In this episode of COVIDcast, Roland Rajah, the Lowy Institute’s Director of the International Economy Program, sat down with Rachel Ziemba, Adjunct Senior Fellow at the Center for a New American Security, and Rodger Shanahan, Research Fellow, West Asia Program, to discuss the economic and geopolitical implications of the recent oil price collapse.
Due to the combined effects of a collapse in demand, a glut in supply, and lack of producer co-ordination, last week the price of oil briefly turned negative. Rajah and Ziemba discussed the global economic impacts, with Ziemba arguing that deflation was now a major risk: “Looking particularly at the US economy, we have almost 30 million unemployed and the number is rising. I don’t think labour is going to have wage-setting powers, and retailers and wholesalers are having trouble passing on higher costs to the end user.”
The effects across a range of oil-producing countries were also considered, with Ziemba noting, “Even some of the richer countries are likely to invest less money via their sovereign funds in the region, but also as they face unemployment there will be less remittances set. That’s going to affect countries like Egypt, countries in South Asia and will generally be a hit to consumption across the world.”
The geopolitical aspects of the price collapse in the Middle East were outlined by Shanahan, who commented on the Saudi Arabian Crown Prince Mohammad Bin Salman’s role in initiating an oil price war in early March, and the “additional reputational damage for Mohammad Bin Salman because of his poor decision-making”. He also discussed the particular vulnerability of Iraq among Middle Eastern states, noting that it relies on oil revenue for two-thirds of its GDP and that there is a serious risk of further political instability in that country as oil revenue also fuels public-sector wages.
Finally the panel discussed the role of China. Ziemba commented:
We’ve seen Chinese policy response across the board as being more muted and modest than in past crises ... I don’t see China riding to the rescue, neither do I see countries like India playing that role.
She noted the further economic challenges ahead as “distressed assets com[e] through the pipeline”.
COVIDcast is a weekly pop-up podcast hosted by Lowy Institute experts to discuss the implications of Covid-19 for Australia, the Asia-Pacific region, and the world. Previous episodes are available on the Lowy Institute website. You can also subscribe to COVIDcast on Apple Podcasts, listen on SoundCloud, Spotify, Google podcasts, or wherever you get your podcasts.