Post COVID – A Difficult and Painful Journey Ahead!

Dr. Salman Ghouri

The year 2020, started with different kind of challenges. Challenges that most of us have never experienced in our life. The invisible enemy that spread the havoc around the world – sparing no one irrespective of religion, caste, where you live - it globally. As of April 29, more than 3.2 million people have been infected and over 220 thousand deaths across the globe have occurred. Though in Europe and some other countries, there has been a decline in recording of new cases and deaths as well. While for others, it is just the beginning particularly in Asian and African countries where covid started spreading late.

Despite the world being geared up with the latest state-of-the-art technology, thousands of nukes, supersonic aircrafts, missiles, chemical weapons etc. Yet all of those are worthless against invisible enemy. A tiny virus that is hard to detect under powerful microscope had a havoc and did not spare any nation – forcing most of the countries to partial or be on a complete lock-down for months. The hardest hit has been in Europe and North America. Initially majority of nations did not take this pandemic seriously. Even though after over 3.2 million effected and 220 thousand deaths, some are still thinking that it is nothing but a conspiracy! 

The world is helpless as thousands of people are dying every day around the world. In the absence of vaccine, different medications have been tested – like chloroquine and antibiotics. In some patients it has worked but generally in most it has not. The only way to deal with this havoc is to lockdown the cities entirely – leading to social distancing until a development of vaccine. This has helped to improve the spread of virus but at the economic cost that now is estimated to be well into tens of trillions of dollars.

The rapid spreading of COVID-19 around the world led to global recession as well as plunging oil demand – as fewer cars are on the road, only handful of flights taking off, partial or full shut-down of factories/industries. The world is at a stand-still. It has affected the livelihood of small to large scale business such as: restaurants, aviation, hotels and tourism industries, doctors’ private clinics, retail shops, daily wage earners, and the list goes on.

According to the International Labor Organization (ILO), some 1.6 billion workers in the informal economy, representing nearly half of the global labor force, are in immediate danger of losing their livelihoods due to the covid pandemic. Aviation industry however, is one the worst-hit. World air traffic suffered a massive drop of more than half in March 2020, compared with the same period last year. The stories of other industries are no different, all having suffered. It is too early to determine the extent of damages so far occurred.

The question is what will happen if one fine morning we get up and find ourselves in a world of COVID free environment.  

The physical, mental, economic and financial distress created by this short episode may remain with us for many years. The world would be needing tens of trillions of dollars to clean up this mess and bring back all the industries, including all other directly and indirectly associated business to pre-COVID environment. The economic and financial destruction caused by COVID in few months, may requires years to repair. Yet physical and mental agony may require countless years. The recovery from the aftermaths of COVID would not be possible without each other support. It is not that simple. It may require financial support of donor agencies (IMF, the World Bank, IBRD, ADB, IDB etc) in the form of write-offs, debt relief and further financial assistance, particularly the developing countries. Moreover, developed countries support is also needed in painful journey of recovery.

Due to the lockdown global oil demand far exceeded its supplies, which was further exacerbated by OPEC strategy of over production. In this painful journey of lower oil prices many US shale oil producers and small producers are forced to shut down while many will go out of business.  As the world storage nearing capacity oil prices slipped down hill and once declined to negative $37.63/bbl May contract.   

The world is in catch-22 situation. On one hand, if oil prices remain softer – post COVID, it will be a blessing for the global economic recovery from the aftershocks of COVID. Savings out of reduced oil import bill would be spent to fix the devastation caused by COVID that requires significant amount of resources.

While on the other hand, lower oil prices over extended period of time has already severely affected the oil industry. The lower oil and gas prices with global weak oil and gas demand has significantly reduced companies’ revenues, profit, cashflows, which would be poorly reflected on companies’ profit & loss and balance sheet. 

They already incurred huge losses and therefore less resources are available for future investments in exploration and production (E&P). A research conducted by Rystad Energy, estimated that E&P companies’ revenues are set to plunge by around $1 trillion in 2020, as compared to $2.47 trillion last year. They were also of the view that 2020 might be the year marked by the lowest project sanctioning activity since 1950s in terms of total sanctioned investments, which stands at $110 billion – only 33% compared to 2019. Many companies have already abandoned or deferred their major projects as well as reduced dividend payments. Shell, for example, is among the first major oil and gas company slashing its dividend by 66%, from $0.47 to $0.16 per ordinary and B ordinary share. On May 1, 2020, ExxonMobil reported estimated first quarter loss of $610 million and also announced 30% cut in its capex for 2020 to $23 billion, compared to $33 billion earlier announced.  While other companies to follow soon.

What does all this mean? Subsequently, inadequate resources would affect the supply side which is now in surplus.

If this happens, dynamics of natural cycle would be repeated – mismatch in demand/supply. During this cycle, oil demand in the post-covid recovery period will exceed supplies. As less resources at oil industry disposal to enhance production (at least in the short run). The world would soon witness increasing trends in oil prices till new equilibrium is restored, albeit at a higher price. The world has witnessed various cycles in the past. Yet the current cycle is more deep and painful as it is accompanied with invisible enemy (covid) that impaired oil demand while sitting on the lap of excess oil supplies.