Source: Ethan Mcarthur
The COVID-19 pandemic has extraordinarily and distinctively impacted various economic sectors and markets in significant and possibly irreversible ways. It has exploited numerous vulnerabilities within the global economy that have the potential to destabilise the volatile global system. A comprehensive demonstration of the acute implications of the pandemic is in the energy industry, particularly the oil sector which is currently in an alarming crisis as it is facing a economic shock. Oil, the largest commodity market in the world, is trading at negative prices meaning sellers are prepared to pay a buyer more to attain the oil. Moreover, with the sector’s value shrinking so greatly, it has become the second smallest segment in the S&P 500 Index. This index is considered to be one of the best representatives of the United States’ (US) stock market, measuring the performance of 500 large companies listed on the US stock exchanges. The oil sector’s weighting is historically down 80% as there are no oil companies in S&P’s Top 10 with the industry’s weighting below 3%. The industry’s executives fear that they are at a risk of disappearing as they are doubtful of whether the industry will ever regain investors post-COVID-19. Through discussion on the implications that COVID-19 has on global economies, it is apparent that the system is in need of transformative policies and strategies that can withstand pandemics.
The global economy, battered by the pandemic, is facing weakened external balances, substantial outflows of portfolio capital, falling commodity prices and depreciating exchange rates. Consequentially, various economies are unable to service their debt due to financial constraints. This fragility and volatility of the economy was exacerbated by the oil crisis which was triggered in April 2020, by the overflow of unsellable oil causing the collapse in oil prices. The overflow of oil formed the aftermath of the price war and the breakdown of trade discussions between Russia and Saudi Arabia in March 2020, which led to Russia refusing to limit production. Saudi Arabia was forced to double down, dumping oil at discounted prices in the global markets. This creates a massive surplus of oil, fundamentally altering the balance between demand and supply. Although Russia, Saudi Arabia and the Organization of the Petroleum Exporting Countries (OPEC) have attempted to restore balance through an agreement on production restriction, the overhang of supply still has significant implications.
Moreover, the decline in commodity price is especially alarming for the commodity-dependent economies in Sub-Saharan Africa and Latin America as they earn more than 80% of their export revenue from commodities. The oil dependent markets are particularly concerning as the fragile, recovering economies of countries such as Algeria, Angola, and Nigeria are struggling to maintain their fiscal balance with the commodity trading at negative prices. Evidently, a vulnerability within these economies is highlighted by the relationship between extreme commodity dependency and high levels of government debt which is further strained by the COVID-19 pandemic. Majority of these commodity exporters may not be able to roll over their debt, emphasising the significant challenge that debt sustainability is challenging the stability of the global economy.
In addition to this, these economies which need to sustain measures implemented to contain the pandemic, are slipping into a destabilising debt crisis as it is unlikely that the commodity prices will rebound quickly. Countries forming part of Gulf states such as Bahrain and Oman are on the verge of detrimental financial crises. The former relies on Saudi Arabia for financial support, whilst the latter’s government debt is heavily discounted. Furthermore, Saudi Arabia’s fiscal crisis has resulted in the Kingdom enforcing problematic policies domestically, which may trigger political upheaval, in an attempt to cope with the COVID-19 recession. The increasing influence of multilateral organisations such as the International Monetary Fund (IMF) are becoming a critical financing source of short-term emergency assistance for energy exporters. Majority of Emerging Markets Economies (EMEs), however, such as Argentina, India, Turkey and South Africa see this crisis as beneficial. A larger portion of EMEs’ imports are imported fuel, subsequently, cheaper fuel will largely cushion the strain of the COVID-19 recession on these economies. Moreover, the decline in oil prices has the capacity to potentially shift the balance of economic power in favour of EMEs.
The International Energy Agency (IEA) and the energy ministers of the G20 met in April 2020 to discuss initiatives to mitigate the implications of the oil crisis and stabilise the market. China, India, South Korea and the US have either offered temporary storage facilities to store the surplus or are taking advantage of the low prices by increasing their stocks. The slowing of production and the dwindling of the surplus of supply will hopefully shift the market into a deficit for the remainder of 2020 thus, returning it to normalcy. The IEA is cautiously optimistic that demand will begin to exceed supply, however, this is largely based on logistical speculation and a broad assumption, as the pandemic continues to pose a significant challenge.
Although low oil prices are normally attractive to consumers, they are hardly beneficial to billions of individuals currently living under COVID-19 lockdowns. These low prices also influence the livelihoods of people employed along the massive oil Global Value Chain (GVC). The lockdowns, restricting movement, are resulting in the declination of activity in the transportation sector, lowering the demand for energy. The global oil demand’s growth over the past decade has been erased as it fell by 9.3 million barrels a day since the start of the pandemic. Emphasis on how low priced oil is threatening the stability of the entire economic order questions the functioning of the global economy when it is focused in the energy markets.
The oil crisis has resulted in the industry being characterised by volatility, fragility and uncertainty with demand becoming its dictator. Given the current state of the market, a possible demand shock is looming in the future as there are greater advances in the strategies for a decarbonising future. Oil companies are truly at risk of becoming obsolete, lest they develop new ways of attracting investments to offset natural energy production and stimulate growth. The industry also needs to develop technology for clean/ renewable energy which may be difficult, given the reduced financial resources. Major companies such as Shell, British Petroleum (BP) and Respol are already pressurised by their investors in Climate Action 100+ to transition towards a low-carbon future. BP has already begun transforming into an integrated energy company in order to attract more investors. The imminent transformation of the oil sector will have a substantial effect on the global economy, altering it in an unprecedented nature.
The COVID-19 pandemic has exploited various weaknesses in the global economy, especially in the energy industry. It has destabilised the balances of power, shifting it from producers to consumers, diminishing the world’s largest commodity market. Countries are pushing for energy transitions and the use of renewables in a post-pandemic world. This highlights the urgency within oil companies to transform and develop diversification policies. The pandemic has resulted in energy-exporting countries plunging deeper into recession, slowly slipping into debt crises. It has exposed global economies’ dependency on the energy market emphasising the lack of policies designed to manage the vast repercussions of macroeconomic changes in a pandemic. The oil crisis has demonstrated the destabilised and uncertain COVID-19 global economy which is extremely vulnerable and in need of strategies that, simultaneously manage economic crises and a pandemic. Although the oil markets seem to be recovering, the global economy is still greatly exposed to the acute implications of the COVID-19 pandemic.
Shanley Webb is a final year student in the degree Bachelor of Arts: Political Science/International Studies at the University of Pretoria. She also plans on pursing a law degree next year and aspires to work on humanitarian issues in the future.