Globalization, the Challenge of COVID-19 and Oil Price Uncertainty

Abstract

The world population, approaching eight billion inhabitants, has seen some of the advantages as well as the challenges and disadvantages of a multilateral, global economy. Following World War II, under the leadership and hegemony of the United States, there was an emphasis on opening within a global multinational system, whereby, free markets, democratic privatization, and the free flow of technology and innovation would get us to a global society where opportunities would allow for the economic betterment of most inhabitants of planet Earth and the global village that we now live in. The engines of this multinational and multilateral political economy were companies with familiar names listed on the global Fortune 500. Among the global Fortune 500 firms, US-based companies, such as GM, GE, Exxon, and others were dominant. The Organization of Economic Cooperation and Development (OECD)-based multinationals were, by far, the source of technology and innovations. Fast forward to 2020, Fortune’s list of global firms still continues to have OECD firms, but we are starting to see the arrival of Chinese, Indian, and other non-OECD firms. Multinational firms, assets, and capabilities now are in OECD countries and other emerging economies in this global market, equally. Global supply chains now are dominant throughout the global economy, and their assets and capabilities are reflective of multinational firms coming from emerging economies, as well as OECD-based firms. The COVID-19 outbreak in China placed millions of people in quarantine and idled factories, impacting Chinese workers and the global supply chains that depend on China as the factory of this planet. Moreover, the pandemic restricted internal Chinese transportation networks, as well as stopped the flow of Chinese tourists to the rest of the world. The curtailment of economic activities in China also impacted the global oil market. China is a major oil producer and it is the lynchpin of oil demand on this planet. Importing an estimated 10mbd out of 98 million barrels daily of total oil production reduced significantly the demand for crude oil and sent oil prices to their lowest level in three decades. Today, oil prices for West Texas Intermediate and Brent are in the range of 33 to 36 dollars/barrel. There are estimates that oil prices could slide further to a range of 20 USD/barrel. The reduction in oil prices will impact the Middle Eastern oil producers’ ability to continue to import goods and services and will affect the social programs internally, whereby, the Arabian Gulf population always looks to their governments for subsidies of all sorts, particularly in education and healthcare. Moreover, government budgets of the Arab oil-producing states within OPEC were predicated on an assumption that oil prices will stay in the range of 50 USD/barrel. The initial attempt by the Saudi government to reduce oil production of all the OPEC members along with Russia did not materialize. Thus, the Saudis, which traditionally have been the swing OPEC producer, have decided to increase their oil production to beyond 10mbd. In addition, they have decided to lower the price for their exported oil. Saudi Arabia’s average production cost for a barrel of crude oil is estimated to be below 5.00 USD. The 20 USD selling price for a barrel of oil will significantly impact the shale oil producers in the United States. The average JOURNAL OF ASIA-PACIFIC BUSINESS 2020, VOL. 21, NO. 2, 77–79 https://doi.org/10.1080/10599231.2020.1745046