Covid-19 – The effect the historic drop in demand for oil has had on the Middle East and Gulf states

In the past 50 years the world has witnessed a number of major economic and energy crises. Although there is often a connection between the two, it is not always the case. In this blog our experts will analyse the effect Covid-19 has had – and will potentially continue to have – on the demand for oil.

drop in demand for middle east oil

Each of the previous crises have been triggered by different shocks, but all led to structural changes in the years that followed. Looking at the 2008/09 financial crisis as an example, the global economy shrank by approximately 1.7%. Oil demand fell by 1.6% and oil prices fell from a historic high of $147 per barrel in 2008 to $32 per barrel within the space of only four short months. What started as a financial crisis in the United States spread to other countries, ultimately leading to a global economic downturn.

The Covid-19 crisis is entirely different to any crisis experienced in modern history because it has delivered a dual shock – a health crisis and an economic crisis at the same time.

China accounts for approximately a quarter of global energy consumption,  so when the first case of Covid-19 appeared in Wuhan and the Chinese economy slowed down sharply, the global economy and oil markets took an initial hit. The virus then went on to spread to all continents, forcing partial or total lockdowns globally.

Countries in the Middle East and North Africa (MENA) faced a dual challenge, both the Covid-19 pandemic and a collapse in oil prices. The negative supply shock came first from a reduction in labour – directly, as the reduction in the workforce as a number contracted Covid-19, and indirectly due to travel restrictions, quarantine efforts and workers staying home to take care of sick family members or children. Supply was then affected by a reduction in materials, capital and intermediate inputs due to disruptions in transport and businesses in MENA countries.

In the first half of 2020 the world economy is expected to have contracted by 10% as businesses and industry scaled back operations and thousands began working from home. Movement by land and air declined sharply, energy demand understandably plummeted as economic activity shrank.

Since the supply reduction agreement came into effect at the beginning of May oil prices have recovered. However the negative impact on the global economy, the economies of the Middle Eastern oil producers, and the energy industry as a whole is not over. It is estimated that a full recovery might take up to two years.  Demand and supply will recover once the Covid-19 pandemic subsides, but how quickly that occurs depends on the length and complexity of the disruption.

The economies of the Middle Eastern oil producers – particularly the Gulf Arab producers – will suffer as a result of weaker oil prices, compelling governments in the region to cut fiscal spending and apportion funds for rescue packages.

The Covid-19 crisis has uncovered the weaknesses of the current economic and energy models; it is obvious that modifications are needed to manage the post-crisis period, especially if the aim is to emerge from the pandemic more resilient.

The World Energy Council – and its global network of energy stakeholders – has a key role to play. We must remember that recovery strategies must be unbiased, maintainable and resistant to future shocks.

If you’d like to speak to one of our experts about how to invest in your set-up so it is more resistant to economic and energy crises please do get in touch.