The fall out of the Organization of Petroleum Exporting Countries and its non-member oil producer allies (OPEC+) oil production cuts on Friday, combined with the outbreak of coronavirus globally, raised the risk for global economic recession, according to experts.
In 2020, global economic growth is predicted at 2.5% with interest rates and commodity prices dropping all over the world. Budget deficits and social expenses are likely to soar globally.
Before the oil price war started, the world was shaken by the decision of the US Federal Reserve to cut interest rates last Tuesday. The 50 bp cut to 1-1.25 points prompted panic in the global market as it might have signaled a severe crisis in the economy due to the coronavirus outbreak.
Regarding the oil price war, the most recent slump would damage several sectors, including petroleum chemistry, shipping, and transportation which later drives the world into a turbulent period.
Analyst Erhan Aslanoğlu of Piri Reis University advised governments around the world to step up the macroeconomic policy space, undertaking reforms to stimulate productivity.
"Governments around the world would enable additional support for their health systems, tax reductions or restructure their public receivables," he said.
Aslanoğlu opined that the measures could offset the limits of expansionary monetary policies. Governments would start discussing social expenditures to be applied, on the back of the sharp increase in budget deficits and social expenses.
An economist from JP Morgan under the condition of anonymity conveyed a warning to Saudi in relation to the oil price war. Saudi is not as strong as Russia in the war as the country relied more on oil sales revenue.
Saudi might face difficulty in handling its budget deficits and could be driven to sell its assets vis the Public Investment Fund as the country needs oil prices around USD80-85/barrel to balance its budget. The country could afford USD30/barrel of oil but would need to sell more crude to cushion the impact on its revenue.
Meanwhile, Russia said that it could stand oil prices of USD25-30/barrel for six to 10 years. However, the price war would prompt both countries to make difficult adjustments along the period of war. Sooner or later they would have to end the stunt.
