to Fight the Economic Fallout From the Coronavirus:

The response to the immediate crisis will rightly take priority now. Economic authorities must also play their part in ensuring the world finally takes decisive steps to prevent it in future.

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 Conclusion:

The shock to the global economy from coronavirus has been faster and more severe than the 2008 global financial crisis. It is even bigger than the Great Depression. In those two previous episodes, stock markets collapsed by 50% or more. Credit markets froze up, massive bankruptcies followed, unemployment rates soared above 10%, and GDP contracted at an annualized rate of 10% or more. But all of this took around three years to play out. In the current crisis, similarly dire macroeconomic and financial outcomes have materialized in three weeks.

In other words, every component of aggregate demand – consumption, capital spending, exports is in unprecedented free fall. The contraction looks to be neither V- nor U- nor L-shaped (a sharp downturn followed by stagnation).

Unless the pandemic stops, economies and markets around the world will continue their free fall. But even if the pandemic is more or less contained, overall growth might not return by the end of 2020. Moreover, the fiscal response could hit a wall if the monetization of massive deficits starts to produce high inflation. Especially if a series of virus-related negative supply shocks reduce potential growth. And many countries simply cannot undertake such borrowing in their own currency.

In any case, even if the pandemic and the economic fallout come under control, the global economy could still be subject to a number of “white swan” tail risks.