Oil glut and COVID-19

The dip in oil prices have increased the already prevailing vulnerabilities in developing oil exporting countries
Oil glut and COVID-19
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In the field of macroeconomics, a general glut in the economy is a situation of excess of supply in relation to demand, specifically, when there is more production in all fields of production in comparison with what resources are available to consume (purchase) supposed production level. This exhibits itself in a general depression or recession.

A glut is said to be general, when, either from a super surplus of supply or shrinking of demand, a substantial mass of commodities shortfalls the elementary costs of production (Malthus 1827, 247). In the second edition of his Principles, Malthus has put forward a theory of under-consumption which later proved to be the foundation-stone of Keynesian economics.

According to classical economists, supply creates its own demand. This theory was particularly stated by J.B. Say and in economic theory it is called Say’s law of market or the Law of Markets. The idea articulated by Say was further developed by Ricardo and other writers which implied that in the long-run, supply and demand are adjusted and for that reason there is no possibility of overproduction or glut.

In the short-run there may be overproduction or underproduction, but normally over-production in the long-run was almost not possible. If the supply of any commodity is more than its demand it will be balanced by another’s demand being in excess of supply. Accordingly, market gluts are unbearable or intolerable and the capital accumulation at a rate which is higher than investment opportunities may not be possible. Malthus and many other classical economists didn’t agree with such views. He observed facts from the short-run point of view and was in some respects superior to his predecessors.

The theory of gluts will eventually lead to unemployment, a glut, and the key force that can prevent such glut lay in the hands of the rich class (landlords in particular). Malthus argued, “There must therefore be a considerable class of persons who have both the will and power to consume more material wealth than they produce, or the mercantile classes could not continue profitability to produce so much more than they consume.’’ We have seen how gluts in this pandemic have created a series of macroeconomic problems of unemployment, economic inequalities and what not. There is a significant class of people in developing oil-exporting countries who have both the will and power to consume more material wealth than they produce out of oil exports. But, the contemporary oil shocks and other economic shocks emerging from COVID-19 have reduced the morale of such countries. For countries that have dependence on oil sales, the amalgamation of the price breakdown and the COVID-19 pandemic has produced new pressures of unemployment, poverty and bad political economy (political instability in particular). The dip in oil prices have increased the already prevailing vulnerabilities in developing oil exporting countries and could take these countries towards the extreme fiscal crunches. At the same time, a price war that occurs between major oil producers aggravated oil glut.

The binary shock of Coronavirus (COVID-19) and the oil price glut is hitting very hard the developing oil-exporting economies of the world predominantly when there is organizational decay in the fossil fuel industry. Covid-19 is expected to impact the developing oil-exporting countries typically hard, having two important causes: Firstly, many of these countries rely on a single good as far as their exports and revenues are concerned which renders them very susceptible to market volatility. Secondly, many of these countries were already in bad state before pandemic shock, and more worsening may intensify prevailing instabilities. We have seen some economies surviving the contemporary COVID-19 crisis on the backbone of international funds in general and sovereign wealth funds in particular or somewhat low levels of public debt. But, this trend is not true for the majority of resource reliant delicate oil-exporting countries who were already coping with high debt levels and complex economic and social crumbliness before COVID-19 shock. Some countries have witnessed an unsustainable level of borrowing on the back of the present-day shock. In recent years, oil-exporting developing countries are more dependent upon short-term and costly private borrowing (non- concessional) , a major proportion of which is supported by oil collateral.

A judicious and comprehensible reaction is needed to understand Oil glut and COVID-19 nexus, covering both private bankers and concessional investors, to carve out a better fiscal niche in developing oil-exporting countries. It is high time to reduce corruption and unlawful financial flows alongside reducing unsustainable debt threats and risks. Grabbing hold of the prospect for an eco-friendly solution could go a long way in helping oil reliant countries to catalyse their changeover. These counties should plan for sustainable, cleaner, and more diversified economic policies (industrial and energy policies in particular).

Dr. Binish Qadri Assistant Professor, Department of Economics, University of Kashmir.

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