The global economy has taken an interesting turn of events with the current crash in the oil prices. This is an aftermath of the failure to come to an agreement by the Organization of the Petroleum Exporting Countries(OPEC)-alliance led by Russia and Saudi Arabia. The reason that it could be detrimental for the developed nations but could prove to provide temporary respite to our slowing economy is because of the coronavirus catastrophe that has taken over the world. The price of a barrel of oil has plunged by 50% than what it was in the start of this year. The price war launched by Saudi Arabia against Russia is because of Russia’s disagreement to curb the production of oil in order to support the oil prices. The refusal to go along with the OPEC proposal of reducing the oil production in order to strengthen the pandemic inflicted economy has led to the biggest fall in oil prices since the day in 1991 when American forces launched air strikes on Iraqi troops. The oil demand that experienced a fall due to the pandemic as China is world’s largest oil importer, the disruption in global oil market will further be exacerbated due to the price war.
The Indian economy stands to benefit from this situation, at least temporarily. As we all are aware that corona virus has begun contracting developed and developing economies. The panic that has infiltrated these countries has started disrupting the production chains worldwide, a bane that globalization of economies brings with it. It might be morbid to ponder upon the economic cost of the lives that are lost due this recent outbreak but it also helps us understand the scale of the problem, which when visualized through numbers makes it easier for us to process and at the same time makes us understand the situation objectively. The virus that originated in Wuhan has infected 1,13,000 people globally and has killed over 4000 worldwide. It has sparked lock downs in various countries to contain the spread of this virus which has led to loss in consumption, production and demand.
One of the previous major outbreaks that had begun in China and had affected the economy was in 2003,SARS(Severe Acute Respiratory Syndrome) had lasted seven months. Apart from the evident economic impact that pandemics bring along with it ,i.e. the treatment of the patients and developing drugs or vaccines to combat the spread of the disease, It also in turn affects the education sector, food industry, tourism industry, airline industry and various other production chains that can be calculated. The indirect cost of the pandemic is generated through risk aversion and with the rise in social media users it has led to an amplification of the impact that the virus could have. In order to reduce human-to-human contact, people avoid going to places that contribute to the growth of the economy, i.e. Schools, grocery stores, shopping malls, workplaces etc. which in turn decrease the consumption and hence the demand.
In globalized world, where the reduction in production in one country could have a direct impact on the other makes it all the more crucial to contract it an early stage. The decrease in production in China has affected economies which are heavily reliant on them for production and sectors which have narrow profit margin have already begun experiencing financial crisis. This could in turn have an effect on employment and reduction in spending power which could reduce consumption and could be an onset for global recession. As most of China was on lock down, their decreased consumption has affected the markets globally and oil market being one of them.
In 2003,The World Bank estimated China’s SARS-related losses at $14.8 billion, and although the United States and Europe were largely spared its ravages, the pandemic reduced the global GDP by $33 billion. As far as pandemics go, SARS actually wasn’t that bad because it killed 916 people worldwide and corona has already killed over 4000.With no real picture as to when will it decrease ,it could affect the global economy and kick start a major global recession.
The reason why India stands to benefit from the situation is that the decrease in oil prices due to the current OPEC fallout and an aftermath of corona ,it could be passed on to end consumers to increase the demand in the Indian market which could help the government in boosting the purchasing power. As the current scenario of failing banking system, higher unemployment and now the disruption in supply chains due to corona virus has generated a fear among the consumers, the passing on of lower oil prices could prove to be beneficial so as to increase the spending power and also to improve the risk appetite of various businessmen which had taken a hit in the recent times. Though the long term effect of falling oil prices could be detrimental because developed economies will take a hit, but in dire times like these we would grapple to any silver lining that we can get.
Weekly Musings 