Coronavirus and its possible impact on the world economy on the examples of international oil production and oil prices

By: Nika Chitadze

Director of the Center for International Studies

Professor of the International Black Sea University

President of the George C. Marshall Alumni Union, Georgia – International and Security Research Center

In terms of social-economic aspects related to COVID 19, International Community is faced before the following sad reality. According to the International Monetary Fund, if humanity manages to defeat Coronavirus by the end of 2020, then the world economy will shrink by about 3%, which is a relatively optimistic scenario. By the other words, the world will suffer much worse if the international community fails to defeat Coronavirus by the end of this year. It is noteworthy that during the economic crisis of 2008-2009, the world economy shrank by only 0.08%.

As for the 3% decrease of the world economy during the year, it can be assumed that if according to today's data, the world's Gross Domestic Product (or the world economy as a whole) is about 86 trillion US dollars and within the recent years the world economy growth was 2.5-3% per year,  it can be pointed out that in 2020 the overall global losses will be about 5 trillion US Dollars. In this case, of course, the economic recession will be fixed almost in every state in the world.

At the same time, the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, which can be promoted by the governmental programs of the various countries in the world.

Taking into consideration the energy consequences of the World economic crisis - due to the rapid decrease on the demand for the fuel, especially oil products, from the global economic problems will especially suffer the oil producer states. For example, budget income of Saudi Arabia for 75% is depended from the oil export, with regard to Russia, the budget revenues of this country are depended from the oil export for about 37%. Despite the fact, that US is considered as one of the main oil producer and at the same time oil exporter country, also taking into account the fact that the falling the international prices on oil will be negatively reflected on the income of US Oil Companies – Trans National Corporations which are acting worldwide, Official Washington is also not interested in the radical decreasing the prices on the “black gold”.

Thus, taking into consideration the current realities, the extraordinary steps in the recent history of oil – related to the intervention in the policy of the states in the field of oil production have been implemented by US authorities. US President Donald Trump has not only persuaded Russia and Saudi Arabia to conduct the negotiations, but also promoted to reach an agreement in the field of oil production. On April 10, 2020 he actually saved negotiations process within the OPEC +, in participation of which was refusing Mexico, and with this country several other oil-producer states.

Mexico, which in September 2019 generated 4.5 million barrels per day, declared about its readiness to decrease its total production to only 0.1 million barrels, then as OPEC member states were requesting on the oil production reduction to 0.35-0.4 million barrels. Finally, Donald Trump promised, the disputed volume in 250 barrel will be US own responsibility and “Mexico will return money when this country will be ready to do it”.

The OPEC + and G20 countries have agreed to reduce oil production for the stabilization of oil prices in the context of coronavirus pandemics: At this stage it is discussed the reducing the world supply for 15%. From the moment of the declaration about results of negotiations, the prices of oil on the oil market have risen by 1.5 times and prevailed 30 USD per barrel.

Oil producer countries, which produce more than 70 million barrels of oil per day, or 70% of total world production, agreed on the reducing the production for 15 million barrels during the nearest two months (May-June). Participants of OPEC+ deal (OPEC members, Russia and several other oil-producers), which totally produce 43,8 million barrels, will decrease the production for 10 million barrels per day. The rest part of reduction will be provided by USA, Canada, Norway and other countries.

Despite of this agreement, taking into account the current realities, decreasing the number of tourists and international transportation, OPEC forecasts a drop in oil demand to 5-10 million barrels per day within 2020. From its turn, the above-mentioned agreement within the OPEC+ could not promote to stabilize the prices on the "Black Gold". Within the second half of the April, oil prices were between 10-20 US dollars. Particularly, as to April 27, the price was only 14,26 USD for barrel.  

According to World Bank report, monthly average price on oil decreased by more than 50 percent within January-March 2020 period. Based on the World Bank prognosis, within 2020 the average oil price will be about 35 USD. In general, it is expected for about 40% decline the prices on the different energy resources - including natural gas and coal.