Oil deal shows the world can unite during crisis
Major oil producing nations announced massive cuts to production over the weekend, perhaps the first concerted effort by G20 leaders to contain the economic fallout of the Covid-19 pandemic. The deal wasn't easy to achieve. It took three days of hard bargaining, two virtual meetings, and a special meeting of G20 energy ministers, to arrive at a consensus. US diplomacy essentially helped galvanise support for the biggest cuts in Opec's history which includes non-Opec members as well. This deal could pave the way for further cooperation in other sectors to fight the pandemic, and US President Donald Trump should see value in global support. The despair following the spread of Covid-19 can be mitigated only if countries get together and act fast. The energy industry, like any other, has been devastated with demand plummeting by roughly a third. Lockdowns in a number of countries bring these economies to a standstill. The popular belief that low oil prices are always a good thing, especially during times like these when the global economy is fragile, has been turned on its head. Cheaper oil can do little to boost spending demand now when most countries are shutting borders and economic activity to contain the virus. Livelihoods are being threatened, millions in the oil and gas industry are unsure of their jobs or are suffering deep pay cuts. Long-term damages have already happened to supply chains. Aviation has been hit hard, just like other major global industries. Runways have turned into parking lots as hangars are no longer enough to park the airplanes that until recently helped connect our world. Cars are spending more time in garages than roads, and we brace for more bad news.
Estimates suggest about 10 to 20 per cent of world demand for oil could vanish in the coming few weeks, which made it all the more necessary to arrive at production cuts to provide some floor support to the price of oil that had fallen below $30 per barrel for the first time since 2016 and has hit its lowest levels since 2003. Stabilising prices of oil, however, may require production cuts to be maintained at this level for longer than the agreed two months before a phased easing begins. The pandemic is upending our old ways of life, and we might not just return to the same way of life as before. Oil, for all we know, might lose its sheen in the post-Covid-19 world. Such a scenario, however, damaging to the prospects to oil producing nations should be kept in mind as countries plan for the future. The UAE has been on diversification drive, Saudi Arabia, the largest exporter of petroleum, too, is focusing on other industries, and can weather the storm to emerge stronger. But it is smaller oil producing nations, some of which are non-Opec members, that might feel the pinch. This is among the many lessons that people and countries are learning from this crisis.