{"id":7646,"date":"2020-04-24T15:10:04","date_gmt":"2020-04-24T09:40:04","guid":{"rendered":"https:\/\/triumphias.com\/blog\/?p=7646"},"modified":"2023-04-10T15:52:29","modified_gmt":"2023-04-10T10:22:29","slug":"covid-19-oil-price-war-implications","status":"publish","type":"post","link":"https:\/\/triumphias.com\/blog\/covid-19-oil-price-war-implications\/","title":{"rendered":"COVID-19 &#038; Oil Price War &#038; Implications"},"content":{"rendered":"<h1>COVID-19 &amp; Oil Price War &amp; Implications<\/h1>\n<p><span style=\"color: #0000ff; background-color: #ffff00;\"><strong>Relevance: Prelims\/Mains: G.S paper II: International relations &amp; G.S paper III: Indian Economy:\u00a0Indian Economy and issues relating to planning, mobilization of resources, growth, development and\u00a0employment.<\/strong><\/span><\/p>\n<p><span style=\"color: #ff0000;\"><em><strong><u>Context:<\/u><\/strong><\/em><\/span><\/p>\n<p><img decoding=\"async\" src=\"https:\/\/www.maplecroft.com\/siteassets\/images\/insight-images\/analysis\/2020\/oil-and-gas-prices-sink-to-lowest-since-jan-2020-amid-global-covid-19-spread.png\" alt=\"Energy Sector Crisis As COVID-19 Spreads Amid Oil Price War ...\" \/><\/p>\n<ul>\n<li>The oil prices have reached their lowest levels in years, leading to the\u00a0<strong>deepest oil crisis<\/strong>\u00a0in decades.<\/li>\n<li>Organization of the Petroleum Exporting Countries (OPEC) and its allies led by Russia under the\u00a0<strong>OPEC+ framework have agreed to cut their oil output<\/strong>\u00a0by 10m barrels per day, or 10% of global supplies. This move is aimed at propping up the falling crude oil prices.<\/li>\n<li>They\u00a0<strong>expect the United States and other producers to join<\/strong>\u00a0in their effort by reducing up to 5m barrels per day.<\/li>\n<li><img decoding=\"async\" src=\"https:\/\/image.cnbcfm.com\/api\/v1\/image\/106432132-158375722192120200309_oil_one_day_drops.png?v=1583757228&amp;h=405\" alt=\"Oil plunges 24% for worst day since 1991 after OPEC deal failure ...\" \/><\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><em><strong><u>Impact of COVID-19 on Oil Sector:<\/u><\/strong><\/em><\/span><\/p>\n<p><img decoding=\"async\" src=\"https:\/\/blogs.imf.org\/wp-content\/uploads\/2020\/03\/CHART-2-eng-march-23-mcd-covid-chart-3.jpg\" alt=\"COVID-19 Pandemic and the Middle East and Central Asia: Region ...\" \/><\/p>\n<p><strong>Reduced demand:<\/strong><\/p>\n<ul>\n<li>Restrictions on movement have reduced travel needs and industries have been closed down. Major demand for crude oil comes from\u00a0<strong>transportation and industries<\/strong>\u00a0along with electricity sector<strong>\u00a0which are under shut down mode.<\/strong><\/li>\n<li><strong>China, a major demand market<\/strong>\u00a0for crude oil was impacted the most in the initial phase of the Pandemic. The western nations including the U.S. are currently under lockdown. The pandemic has spread worldwide.<\/li>\n<li>The prevailing market conditions have led to a drastic fall in global demand for crude oil and led to steep drop in the oil prices.<\/li>\n<li>Current estimates place a 20-30% fall in demand due to the lockdown worldwide.<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline; color: #ff0000;\"><em><strong>Disrupted supply chains:<\/strong><\/em><\/span><\/p>\n<ul>\n<li>The\u00a0<strong>restriction on movement<\/strong>\u00a0has made the movement of oil from the producer countries to the demand economies difficult, making it expensive.<\/li>\n<li>Disruptions in the oil supply chains have also been reported.<\/li>\n<\/ul>\n<p><strong>Business sentiment:<\/strong><\/p>\n<ul>\n<li>Given the fact that economic recovery would need a long period of time, the disruptions would last for an extended time frame.<\/li>\n<li>This would lead to the\u00a0<strong>reassessment of planned projects<\/strong>\u00a0in the major oil economies. This would render\u00a0<strong>investment at least in the short term, doubtful.<\/strong><\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><em><strong><u>Miscellaneous factors at play:<\/u><\/strong><\/em><\/span><\/p>\n<ul>\n<li>Corona virus pandemic has just increased the rate of fall in crude oil prices. There have been other factors at play too.<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline; color: #ff0000;\"><em><strong>Political agenda:<\/strong><\/em><\/span><\/p>\n<p><strong><em>OPEC+:<\/em><\/strong><\/p>\n<ul>\n<li>Saudi Arabia and Russia have been previously engaged in a\u00a0<strong>price war<\/strong>\u00a0over the crude oil. They have previously resorted to\u00a0<strong>increasing their production to retain their market shares<\/strong>.<\/li>\n<li>Though Saudi Arabia and Russia both are reliant on oil revenues to support their economies, both nations had stayed away from cutting productions to prop up prices due to their\u00a0<strong>political agendas<\/strong>.