ARTICLE: Oil prices are tumbling not because of supply glut but because its demand is plummeting. There is virtually no storage capacity left for a supply glut of the commodity (following demand collapse), which puts a cap on the price, especially in a world of virtually non-existent demand. Oil wells aren't like sink faucets; if you stop the flow, it's a lot of work to get the systems running again. The problem is that demand for oil products globally has collapsed - no flights, no factories, dramatically lower car usage. Also the petroleum producers continue to see their necessity undermined by the day with the growth (and rapidly improving economics) of renewable energies, climate-change policies that encourage de-carbonization, and what looks like a rebirth of the nuclear industry.
Such change is said to mark a shift from perceived oil scarcity to oil abundance that is sure to radically transform the structure of the oil market-even more than the shale revolution itself.
As demand for oil drops amid pandemic-induced cessations of travel and tourism, so have prices. Coinciding with transitions to greener economies, a prolonged oil-price collapse is perhaps making drilling less profitable, causing some producers to close shop, and permanently downsize oil's role in the world economy.
For many countries that have relied on crude oil for export revenues, notably most of the members of the Organization of the Petroleum Exporting Countries (OPEC), the collapse in price spells big trouble.
Falling oil prices are causing producer states-particularly those in the Middle East, with economies relatively undiversified beyond oil-to rethink their budgets. Algeria, is said to need the price of oil to be over $100 a barrel for its government's books to balance while the price of Brent crude, a benchmark, is just over $40. Iraq, a big oil exporter, is said to be nearly broke. Even Oman and Kuwait are said to be living beyond their means. Saudi Arabia, the world's biggest oil exporter, is said to be using its cash reserves for months to make both ends meet.
The long lockdowns and resulting economic slump in host countries are said to have put tens of millions of immigrants in the Middle East out of work, or on unpaid leave, and forced many to return to countries already grappling with poverty and high unemployment. Experts fear this reverse migration will have debilitating consequences for the workers and their home countries, as well as their host nations.
The six oil-rich Gulf nations have traditionally hired South Asians for their construction and transport sectors. The onset of the coronavirus pandemic, however, has drastically undermined this economic model.
The salaries that Asian migrant workers earned in the Middle East trickled home in the form of transfers to siblings to open small businesses, homes for aging parents, and school fees for children. Now, their joblessness is expected to have a ripple effect, too, as a decline in remittances would reduce consumption and turn local businesses into loss making enterprises.
According to independent estimates, the fast-changing business landscape owing to the coronavirus-related restrictions, in conjunction with dropping oil prices, is causing 13 percent unemployment in the Gulf, with the burden expected to fall mostly on foreign nationals, as Gulf nationals are hired mainly by the public sector. Experts say that of the 900,000 jobs anticipated to be lost in the United Arab Emirates, an overwhelming 835,000 belong to the expatriates. In Saudi Arabia, the number jumps to 1.5 million out-of-work foreign residents.
It is not just the blue-collar workers who are in trouble, migrant workers of all incomes are said to have been heavily impacted by the pandemic.
The airline Emirates made the UAE a global hub of air travel, but as flying was suspended and remains limited to essential commuting for at least the foreseeable future, the airline decided to lay off thousands of employees to save cash.
The policy of firing expats hoping to solve the problem of a local surge in unemployment, according to experts, could prove to be counter-productive. They said the exodus of foreign nationals will magnify a downward trend in property and rental prices in the Gulf region and reduce demand for the already struggling retail and hospitality sectors. For millions who made it in the Gulf and climbed up the social ladder there, the coronavirus is said to have ushered in the end of an era.
In an April report, the World Bank estimated that remittances to low- and middle-income nations will drop by 20 percent this year, a steeper dive than the 5 per cent witnessed after the global recession in 2009.
In nominal dollar terms recorded remittances sent home by migrants from developing countries reached almost $500 billion in 2017-2018, a rise of over 8.5 per cent from 2015-2016. This amount, however, reflects only transfers through official channels. However, unrecorded flows through informal channels may add 50 per cent or more to recorded flows. Including these unrecorded flows, the true size of remittances is said to be larger than Foreign Direct Investment (FDI) inflows and more than twice as large as official aid received by developing countries.
At the national level, remittances contribute significantly to GDP. Remittances also contribute to stability by lowering the probability of current account reversals. At the community level, remittances create multiplier effect in the domestic economy procuring employment opportunities and spurring new economic and social infrastructure and services, especially where effective structure and institutions are absent. The poverty reducing and income distribution effect of remittances is also significant.
Pakistan is happy that its oil bill would not be such a burden any more on its limited foreign exchange reserves. But owing to the deepening recession in the Gulf Cooperative Council (GCC) countries, jobs of millions of Pakistani workers in the region have come under serious threat with thousands having already lost their jobs and awaiting home-bound journey, some with their savings and others almost empty handed.
Islamabad is set to lose a big chunk of remittances from the Middle Eastern states. At the same time, it has to devise a strategy to accommodate the returning Pakistani workforce from overseas in the domestic job market.
Remittances have a huge share in the country's foreign exchange earnings and they are part of the balance of payments data, announced by the State Bank of Pakistan every month.
In April 2020, Pakistan received remittances worth $1.79 billion, out of which inflows from GCC countries amounted to $958.51 million. Growing joblessness in GCC countries did not reflect in the latest remittances data (for April 2020) because of Eidul Fitr in May, before which Pakistanis settled abroad send more money back home. The inflow of remittances remains high in Ramazan and this trend has continued in current year as well.
Experts, however, predict that remittances would receive a hit in the next one to two months. They believe Pakistan's remittances would fall by at least $5 billion in the coming months solely because of the slowdown triggered by the coronavirus around the globe.
And in the opinion of these experts Pakistan's capacity to accommodate the returning workers was not in such a state as to absorb all of them because the country's economy was already slowing down.
Pakistan is in deep recession, therefore, it cannot create enough jobs at this time to accommodate all the returning migrant workers from the Middle East. It will take some time to overcome the losses borne on account of lockdown and to completely reopen the economy.
Pakistani workers in GCC countries were mostly employed in construction and transport sectors. Both the sectors are not in a good shape currently in Pakistan, hence, it will be difficult to immediately accommodate the returning workers in good numbers.
Overall, the world economy is expected to lose $8.5-9 trillion in remittances on account of the coronavirus pandemic. The drop in remittances would cause a dip in foreign exchange reserves of the country as well. And as a result the rupee would further weaken against the dollar.
Though debt rescheduling will provide Pakistan some breathing space for the time being, the country may not be in a good position when the deadline to repay the debt approaches.
Remittances for May 2019 stood at $2.3 billion. Overall, remittances were expected to fall to $18-19 billion in FY 20. But as the returnees have also been bringing with them their savings the year would perhaps end with relatively higher amount, exceeding perhaps $23 billion, the highest in many years.
Copyright Business Recorder, 2020
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