The reality of the effects of COVID-19 pandemic on the global economy is dawning on us. The pandemic is threatening to trigger a global recession. Many businesses around the world are shut, stock markets are suffering massive losses and global supply chains have been adversely disrupted. On top of all that, there’s a brewing oil price war between Russia and Saudi Arabia that may have adverse far reaching effects on the global economy.
The price wars started last week when Russia rejected Saudi Arabia’s plan to cut oil production. Saudi Arabia and other OPEC member states want higher prices following the rapid decline in demand as countries try to contain the COVID 19 pandemic. Saudi Arabia responded by flooding the market with oil at hugely discounted prices, pushing the oil prices to four year lows as the situation quickly degenerated into a market share war. Investment firm Goldman Sachs has raised an alarm that oil prices could fall even further to $20 a barrel. The oil and gas industry is facing disruption from both the demand and supply standpoint. The demand started to fall when China and other Asian nations went into lockdown as they grappled with the effects of COVID-19. These lockdowns are also being implemented in other major oil markets in Europe and North America.
EFFECTS ON THE GLOBAL ECONOMY
This price war is going to have far reaching effects beyond Russia and Saudi Arabia. OPEC has warned that developing countries such as Angola, Algeria, Nigeria and Venezuela whose economies are heavily dependent on oil revenue will bear the brunt of the price war as they stand to lose more than 85% of their oil and gas revenue. The USA has been caught in the midst of this fight that could adversely affect its oil sector. We are likely to see major mergers and acquisitions, collapses of smaller players in the USA economy.
On the upside, this comes at a time when the stock markets and global economies are already being battered by the COVID-19 effects and it could help jumpstart world trade as nations emerge from the pandemic. China, the epicenter of the virus has reported no new cases of infection already. However it remains to be seen whether this price war will trickle down and have any effect as most of the major oil markets in Europe and North America are experiencing lockdowns as they try to contain the COVID-19. Also the petrol and diesel prices are also unlikely to drop significantly as governments will want to keep the prices high to get the much needed revenue.
For Saudi Arabia this price war could prove to be an existential threat to its economy. Saudi Arabia doesn’t seem to have the capacity to flood the oil market without depleting its stored oil reserves and bankrupting its economy in the process.
Russia’s economy as at the moment can survive a low oil price for a very long time as it has no foreign debt and has huge gold reserves. Politically however Russia is expected to suffer as president Vladimir Putin’s waning popularity takes further hit from the resulting economic slowdown.
EFFECTS ON ELECTRIC MOBILITY INVESTMENTS AND CLIMATE CHANGE
The low oil prices become a climate change threat as it threatens to disrupt the ongoing transition into renewable and cleaner energy sources. The low prices are expected to last for quite some time and that’s going to dampen the investor prospects and enthusiasm in the fields of electric car mobility and battery technologies.