<\/li>\n<li><strong>Saudi has been trying to target its regional rival Iran,<\/strong>\u00a0also an oil producer. The decreasing oil prices would have had a higher adverse impact on Iran (currently under an economic turmoil) than on Saudi Arabia.<\/li>\n<li><strong>Russia has been looking to target U.S. interests in the Shale gas sector<\/strong>\u00a0and is also looking to find a way out of the economic sanctions imposed by the west.<\/li>\n<li>Each of the member nations of the OPEC+ have their\u00a0<strong>own agenda and interests<\/strong>\u00a0which had made the conclusion of an agreement to cap oil production difficult. However the continued inability of the OPEC+ to agree on production cuts led to historic falls in oil prices.<\/li>\n<\/ul>\n<p><strong><em>The U.S.:<\/em><\/strong><\/p>\n<ul>\n<li>The\u00a0<strong>U.S. interests<\/strong>\u00a0were also hurt because its shale gas sector was finding it difficult to compete against the low priced oil.\u00a0<strong>Crude oil prices of less than 40 dollar per barrel will pressurize shale gas producers and make it economically unviable<\/strong>. The shale gas sector supports a large proportion of the employment in the U.S. hence any disruption in this sector would lead to large scale unemployment and loan defaults by the sector.<\/li>\n<li>Hence with an agenda to support its shale producers in the election year, the U.S. decided to intervene to help conclude an agreement on production cuts of crude oil. Given its low leverage over Russia it has been\u00a0<strong>pressurizing Saudi Arabia through the threat of sanctions<\/strong>\u00a0to restart its negotiations with Russia.<\/li>\n<li>A\u00a0<strong>G-20 meeting under the chairmanship of Saudi Arabia<\/strong>\u00a0has been called to stabilize the oil market.<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline; color: #ff0000;\"><em><strong>Global recession:<\/strong><\/em><\/span><\/p>\n<ul>\n<li>Even before the COVID-19 pandemic, the world economy was going through a\u00a0<strong>prolonged phase of low growth<\/strong>. There had been reduction in growth rates of oil demands.<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline; color: #ff0000;\"><em><strong>Move towards Renewable energy:<\/strong><\/em><\/span><\/p>\n<ul>\n<li>Despite a predominantly Oil based global economy, there have been attempts being made towards more\u00a0<strong>electrification and shift to renewable energy sources<\/strong>. Continued global investments in renewable energy sources had posed a challenge to the oil sector.<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline; color: #ff0000;\"><em><strong>Concerns:<\/strong><\/em><\/span><\/p>\n<p><strong>Governance structure for energy sector:<\/strong><\/p>\n<ul>\n<li>There is\u00a0<strong>no one global governance structure for the energy sector<\/strong>\u00a0involving all the major stakeholders. There are multiple international forums with limited leverage over all.<\/li>\n<li>The global governance for energy sector has collapsed.<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline; color: #ff0000;\"><em><strong>Too low oil price level:<\/strong><\/em><\/span><\/p>\n<ul>\n<li>The current level of oil prices is\u00a0<strong>too low to economically sustain the oil production<\/strong>. This would make the oil sector economically unviable.<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline; color: #ff0000;\"><em><strong>Interdependency of the world economy:<\/strong><\/em><\/span><\/p>\n<ul>\n<li>Given the high interdependence of the world economy, the\u00a0<strong>oil crisis is not limited to just the oil producing countries.<\/strong><\/li>\n<li>For example, though India, a major demand market for energy resources might benefit from the low oil prices in the short term, the long term impact might not be good for India. A large portion of Indian Diaspora is resident in the oil dependant economies of the Middle East. A major disruption of these economies might apart from reducing India\u2019s inward remittances also lead to reverse migration to India.<\/li>\n<li>The impact on the oil producing economies would also\u00a0<strong>impact the growth<\/strong>\u00a0<strong>prospects of global economy,<\/strong>\u00a0due to disruptions in trade and investments.<\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><em><strong><u>India\u2019s case:<\/u><\/strong><\/em><\/span><\/p>\n<ul>\n<li>The Low oil prices has both\u00a0<strong>advantages as well as challenges for India,<\/strong>\u00a0as very low prices are equally bad as very high prices.<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline; color: #ff0000;\"><em><strong>Positives:<\/strong><\/em><\/span><\/p>\n<ul>\n<li>India is predominantly dependant on import of its energy sources. It imports around 80% of its energy requirements. The steep drop in prices is beneficial given that it would help\u00a0<strong>contain its Current Account Deficit.