Answer Synopsis 12/11/2020

Question : “The Covid-19 pandemic has significant impact on both oil demand as well as the supply side, creating unprecedented global scenario”. Comment. (15 marks, 250 words)

Structure of the answer

  • Introduce by writing a few lines about the status of public health in India.
  • Discuss how it impacted the oil sector.
  • Conclude by giving a way forward.

Answer

Oil prices were already facing a downward trend, owing to a disagreement between Russia and Saudi Arabia (regarding oil production cut, leading to an oversupply of oil- Price war). Covid-19 has just acted as a catalyst in bringing down oil prices (because of too little demand).

Impact of Covid-19 on Oil Sector

  1. Reduced Demand
    • China, which is the world’s manufacturing base and one of the leading consumers of oil, has been impacted by the lockdown imposed by the pandemic.
    • Similarly, other major economies like the US, EU and India etc. were witnessing economic shutdowns.
    • This, in turn, had reduced the demand for oil and dragged the oil prices to a historic low.
  2. Impacting Industries
    • Further, the major demand for crude oil comes from transportation and industries like electricity, aviation, tourism etc. which were under shut down mode.
  3. Fear of Global Recession
    • IMF fears that the global recession triggered by Covid-19 will be one of the worst economic crises since the Great depression of 1929.
    • The subdued demand in the global economy will further keep the prices of oil at a low level.
  4. Political Instability in West Asia: This crash in oil prices may undermine the political stability of several oil-exporting countries in West Asia.
  5. Domino Effect: Given the high interdependence in the world economy, the oil crisis will create a domino effect in other non-oil-producing countries and further impact the growth prospects of the global economy.
  6. Shifting of Wealth: In the long run, the wealth would transfer from oil-exporting countries to oil-importing countries.

The sharp fall in oil prices can turn out to be a blessing in disguise to large oil-importing countries like India and China.

Oil and gas is critical for the energy needs of the world economy. Thus, there is a need for a multilateral effort to finalize an agreement which could help bring the oil prices to a healthy range (which could be beneficial for the consumers and economically viable for the producers). In this context, G-20 can take the lead in coming up with an international intergovernmental framework for energy governance.

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