One of the most significant developments of the year 2020 is Covid19 that appeared towards the end of 2019; it is a global epidemic (pandemic) of the 21st century. These days, the whole world is being shaken by COVID 19 (new type of coronavirus) that has become a pandemic. This development is seriously and negatively affecting the global political economy as well as previous consumer trends and lifestyles. At a time of increased transportation and connections worldwide, all countries and their economies have been affected by this pandemic.
This situation adversely impacts various commodities and sectors, and consequently makes negative impact on the economies of the states as a whole. These days the price of BRENT type oil is about $ 26 per barrel. This has an adverse effect on the budgets of states whose national incomes depend to a large part, on the sale of hydrocarbon reserves such as petroleum. Moreover, this state of affairs, also puts into difficulty the energy corporations which rely on oil sales. In particular, it affects negatively the non-conventional oil extraction activities. The fall of oil price below the $ 50 per barrel, which is accepted as the psychological limit, is an unfavorable development for countries and corporations dependent on these revenues.
Source: BloombergHT (https://www.bloomberght.com/emtia/brent-petrol )23.03.2020 hours 11:15,26 (Istanbul time)
As will be seen from the chart above, the price of Brent oil per barrel has gone down, in the last month since February 24th, from a level of $ 55 to about $ 25. In general, the fall of oil prices to one half within one month means a proportional loss of income for countries reliant on oil revenues. No such fall of oil prices to such a low level has been witnessed since November 2001. The price of WTI/NEX type oil which is slightly lower quality than Brent, has fallen from $ 22.59 to negative values of – $38 per barrel on March 20th, 2020.
Source: (https://www.macrotrends.net/1369/crude-oil-price-history-chart erişim 23.03.2020, hours 11:40 (Istanbul) ).
Earlier, attention was on the negotiations between Russia and OPEC (in particular Saudi Arabia) on a possible production quota agreement and on how these negotiations turned into a disagreement; unexpectedly, a contagious disease that originated in China has affected the whole world. This situation, in many ways, resembles the fall of oil prices following the 1997 Asian financial crisis.
The price of oil (WTY/NYMEX) per barrel which was $ 40 at the beginning of the year 1997, had fallen to the level of $17 by November of the same year. This has led to the fall of oil prices due to the decline in Asian economies and the slowdown in production and trade; and in turn this development has reflected unfavorably on the budgets of countries whose national incomes were dependent on hydrocarbon resources (Rentier States).
In 1998 the Ruble crisis occurred in Russia, and a most important factor that led to this was the decision of the Russian government not to support Ruble anymore and to let it fall suddenly in the free market.
One of the reasons why it could not prevent the fall was the serious loss of revenue by Russia due to the low oil prices.
The hydrocarbon reserves which constitute an important source of revenue for Russia, was used as a political-economic leverage and high oil prices increased their revenues. But its dependence on hydrocarbons for its revenues is still continuing and it has not been able to diversify its economy at the desired level.
A similar situation is also true for Iran, which is one of the countries hit intensely by the COVID 19 pandemic. In this sense, Russian situation is not as grave as the situation of Iran. Iran has been very adversely affected both by the COVID 19 cases and the high rates of deaths caused by it as well as by the fall of the oil prices. There are two different views as to why Russia, in its negotiations with Saudi Arabia and OPEC prior to COVID 19, did not opt for a production cut.
The first view was that, Russia intentionally wanted to keep the oil prices low, in order to cause the reduction of shale oil prices and the investments into non-conventional oil production and in general a reduction in the number of oil wells that was on the rise in the US; and thus, just as in the gas market, to maintain its hold on the oil market. A major problem with this reasoning is that, both Russia and Iran who have rather stretched themselves strategically to vast areas in the Middle East would not wish to cause a serious disruption of their national incomes.
The other view is that, Russia, as in 1998 and as for natural gas, actually would not allow a disruption of production because it has to maintain income for the state, in addition to being perceived in the markets as a ‘reliable supplier’.
Nevertheless, COVID 19 has caused a global reduction in travels, transportation, trade and individual visits (reduction in mass transport, increase in social isolation of people, growing tendency to work on-line) and thus has disrupted and reduced unexpectedly the global oil consumption in a manner similar to the one in 1997.
It is obvious that COVID 19 will have significant political and economic impacts on lifestyles, lives in general and economies. Despite the relatively lower level of loss of life in some developed countries (Korea, Japan, Singapore and Germany), the inability to prevent the spreading of the disease especially in some European countries that are going through economic difficulties, such as Italy and Spain and losses of hundreds of lives in countries like Iran, will lead to the questioning of the health systems in those countries, to the increasing role of the state, and to the worsening impact on economies.
In short, it is inevitable that COVID 19 which is a global problem, will affect the global economy, as had been seen in the example of oil markets. In this connection, some countries (especially like Iran) will pass through a more painful period, compared to others. This situation will cause a questioning of the institutions such as the EU and their solidarity (Spain asked medical equipment from NATO.)
This period, will also test the nation-states (sovereign states) in terms of their health systems, their ability to combat contagious diseases and their success in crisis management. Even though the problem is global in nature, an important reason for keeping the combat at the national level is that, each country will manage the initial response through its own domestic means at domestic level. And this will test the measures taken by each country and how they manage the processes and crises.
20 April 2020 WTI/NYMEX oil price reached -37$.