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Oil price crash will not offer help that Asian economies need

Long-term uncertainty has grown, overturning budgets and demanding cool heads

| China
A crude oil import terminal in Qingdao, China, pictured in August 2019: the combination of easy money and cheap oil could worsen deflationary pressures.   © FeatureChina/AP

In normal circumstances, a historic dive of over 30% in crude prices, prompted by the collapse of an alliance of 24 major oil producers, would have been a big boost for the import-dependent and energy-hungry emerging economies of Asia.

The disintegration of the OPEC production deal with Russia that had been working to keep global supply and demand in balance has raised the prospect of a flood of unwanted barrels.

But these are not normal times, thanks to the coronavirus epidemic that erupted in China at the start of this year and and has now turned into a disastrous and disruptive global pandemic.

China, the world's second-largest oil consumer and biggest crude importer, is hardly in a position to benefit from cheap oil when large parts of its manufacturing sector, commercial activity and domestic as well as international travel lie crippled by weekslong quarantines and lockdowns. Chinese oil demand has plunged by an estimated 2 million barrels per day, or 15%, and the country has been turning away crude cargoes.

Neighboring giant South Korea was the hardest hit outside China in terms of the number of coronavirus infections, with consequent economic effects, until recently, when it was overtaken by Italy.

Manufacturing activity, commerce and tourism have been disrupted across Southeast Asia, which has a high interdependency on China and its supply chains. Low oil prices may provide marginal relief to these economies, but will be a poor match for the debilitating coronavirus.

Oil-producing and exporting countries such as Australia, Indonesia, Malaysia, Brunei and Vietnam will suffer because of lower revenues, depleting government coffers as well as hurting their upstream oil companies.

As Asia's worst-affected economies implement radical monetary policy easing and resort to other pump-priming measures to combat the effect of the coronavirus, the combination of easy money and cheap oil could worsen deflationary pressures. In the meantime, lower oil prices are unlikely to stimulate public consumption when economic growth is faltering.

The longer-term danger of another bout of depressed oil prices, and one that does not always get the attention it deserves, is the risk of oil companies across the globe further reducing spending on oil exploration, having already slashed their upstream budgets since the oil price collapse of 2014-16.

Even the surge in crude and natural gas flows from the U.S., providing a crucial new supply stream for Asia free of the geopolitical risks present in the Middle East, could dry up as shale sector companies are forced to cut back spending.

As a fast-growing oil demand center, Asia stands to lose most over the next decade or two if the world's oil production capacity shrinks much faster than the growth in alternative sources of energy.

Finally, the huge uncertainty looming over the oil market over whether Russia and Saudi Arabia are indeed going to wage a price war or return to the negotiating table does not help.

The two outcomes could produce vastly different results, a difference of $30 or more in crude prices. Governments in Asia, already grappling with the unknowns of the coronavirus, have been left clueless on the oil price levels to factor into their budgets.

Though Saudi Arabia and Russia went into full combat mode in the days following the clash of their energy ministers in Vienna on March 6, they could well make another about-turn. Both countries are under pressure from their fellow producers in the alliance to put the strategy of market-management and output restraints back together.

Saudi Arabia's Minister of Energy Prince Abdulaziz bin Salman Al-Saud and Russia's Energy Minister Alexander Novak at an OPEC and non-OPEC meeting in Vienna, pictured in December 2019: they could well make another about-turn.   © Reuters

The heavyweights had managed to successfully lead an informal coalition of OPEC and ten non-OPEC oil producers since 2017 to mop up a massive global oversupply of crude and bring some stability to the oil market.

Going into the ministerial meetings last week, the ideological differences between Saudi Arabia and Russia were well-known and anticipated. But hard line stances imploding the alliance were not.

Saudi Arabia had led fellow OPEC members to agree to deepen their collective cuts by 1 million barrels per day, on the condition that Russia and the rest of non-OPEC allies throttle back by half a million till the end of this year. Saudi Arabia regarded that as the appropriate response to the plunge in oil consumption due to the coronavirus.

However, Russia rejected the proposal, advocating a rollover of the existing production quotas through the second quarter, citing lack of clarity around the epidemic and its economic implications.

The differing viewpoints were far from irreconcilable. But in contrast to previous occasions, when the two sides had managed to negotiate a compromise agreement, this time around they dug in their heels or were blindsided, and ended up declaring the alliance dead.

A stunned oil market went into a panicked sell-off, though crude prices were starting to recover ground by the third day, on signs that there might be another 180-degree reversal.

If oil prices hold at current levels or lower for a period of time, policymakers in Asia will need to be on their guard for further collateral damage: efforts toward decarbonization could be thrown into a state of confusing flux. The situation calls for cool heads, measured responses and keeping long-term goals firmly in sight.

Vandana Hari is founder of Singapore-based Vanda Insights, which tracks energy markets. She has two decades of experience providing intelligence on the energy sector.

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