The oil-price shock will hasten the move to living with COVID-19

By Omar Shaban

I wrote weeks ago that the world would not be able to bear this paralysis that has struck the economy in most of its members, and would search seriously for the transition from the state of stagnation, isolation, and standstill caused by corona to a stage of living with it. The collapse of oil prices to well below zero is natural and expected. Such a collapse happens when supply swells against a sharply falling demand. Demand for oil fell very greatly in the past three months owing to the halt of the wheel of production, means of transport, tourism, movement, factories, cars, and other activities — while oil wells by their nature cannot stop, and the cost of stopping is high, so they continued producing in the hope life would return to normal quickly. The stores and tankers filled with oil that found no buyer (a state of severe glut). The producer seeks to dispose of it to relieve himself of the cost of storage, whether in stores or on tankers. It often happens that a commodity is offered for sale at a very low price, or at a loss, to be rid of the cost of holding it.
It is in the interest of the oil-consuming states to buy large quantities for delivery sooner or later, as far as their storage capacities allow. This enormous fall in oil prices will later reduce the production cost of thousands of goods. It has often happened before that the growers of some commodity threw large quantities of it into the sea to preserve its supply so its prices would not collapse. The matter is not new.

The collapse of oil prices confirms the danger of relying on oil production and export alone. Diversifying revenue sources is a necessity to avoid such shocks. The oil-producing states whose public budgets rely heavily on oil-sale revenues, and which adopted luxury, non-productive consumption patterns, will be exposed to large financial crises, and the deficits in their budgets will swell. Their trade balance will suffer a great disturbance because of the widening gulf between the import and export lines. The oil states will not be able to spend lavishly as was always the case; they will cut greatly their contributions to the budgets of international and UN institutions, and their spending on their external interventions, military and humanitarian alike. Some wars will stop or slow because the spending on them stops. Spending on arms purchases will fall considerably. The citizens of these states must tighten their belts from now on, because of the austerity their governments will apply to them.

What happened with oil will have strategic reverberations for international relations and domestic politics. The barons of oil production in the West — America, Norway, and others — will press their governments to hasten the return of the economy and life to normal as far as possible.

The shock of the oil-price collapse will push the harmed states to exit the corona crisis quickly.