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    The pandemic, falling oil prices and implications in the Middle East

    By Jin Liangxiang
    0 Comment(s)Print E-mail China.org.cn, April 2, 2020
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    A volunteer disinfects a street in Tehran, Iran, on March 31, 2020. [Photo/Xinhua]

    The ongoing COVID-19 crisis will put the global economy in an extremely difficult situation. The Middle East, including oil producers in the Persian Gulf that are vulnerable to external economic ups and downs, will be one of the parts of the world to be hit hardest by the coming economic difficulties. This will have various long-term impacts on their domestic politics and external relations.

    March of 2020 witnessed the unprecedented crashing of oil prices. On March 8, in response to a breakdown of negotiations on output cuts, Saudi Arabia threatened to discount its crude and boost production, which prompted the price of Brent crude, the international oil marker, to fall to as low as $31.02 per barrel, and West Texas Intermediate, the U.S. benchmark, to fall to $27.71 per barrel. 

    The falling of oil prices was an immediate and direct response to the breakdown of negotiations between Russia and OPEC countries, as Russia was unwilling to join in OPEC's efforts to reduce oil output. But competition for market share can't be an explanation; instead, the falling of oil prices is believed to take place within a far more complex context. 

    In a lesser – but also an important – way, the falling of oil prices should be attributed to the slowing-down of emerging economies. According to statistics, China's GDP growth rate dropped to 6.1% in 2019, and India's fell to 5.3%. Although China did import about 505 million tons of crude in 2019 in comparison to 402 million in 2018, the expectations for demand were weakened. It was largely due to the slackening of the market expectations that OPEC initiated the negotiations on reducing output. 

    Besides the two factors mentioned above, the ongoing COVID-19 pandemic should be the most important reason behind the crashing of oil prices. Despite joint global efforts, it seems that the virus' spread has yet to lose any momentum. By April 1, more than 900,000 infections have been registered across the world. With a large population staying at home, the pandemic will undermine not only global manufacturing but also transportation and tourist industries on an unimaginable scale. 

    Experts believe that even if the pandemic is overcome within half a year, the global economy cannot avoid a historically difficult time. In fact, it will likely take more than half a year to solve the problem. Market confidence is therefore seriously undermined. As competition for market share will be a defining feature of oil politics, it is expected that crude will remain below $40 per barrel.

    Of course, the falling of oil prices will bring negative economic implications for oil producers in the Gulf and the Middle East in general. Oil producers in the Gulf, despite their efforts to diversify their economies in the past decades, are still dependent on oil production for financial budgets at a government level, and in some countries the dependence can be as high as 70%. The falling of oil prices will make them lose half of their revenues from oil, and it will tighten their budgets that have already been tight in the past decade due to the financial crisis of 2008.

    The repercussions will be felt not only by Gulf-based oil producers but also by Arab countries of the Middle East in general. The recent decades have seen more and more migrant workers across other Arab countries seeking fortunes in countries located on the Gulf – not only lower-class laborers but also middle-class people and scholars. They work in Gulf countries, and they send back salaries to support families at home. Hence, the worsening of the Gulf's economy will augment the economic difficulties of other Arab countries.

    The economic implications will also lead to political and social fallouts. In Gulf monarchies, some of the oil revenue has been allocated to the public, and high-level social welfare has served to pacify the quest for political rights among ordinary people, as well as to maintain stability. The declining of social welfare will create social dissatisfaction, which could be a serious threat to domestic stability.

    In other Arab countries, the situation could be even worse. Those migrant workers might have to return home, and they and their families will have to face new pressure as sources of income are cut off. Their homecoming will also create new pressures of employment. These will add to the problems of governments that have already been struggling.

    Currently, all Middle Eastern countries, like other parts of the world, are concentrated on the efforts against the virus, and people are being mostly urged to stay at home. Chances are high that discontents will be released shortly after the pandemic, which might seriously undermine overall political and social stability.

    The falling of oil prices might also bring long-term implications on the structure of Gulf countries' external relations. Gulf countries regard their relations with the United States as the pillar of their foreign relations structure. They sell their oil at prices in dollars, and they put their petrol dollars in the U.S., either by buying U.S. treasury securities or purchasing arms from the U.S., which serves to maintain U.S. financial hegemony. On the other hand, the U.S. gives Gulf countries protection from other regional powers like Iran. But with the declining oil prices, the linkage will be greatly weakened on the Gulf side, as Gulf oil producers will no longer be so capable of buying U.S. bonds and arms. 

    Besides, many experts reasonably believe that the falling of oil prices was intentionally managed by countries, including Saudi Arabia, to push American shale oil out of the market in the context of its slackening. And Americans have reasons to be discontent with Gulf oil producers.

    As their relations are mainly bonded by interests, when those interests fade away, the linkage will be weakened.

    All in all, the impact of the COVID-19 crisis will be most visible in the Middle East. The pandemic and the falling of oil prices will have long-term implications for Gulf countries and the Middle East as a whole. The fallouts will be more tangible after the pandemic's eventual conclusion.

    Jin Liangxiang is Senior Research Fellow with the Center for West Asian and African Studies, Shanghai Institutes for International Studies. For more information please visit:

    http://www.xintanhuang.com/opinion/jinliangxiang.htm

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