Record decline in oil prices: what this means for Ukraine

Ihor Orel
09:00, 11 March 2020
Economy
783 0
Opinion

World oil prices fell by 30 percent – if on Friday trading closed at $41.28 per barrel, on Monday morning oil was trading below $29. This is the strongest one-day drop in quotes since 1991, when the Gulf War broke out.

Such a landslide drop in black gold prices was caused by the fact that Russia, in negotiations with OPEC to extend the deal to reduce oil output, refused not only to offer Saudi Arabia a more substantial reduction in output, given the fall in demand for oil as a result of the spread of dangerous coronavirus, but also to extend the current agreement, which expires on April 1. It was this deal, concluded back in 2016, that allowed keeping oil prices at a fairly high level. In turn, Saudi Arabia, in response to the demarche by Russia, announced significant discounts on its oil and, thus, launched a price war.

If Russia and OPEC fail to agree on a reduction in output, prices may fall below $30

This led to the fact that on Black Monday, March 9, world exchanges showed the worst results since the 2008 crisis. At the New York Stock Exchange, trading opened with a drop in quotations of more than 7%, after which, according to the regulations, they were suspended for 15 minutes. After the resumption of work, the fall continued.

Despite the fact that on Tuesday morning, March 10, oil prices rebound a little, increasing by about 7%, experts warn that if Russia and OPEC cannot agree to reduce output, prices may fall below $30.

Such a development will inevitably affect all areas of the economy. Let us take a look at this question from the practical perspective that interests the Ukrainian population – how will the events of Black Monday and the development of the crisis affect the wallets of our citizens? How can prices at gas stations change, and what will happen to the hryvnia exchange rate?

On the one hand, a drop in oil prices could lead to a decrease in the cost of petroleum products. Theoretically, with some time lag, this can lead to cheaper gasoline and diesel fuel at Ukrainian gas stations, which cannot but please domestic motorists. Also, a fall in world energy prices could have a positive effect on the Ukrainian trade balance, as our country annually purchases petroleum products worth more than $5 billion.

However, not everything is so simple. Indeed, on the other hand, when the price of oil falls, prices also go down on other commodity markets important for Ukrainian exports – metallurgy and agricultural products, which, accordingly, will reduce foreign exchange earnings and hit the country's industrial potential.

The fall in world prices for black gold will also reduce the state budget revenues from rental payments, customs duties and other taxes, for example, from gas stations. That is, the budget deficit will only increase, which can lead to its revision and cost reduction.

The situation is complicated by the chaos that is unfolding in the upper echelons of Ukrainian power

If fever prevails on world markets, the cost of external borrowing may increase for Ukraine or access to international financial markets may be completely closed. Therefore, it is vital for the country to continue cooperation with the International Monetary Fund, which will make Ukraine more predictable for investors, even in conditions of international instability.

Together, these negative factors will increase the pressure on the hryvnia, which will entail devaluation and acceleration of inflation. In this case, the positive effect of falling oil prices for the Ukrainian economy and population will be completely leveled. Moreover, Ukrainians should prepare for the most negative scenarios.

Experts still find it difficult to predict the extent of a possible devaluation, however, by noon on Tuesday, March 10, hryvnia quotes against the dollar on the interbank currency market were set at UAH 25.30 / 25.35, which is 35 kopiykas below the closing level of previous trading. On the cash market, the value of the dollar soared even higher – up to UAH 25.86.

The situation is complicated by the chaos that is unfolding in the upper echelons of Ukrainian power.

Instead of a strong government, which has a clear plan for responding to constantly changing global conditions, we have a quickly assembled Cabinet without ministers responsible for key areas – energy, the agricultural sector, and industry.

These ministers should already be appointed, there should be a developed strategy of how Ukraine will respond to the impending crisis, which sectors of the economy should be supported, and which should not, and how to protect the incomes of the population. However, it seems that the authorities chose their favorite strategy of "maybe it'll pass", which, as the history of modern Ukraine and the experience of the previous world economic crises shows, just doesn't work.

Ihor Orel

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