The Oil Price Surge and Post-Covid Global Economy
Global oil prices witnessed a surge during the recovery period after COVID-related lockdowns. It rose to nearly 100 USD per barrel as the demand for oil increased. Oil is correctly termed as ‘black gold’ because it is accounted as the most volatile and luxurious commodity which is equally necessary. The massive elevation is recorded again since the commencement of the Russian-Ukraine crisis in February and is likely to continue as the geopolitical tensions are still on the edge.
Minor tweaks in the global economic framework or geopolitics cause notable oil price fluctuations. After the pandemic struck, demand for oil plummeted as the entire world was under limited movement and the economy was running abnormally. This was the first time price of crude oil fell below zero. As the world economies began to rejuvenate from the COVID fears, there was a sudden rise in oil demand. After the two-year economic recovery path, the global market is observing a tectonic shift owing to the high oil price.
Oil Market During the Pandemic
Crude oil was traded at 60 USD per barrel before the novel coronavirus spread like a wildfire. It was in February 2020 itself that the analysts at the Organization of Petroleum Exporting Countries (OPEC) predicted a slump in the future global crude demand due to the COVID-19, however, the world was still unprepared [1]. During that phase, the oil-exporting countries maintained market equilibrium by keeping the global oil supply stable. The oil market began its year on a positive note, OPEC and non-OPEC partners i.e. OPEC-plus were performing additional production adjustments to cater to the market demands. A structural transformation in the energy industry wherein the countries have shown commitment towards decarbonization was already having a major impact on the oil producers. They were further burdened with the emergence of the unprecedented COVID-19 pandemic and subsequent global economic contraction. To curb the spread of infections, governments around the world resonated to drastic measures of closing their borders resulting in limited economic exchanges. Gradually the global demand suppressed as well as the supply chains got disrupted due to the lockdowns leading to collapse in the oil market. The supply numbers remain negative due to the reduction in labor as the pandemic had a direct effect on the lives of the workers, travel restrictions, and quarantine measures. For the first time in history, the benchmark price for the West Texas Intermediate (WTI) crude went negative in April 2020 for a brief period after oil producers declared to cut around 10 percent of global oil production [2]. The oil price shock caused by reduced demand inflicted serious consequences on global economic activities.
OPEC and OPEC-plus have taken collaborative efforts post-COVID to deal with market volatility and growing oil imbalances. To overcome the losses and trigger the crude prices, oil-producing countries declared to cut down their total oil production amounting to nearly 10 million barrels per day [3]. They aimed to further decrease the production by 1.5 million barrels per day in the second quarter of 2020 replenishing the subdued global oil demand. However, the response concerning the measure of limiting the oil production has not been similar amongst all the members. Few countries within OPEC-plus such as Russia and Kazakhstan, as per the reports, stood against the idea of additional oil production cuts and continue the supply to the global markets at the given depressed rates.
Oil price collapse created intertwining effects wherein the economies suffered due to reduced exports receipts and there was a drastic drop in the revenues in government coffers. The current account balance got disturbed and overall debt increased.
Surge in Oil Prices
The period of uncertainty began to fade away as the COVID-19 wave slowed down. The situation was very well exploited by the oil-importing countries as lower prices were advantageous for them. OPEC effectively manages the price of crude globally by expanding or contracting the oil supply. It was by mid-year in 2020 the outcome of OPEC’s tactic was visible. The oil prices started to pick up, albeit stalled around 40 USD. The overburdening production cuts were rolled back gradually. OPEC and OPEC-plus members boosted the supply, additionally, the oil company stocks and prices jumped after Pfizer-BioNTech announced the successful completion of trials of the COVID-19 vaccine [4]. This was just a modest change and the market still had a long road to recovery. Oil-exporting countries were overproducing to compensate for their losses before. It was in February 2021, the oil prices return to the pre-COVID level for the first time after months of hardship. The countries agreed to pump the oil supply to bring back the business at its usual state and towards the end of 2021, WTI crude rose to 78 USD and Brent to 82 USD [5]. OPEC and its allies decided to produce 400,000 barrels per day from February 2022 as there are no major COVID-related restrictions in place. One underlying consequence of overproduction is high levels of inflation in the global economy creating more burden on consumers with a weak purchasing power. Further, the situation might become more unfavorable as global oil markets are currently prone to the Russia-Ukraine standoff.
Ukraine Crisis Scaling Up the Oil Prices
Russia initiated its ‘special military operation’ in Ukraine on February 24 to curb NATO’s eastward expansion and force Ukraine to back down from joining NATO. The unprecedented economic sanctions are imposed on Russia to isolate the country from the global economy. Russia is the second-largest energy-exporting country and accounts for about 10 percent of the world’s energy output, therefore, blocking oil and gas supplies would result in greater market volatility. After the invasion, the oil prices soared to record highs crossing the 100 USD mark per barrel. Russian supply chains are extremely meaningful to the global energy balance. Even countries including the US, a major oil and gas producer in itself, import Russian crude and LNG to meet their consumption requirements. The prices surged overnight, as per the latest reports Brent touched the height of 122 USD per barrel and WTI crude stood at 115 USD per barrel [6]. Russian crude makes up to 3 percent of America’s oil imports, 8 percent of Britain’s oil needs, and more than 20 percent of European demands. Oil embargos from all around the world resulted in tight market conditions, further, building pressure on food prices and the cost of other commodities.
In practical terms, there is no outright ban on the import of Russian oil as major European countries, the UK, and other regions are dependent on the product. These countries have targeted phasing out the import of Russian oil until the end of 2022. Increased oil prices and lack of market alternatives might benefit Russia in a theoretical sense. With not enough buyers for Russia now, it can decide to supply oil to limited importers at inflated rates and compensate some of the losses suffered after its assets froze. However, the government revenue is going to witness a downtick when oil buyers reduce to minimal numbers and the Russian economy remains isolated. Currently, Russia is not withholding its volumes at all, still, almost 70 percent of the Russian oil is undergoing difficulties to find buyers and the future is not looking bright [7].
Boycotting the Russian oil supply in response to the ongoing geopolitical crisis in Ukraine has the potential to turn the global economy upside down which would be a major blow after the recent COVID catastrophe. The harsh reality of the global oil markets is that even if the Ukraine conflict comes to a halt and things become normal, the inflationary trend is not going to subside instantly. In conclusion, the world is suffering from the ill effects of globalization processes.
References
[1] https://www.bloomberg.com/news/articles/2022-02-16/oil-prices-near-100-as-global-economy-struggles-to-balance-post-covid-crash
[2]https://www.oecd.org/coronavirus/policy-responses/the-impact-of-coronavirus-covid-19-and-the-global-oil-price-shock-on-the-fiscal-position-of-oil-exporting-developing-countries-8bafbd95/
[3] https://www.dw.com/en/opec-and-allies-agree-to-cut-oil-production-to-nearly-10-million-barrels-a-day/a-53103182
[4] https://qz.com/1979803/how-did-opec-respond-to-the-pandemic/
[5]https://finance.yahoo.com/news/opec-decision-not-increase-production-190615309.html
[6] https://www.thenationalnews.com/business/2022/03/24/oil-prices-rally-above-120-as-eu-discusses-sanctions-and-storm-disrupts-russian-crude/
[7] https://www.jpmorgan.com/insights/research/oil-gas-energy-prices
Pic Courtesy-Natalya Letunova at unsplash.com
(The views expressed are those of the author and do not represent views of CESCUBE.)
