International oil prices plummeted subsequent to Russia’s refusal to decrease output to jack up the prices as proposed by Saudi Arabia during Oil and Petroleum Exporting Countries (OPEC) meeting with Russia. Brent fell by 7 percent dropping to the lowest level since June 2017. The existing OPEC/Russia agreement setting out production targets; however, will expire by 31 March and it is unclear how the two countries would react though the Russian Energy Minister Alexander Novak has publicly stated that countries will have no obligation to reduce oil output after April 1.
Saudi Arabia’s rationale for a production cut was premised on a significant drop in world demand, especially European demand, due to coronavirus, declared a pandemic. Russia’s rationale is not seemingly based on economic considerations given that it stands to lose between 100 and 150 million dollars per day as a consequence; additionally, the yields on Russian oil and gas companies will decline significantly, for example, Lukoil dividend yield of 6.2 percent at present has already witnessed a stock price fall of nearly 20 percent.
Russia was recently humiliated due to US sanctions that stalled its efforts to complete its Nord Stream 2 pipeline which would have taken natural gas to Europe prompting analysts to maintain that President Putin may have been engaging in retaliation, given the fact that if the international price of oil falls sufficiently it would render US shale industry uneconomic. As per CNBC, Russia has ‘sucker punched’ the US oil industry and the “downturn could damage the US economy, result in smaller American energy industry, and knock the US from its position as the world’s largest producer.” This in turn would have implications on the US elections that may lead to President Trump backing down on some anti-Russia decisions before November this year.
The massive decline in oil prices was followed by a crash in the stock markets around the world, including Pakistan. And the dollar gained sharply versus the rupee in the inter-bank and open markets on Black Monday due to the outflow of over 200 million dollars.
Prime Minister Imran Khan, oblivious of the crash in the international and local markets, unfortunately chose Black Monday to claim in Mohmand, while distributing Kafaalat cards, that inflation has been successfully tamed and there would be no increase in gas or electricity tariffs and prices would now begin to move downward. It is unclear whether the IMF would allow the principle of full cost recovery to be postponed till just the end of the current year or, what is highly unlikely, abandon it for the duration of the programme; or contrary to what has been evident so far these sectors actually improve their performance which would no longer necessitate a raise in tariffs.
True that Pakistan’s major imports are petroleum and products and the fall in the international price would reduce our import bill; however, the rupee-dollar parity has worsened. Imports were beginning to rise again (since October last year month-on-month) seen as the first good sign in relation to the productive sectors reliant on imports of raw materials and semi-finished products and hence there is legitimate concern that any deterioration in the exchange rate would derail these critical imports for the productive process. Exports increased in October 2019 month-on-month but have since been in the negative territory though in December 2019, there was zero growth. Besides our exports consist mainly of consumer items and hence a recession worldwide, due to the double whammy – coronavirus together with stock markets crash, would automatically reduce their demand.
To conclude, the Prime Minister’s optimism is misplaced and one would hope as consistently suggested by BR that he seeks an independent view on the state of the economy.
