BY TASNEEM MADI
In late December, a new outbreak known as COVID-19 or coronavirus appeared in Wuhan, China. The outbreak that typically causes human flu-like symptoms including fever, cough, and shortness of breath that may lead to death, took its toll on travel movement, world stocks and oil prices with estimates that in case of turning into pandemic, Coronavirus could cause an average annual economic loss of 0.7% of global GDP — or $570 billion.
According to a situation report published on February 22, the disease has spread virtually to 28 countries, where 77,794 cases around the world were infected with the disease. The World Health Organization (WHO) assessed the risk situation in China as “very high”, while the regional and global levels were marked as “high”. The report further disclosed 76,392 coronavirus cases in China alone, with 2,348 deaths. Global panic has been increasing due to the rise of coronavirus outside mainland China.
All Eyes on China’s Economy
China, whose growth represented about 39.2% of the global economic growth in 2019, according to the International Monetary Fund (IMF), was the biggest victim of the virus until now.
According to a recent Morgan Stanley report, China’s economic growth in the first quarter (Q1) of 2020 could fall to as low as 3.5% if the spread of the new coronavirus is not contained fast enough for manufacturing production to resume to normal levels. Meanwhile, Reuters economists forecast that China’s economic growth will decrease from 6% in Q4 2019 to 4.5% in Q1 2020, as mentioned on the World Economic Forum (WEF)’s website.
Despite measures taken by Chinese government to shield its economy from the outbreak, a range of early indicators in February confirmed that the outbreak has crippled production in China as factories still below capacity and transport is reduced.
The fact that China has been the largest exporter of commercial services in the world and the second largest importer of goods such as crude oil and iron ore since 2009 will open the door for a domino effect to spread to global market that surely to suffer due to the Dragon’s slowdown.
China, the second largest economy in the world, and the locomotive of world growth is becoming a threat for global growth due to COVID-19.
Hence, the global economic and financial integration, which is considered as an important factor for tremendous economic success, has become in this case a source of vulnerability.
Adding Insult to Injury for Global Oil Market
Coronavirus outbreak seemed to be the last thing that oil sector wanted to see after a tumultuous year of trade war, strikes on Saudi oilfields and threats of war between Iran and the US in addition to the current outages in Libya.
The International Energy Agency (IEA) announced that the global oil demand has been heavily hit by the coronavirus and the widespread shutdown of China’s economy. Accordingly, the global oil demand is expected to drop by 0.435 million barrels per day (mbbl/d) in Q1 2020, according to the IEA’s Oil Market Report (OMR), in February 2020. Meanwhile, the global oil supply decreased by 0.8 mmbbl/d to 100.5 mmbbl/d, due to a blockade in Libya and the UAE’s decrease in output.
As a result of the supply and demand movements, Brent crude oil prices has already fallen by 23.5% since the first case in China, from $66 per barrel on December 31, 2019 to reach $50.52 on February 28, 2020. Moreover, the US West Texas Intermediate crude decreased by 26.7%, from $ 61.06 per barrel since December 2019 to $44.76 per barrel on February 28, 2020.
According to analysts the situation would have been worse for the prices, if it were not for heightened tensions in the Mideast and the shut-in of about 1mn b/d of Libyan output.
The serious situation prompted the Organization of the Petroleum Exporting Countries (OPEC) to revise its outlook for global oil demand growth to 0.99 million barrels per day (bpd) in 2020.
In the meeting, scheduled for the first week of March, OPEC and its allies are expected to make a substantial cut in oil production as global energy producers scramble to respond to the coronavirus outbreak that has crippled demand.
Earlier this month a technical meeting of the top OPEC and non-OPEC members of the alliance recommended reducing production by an additional 600,000 b/d to help balance the market.
However, the uncertainty surrounding the impact of the coronavirus and Russia’s reluctance to approve more cuts still representing the main obstacles for the members to reach a unified stance, where Saudi Arabia is pushing to make a substantial cut in oil production.
According to Oslo-based consultancy Rystad Energy, coronavirus could cut oil industry investment by tens of billions of dollars this year and delay the delivery of offshore installations currently being built in Asia.
Lower oil prices will result in oil and gas companies scaling down their flexible investment budgets, especially shale operators in the US as well as some offshore exploration and production players, Rystad told Reuters. “Experts do not yet know when the effects of the epidemic will ease, but one thing remains clear: the situation will worsen in March and the impact of the virus is not limited to Chinese fabrication yards – it affects the entire global service industry,” it added.
The oil and gas sector will not be the sole victim for the virus, as analysts have warned that transport groups, hospitality chains, airlines, luxury goods makers and retailers will be among that hardest hit by the coronavirus. Stock markets also began to act in a nervous way with slide in stocks coming in a stunning speed, as investors grapple with evidence that the deadly coronavirus epidemic is spreading beyond China to other countries, including Italy, South Korea and Iran.
Covid-19: Politics, International Relations
Throughout human history, epidemics were game changers that altered the course of history several times. Coronavirus still can’t be compared to those plagues that had devastated humanity. However, in modern societies a health emergency combined with a global recession can take its toll on politics too.
COVID-19 has become the biggest crisis for China’s Communist Party since China’s last outbreak of a mystery disease in 2002-2003. SARS, or severe acute respiratory syndrome, killed nearly 800 people.
Chinese president, Xi Jinping, is scrambling to contain the virus, but the government, worried that a sudden economic slump could undermine its grip on power, is also working to get vital industries back on track and reopen factories.
While Chinese officials are working to persuade the public that the government is taking swift action, much of the country remains in lockdown, with hundreds of millions of people facing hard limits on going outdoors.
The Chinese government also was under fire from international media that kept accusing it of hiding the real situation in China.
The US president was not luckier than his Chinese counterpart in his share of coronavirus criticism. After fierce criticism for his rosy statements, Trump began his war of words against Democrats, who he accused of trying to weaponize the situation to hurt him and said the media was “doing everything they can to instill fear in people, and I think it’s ridiculous.” The people who weren’t giving him credit for his handling of the situation “don’t mean it. It’s political.”
In European Union, many analysts see the outbreak as another test for the European unity and trust. The dealing with the coronavirus has turned into a chance for opposition parties across the world to attack and criticize their regimes including the far-right parties in Europe who used the disease as tool to spread their antimigrant campaigns. Still biggest fears of the analysts lie on the fact that it will be much harder to contain the virus when it spreads to poorer nations, with less-developed health systems.