The coronavirus has had a direct impact not only on the oil markets, but key sectors straddling tourism, airlines and logistics, industrial, financial and trade.
It has led to the fading away of expectations about stable oil prices, which was what many were expecting at the end of last year.
But the corona outbreak, which started in China and then moved all over, has caused economic indicators to hit rock bottom. Although the implications are yet to be considered in detail, we will analyze the impact on the backbone of Gulf economies, i.e., oil.
Within days, prices fell by 17 per cent to $54 a barrel from $65.
This caused exporting countries to lose a large portion of their oil revenues at a time when they are striving to overcome earlier price declines.
In light of this fast-spreading issue, OPEC called for an emergency meeting of oil producing countries to consider possible measures to be taken to stop the price erosion.
It has no option but to reduce production by a further 600,000 barrels per day, as suggested by the executive committee. This itself is a modest amount.
But no guarantees
It is highly doubtful that this reduction would help exporting countries end the price dwindling if the virus outbreak continues.
Why wouldn’t a new production cut work out? This is the key question, simply because the suggested reduction is marginal compared to the drop in Chinese oil imports, which are expected to fall by 27 per cent from 11 million barrels per day - most of which from the Arab Gulf - to only 8 million barrels a day.
It is four times what OPEC seeks to reduce. This is in addition to projections of low demand from other regions, which will further imbalance supply and demand. Non-OPEC oil-exporting countries, in particular the US, will take advantage of this shrinkage to increase their exports, which will again diminish the impact of an OPEC cut. This will again lead to further price deteriorations in case the Corona is not contained.
Longer term fallout
These would definitely result in side effects for oil-based economies and contribute to widening budget deficits, which as it is have barely managed to catch a breath thanks to last year’s slight improvement in oil prices.
The problem here is that OPEC and OPEC + have no clear-cut strategies to deal with such developments other than a simple output reduction. Yes, such a strategy had worked in the past three years. It used to help oil-producing countries maintain acceptable prices through which they were able to improve their economic conditions, especially as most members adhered to the reduction rates.
Other factors have also led to a balanced oil market, such as the almost complete suspension of Iranian exports and the sharp decline in Libyan production. It is plausible to say that without these two factors, we would not have seen a drop in oil prices.
Despite these repercussions for the global economy, and oil markets in particular, The virus issue highlights the need for Opec to adopt new strategies beyond output reduction. This measure has never been wholly effective, as producing countries outside of OPEC may exploit it to goose their exports.
Especially those such as the US which has the capability to address any price decline, thanks to their minimal dependence on the oil sector. This is a wise strategy that must be adopted by others to reduce the effect of volatility in the oil markets and on prices.
- Mohammed Al Asoomi is a specialist in GCC economic and social affairs.