<\/strong><\/li>\n<li>India should take advantage of the low prices to\u00a0<strong>stock up on crude oil in its strategic oil reserves<\/strong>\u00a0and refineries.<\/li>\n<li>The oil savings made by the government could help it\u00a0<strong>finance the economic package<\/strong>\u00a0announced by the government during the pandemic, without affecting its fiscal position.<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline; color: #ff0000;\"><em><strong>Challenges:<\/strong><\/em><\/span><\/p>\n<ul>\n<li>The fall in oil prices could have an\u00a0<strong>adverse impact on India\u2019s large diaspora<\/strong>\u00a0settled in the Middle East. Apart from threatening the economic security of the Diaspora it would also lead to a subsequent\u00a0<strong>reduction in inward remittances<\/strong>\u00a0to India.<\/li>\n<li>The\u00a0<strong>Domestic oil producers in India are also suffering<\/strong>\u00a0due to the unviable low prices in the market and may need some relief from the government.<\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><em><strong><u>Way forward:<\/u><\/strong><\/em><\/span><\/p>\n<p><strong>Finalize an agreement:<\/strong><\/p>\n<ul>\n<li>The G-20 conference should help the oil sector finalize an agreement which could help bring the\u00a0<strong>oil prices to a healthy range of around 40 dollars per barrel<\/strong>\u00a0which could be beneficial for the producers and economically viable, even for the producers.<\/li>\n<\/ul>\n<p><strong>Global governance structure:<\/strong><\/p>\n<ul>\n<li>Given the criticality of the energy sector in the world economy, the lack of an effective global governance structure in this domain is a cause of concern. There is the need for an\u00a0<strong>international intergovernmental framework for energy governance.<\/strong><\/li>\n<\/ul>\n<p><strong>Reforming the sector:<\/strong><\/p>\n<ul>\n<li>There is the need for a\u00a0<strong>relook at the energy sector<\/strong>\u00a0as a whole.<\/li>\n<li>Reforming and streamlining the gas and oil sector must be considered.<\/li>\n<\/ul>\n<p><em><span style=\"color: #ff0000;\"><strong><u>Conclusion:<\/u><\/strong><\/span><\/em><\/p>\n<ul>\n<li>Given the\u00a0<strong>heavy reliance of economies on oil<\/strong>, there is likely to be a recovery of the oil sector in the post pandemic phase. However, there is an urgent need to protect the interests of the sector in the immediate future.<\/li>\n<\/ul>\n<p><span style=\"color: #0000ff;\"><strong>For more such notes, Articles, News &amp; Views Join our Telegram Channel.<\/strong><\/span><\/p>\n<p><a title=\"Telegram Link\" href=\"https:\/\/t.me\/triumphias\" target=\"_blank\"><span style=\"color: #ff0000;\"><strong>https:\/\/t.me\/triumphias<\/strong><\/span><\/a><\/p>\n<p><span style=\"color: #0000ff;\"><strong>Click the link below to see the details about the UPSC \u2013Civils courses offered by Triumph IAS.<\/strong> <\/span><span style=\"color: #ff0000;\"><strong><a style=\"color: #ff0000;\" title=\"Courses available\" href=\"https:\/\/triumphias.com\/pages-all-courses.php\">https:\/\/triumphias.com\/pages-all-courses.php<\/a><\/strong><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>COVID-19 &amp; Oil Price War &amp; Implications Relevance: Prelims\/Mains: G.S paper II: International relations &amp; G.S paper III: Indian Economy:\u00a0Indian<\/p>\n","protected":false},"author":1,"featured_media":3299,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[123,18,7,42,43,13],"tags":[1656,3047,2453,3050,1729,896,3051,3045,3046,2665,1566,3049,3048,392,176],"class_list":["post-7646","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-current-affairs","category-general-studies-ii","category-general-studies-i","category-general-studies-iii-technology-economic-development-bio-diversity-environment-security-and-disaster-management","category-indian-economy","category-society-and-social-issues","tag-covid-19","tag-crude-oil","tag-demand","tag-global-recession","tag-governance","tag-indian-economy","tag-interdependency","tag-oil-prices","tag-opec","tag-politics","tag-renewable-energy","tag-shale-gas","tag-supply-chains","tag-union-public-service-commission-upsc","tag-us"],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/7646","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/comments?post=7646"}],"version-history":[{"count":4,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/7646\/revisions"}],"predecessor-version":[{"id":13802,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/7646\/revisions\/13802"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media\/3299"}],"wp:attachment":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media?parent=7646"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/categories?post=7646"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/tags?post=7646"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}