US, WASHINGTON (ORDO NEWS) — The sharp drop in oil prices amid the development of coronavirus immediately raised the question of how related these two phenomena are and what global consequences they will have.
It would seem that there is a direct correlation: reduction of production in China by 40-60 percent in a number of industries and a sharp decrease in exports, a drop in consumption by China – the “world factory” and the largest importer of energy products, quarantine and “work at home” in dozens of the largest countries in the world and, as a result, according to the “domino principle”, a drop in oil prices.
However, it seems that the epidemic only stimulated what was being prepared for a long time.
Oil prices had previously sharply collapsed due to critical, in fact, military events: on January 17, 1991, oil fell by 34.8% against the backdrop of the Persian Gulf war (the entire period of the protracted drop lasted from October 1990 to February 1991), prices fell in September – November 2001 against the backdrop of terrorist attacks in the United States.
This time, the fall takes place in peaceful conditions and is associated with Russia’s withdrawal from the OPEC + agreement – and all this suggests that the fall was actively stimulated by outside forces, it was completely “man-made” and in no way connected with the influence of coronavirus or usual economic factors.
In this situation, there are winners and losers. An important question is how much the fluctuation in oil prices will affect Russian partners in the oil and gas sector, primarily China. Russian-Chinese oil and gas cooperation is to some extent protected by long-term contracts, but under force majeure circumstances, which the pandemic of the virus is certainly, many oil and gas transactions may be revised, for example, regarding the fact that China will choose less oil and gas, and this will affect Russian oil revenues.
US long-term drop in oil prices is unprofitable, as it will bring down the production of shale oil, which costs about $ 40. Current prices are also disadvantageous for Saudi Arabia , whose budget is based on the price of oil starting at $ 65.
On the other hand, China and many other Asian countries benefit significantly, which get the opportunity to buy oil at a much lower price and thereby significantly facilitate the recovery of their economy.
Typically, falling oil prices have spurred Asian countries’ economic growth, and this time will also allow governments to initiate fiscal stimulus measures. However, in the current environment, the benefits of cheap oil may be far more moderate given consumer demand weakened by the coronavirus.
It is also clear that a drop in oil prices will put pressure on the budgets of Malaysia and Indonesia, the two countries exporting oil in the Asian region, and limit their ability to include financial incentives to revive the economy.
There is another side to the issue. The fall in oil prices makes any alternative energy sector practically unprofitable, including the use of wind and solar energy. And this very question is very significant for China.
In recent years, China has considered alternative energy sources as a way not only to create a new “clean” economy, but also to ensure energy security, “untie” the largest oil and gas exporters. In principle, the increase in the use of renewable energy sources around the world to date has only increased the influence of China, which, insisting on increasing the use of renewable energy sources, undermined the influence of large oil exporters. Apparently, despite the huge investment, China will not succeed in this in the near future.
China is the world’s largest manufacturer and exporter of solar panels, wind turbines, batteries and electric vehicles. The thirteenth five-year plan of China (2016-2020) in the field of electricity is aimed at increasing the share of non-fossil fuels in total electricity production from 35 to 39 percent by 2020. The National Energy Administration of China and the National Development and Reform Commission planned to invest more than 360 billion dollars in the development of renewable energy sources and create 13 million jobs in this sector by 2020 (for comparison: about 800 thousand employees are involved in this sector in the USA).
A little more than a year ago, a considerable proportion of positive romanticism was present in discussions about alternative energy sources. The New World: The Geopolitics of Energy Transformation report, presented in January 2019, argued that the geopolitical and socio-economic impact of the rapid growth of renewable energy sources could be as deep as when switching to the use of fossil fuels two centuries ago.
The predicted changes included the emergence of new energy leaders around the world, changes in the structure of trade and the development of new energy alliances; instability in the “hydrocarbon” countries and so on. China was supposed to benefit from the transformation of its energy industry in terms of energy security, because it already occupies a leading position not only in production.
Currently, Europe, China and Japan are heavily dependent on imports of fossil fuels, but as their share of renewable energy grows, their energy independence could increase. Japan is the most dependent country: its net import of fossil fuels is five percent of GDP. South Asia spends more than three percent of its GDP on fossil fuel imports. Theoretically, countries that switch from imported fossil fuels to renewable energy sources produced domestically should significantly improve their trade balance.
Over the past few years, China has been eager for new energy sources. At the beginning of 2017, four of the world’s five largest renewable energy deals in the world were made by Chinese companies, China owns five of the six largest solar modules for manufacturing companies and the world’s largest wind turbine production.
China’s leading technology companies, primarily data storage and processing companies, have long begun the transition to renewable energy.
China sought to switch to alternative sources and for another reason – the fight against environmental pollution. Based on the analysis, RAND Corporation concluded that the cost of air pollution control in China in 2012 amounted to $ 535 billion, or 6.5% of GDP, primarily due to a loss in labor productivity.
At the same time, although China is the largest alternative energy market in the world, in 2018 wind energy amounted to only 5.2%, solar – 2.5% of the national electricity production. Renewable energy problems began in China at the same time as the U.S.-China trade standoff began in mid-2018.
The deployment of the vast fields of batteries that generate solar energy has proven to be a very expensive affair. The rollback of subsidies to support wind and solar energy has begun, with the central government sharply increasing financial support for what it calls “generating new energy” —that is, producing shale gas and extracting methane from coal.
Thus, the paradox of the current situation is as follows. China, like no other country, needs low prices for traditional energy resources. The whole world expects the Chinese economy to recover, while confidence in China after a quick internal victory over the coronavirus is gradually returning. Many associate the restoration of the entire world economy with the restart of Chinese industry and the growth of Chinese consumption, and at the same prices for oil this would be very difficult and expensive.
But the further – albeit long and painful – transition to alternative energy, which would gradually remove China at least partially from oil and gas dependence, is buried for a long time. China will have to revert to old models.
However, China is very happy with the new oil price. He gets a huge bonus, which will allow him to “restart” with minimal losses.
In general, in the first half of 2020, obviously, there will be a sharp drop in corporate profits around the world, and then a sharp rebound will begin as a form of economic recovery. This may make the prospects for global profit growth for 2020 moderately negative. Against this background, Asian markets, which are the main beneficiaries of cheap energy, will prove to be significantly more stable and successful than the markets of oil exporting countries.
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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.