Another shockwave is about to rip through a world economy already reeling from the coronavirus.
Oil prices plunged after the dramatic breakdown of talks between OPEC and Russia on how to manage the world’s oil supply. Saudi Arabia responded with a price war and benchmark Brent crude tumbled by almost a third to $31 a barrel on Monday morning. According to Bloomberg News, Goldman Sachs Group Inc. told clients that prices, which started the year at $66, could quickly dip into the $20s.
Such an extraordinary move, if sustained, would savage national budgets from Venezuela to Iran, threaten the heartland of America’s shale revolution and upend politics around the world. For central bankers, the prospect of destabilizing prices are an added complication as they try to model the impact of the epidemic on the economy.
And a long period of cheap oil prices could even hurt the fight against climate change by slowing the transition to renewable energy.
“Something like this could have more global repercussions than a trade war between China and the U.S. because oil touches so many things in the world economy,” Rohitesh Dhawan, director of energy, climate and resources at Eurasia Group in London, told Bloomberg News.
There are winners from rock-bottom oil prices — among them China, the world’s largest oil importer, whose recovery from the virus will be key for the global economy.
But this time is different.
The U.S. — once a winner from low oil — is now an exporter rather than a buyer. And the hit to economic demand from the virus dulls the impact of any stimulus that cheap oil might provide. Oil shocks — on the way up — used to be feared for their impact on inflation.
Now in a world where central bankers desperately pursue price growth, the opposite dynamic is at play.
(Bloomberg News)
