The Organization of Petroleum Exporting Countries (OPEC) is a formal global cartel composed of nations that produce and export oil among other fossil fuels and rely on the revenue generated by its exports as the main source of revenue. The primary functionof OPEC is to “coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets.” The oil market is highly volatile, with prices that fluctuate capriciously. In order to stabilize prices and modify the supply chain in accordance with the market prices more efficiently, 10 non-OPEC countries decided to collaborate with OPEC in 2017, Russia being its key player. Accordingly, Russia and Saudi Arabia (the de facto leader of OPEC) exert great influence in the decision-making process that have paramount consequences globally and nationally.
The main interests that capture oil market analysts mount to discussing how OPEC+ decisions alter the macroeconomic policies and sifts in the geopolitical interests and international relations. Seldom is the trickle-down effect of these policy changes fully explored to examine how it affects the migrant workers and the general employee status among these nations: the links between policies and their effect on workers are assumed to be understood. For instance, if the headline mentions how the government intends to slash public funds, it is assumed it will exacerbate unemployment and further reduce the living standards of its citizens. While this has merit, the deeper everyday effects of citizens are often gone unnoted.
In this pandemic, it becomes most riveting to explore this facet since these nations exporting fossil fuels are facing a dual crisis: COVID-19 pandemic and depressed oil demand resulting in low oil prices. In order to fully grasp the depth of both and its impact on the workers, the article will be divided into two sections. First, the context of the Russian-Saudi oil price war and its implications will be discussed. Second, the characteristics of most fossil fuel producing nations will be highlighted in tandem to the fiscal and monetary authorities and their efficiency. Finally, the effects will be explained.
The context: Russia-Saudi price war and its implication
In March 2020, as coronavirus was rapidly spreading globally and virtually all economies had come to a halt, the demand for crude oil and other fossil fuels plummeted. As nations began imposing national lockdowns, banning travel and suspending industrial productions, the demand for oil only crippled. The OPEC countries felt threatened and in response, the need to stop production of oil in order to increase prices revenues. Furthermore, storage capacities were running out for most nations importing these commodities. However, the key players in the global oil market share, Russia, the US and Saudi Arabia felt threatened for different reasons worth noting.
The US had entered the oil market and captured an unprecedented portion of it – it was the highest producer of shale in 2018, surpassing Russia and Saudi, much to their dismay. Russia was further aggravated due to the sanctions imposed by the US on its oil company. While Saudi Arabia and the other OPEC nations align more with Russia because of their authoritarian tendencies and their national interest being oil, Russia wanted to take particular advantage of the low prices. Saudi Arabia however, wanted all the OPEC nations to cut down their production by 1.5 million barrels per day (bpd). When proposed the same in the meeting convened in Vienna, Russia bailed. Steven A. Cook, on the intention of Russia, writes “More likely, the Russians did not want to cut production because they were more interested in hurting U.S. shale producers and snatching market share from the Saudis.”
This had devastating consequences. Saudi Arabia retaliated by promising to increase oil production to 12.3 million bpd and offering discounts on oil production. WTI and Brent crude, two oil giants in the US saw their stocks crash to record lows. The US, already reeling with high rates of unemployment and the most affected by the pandemic, stepped in, and threatened to pull out its troops in Saudi Arabia had OPEC+ not reached a more fruitful decision. Finally, exactly a month later, OPEC+ convened yet again. Moscow and Riyadh managed to end the price war as they agreed to cut overall oil production by 10 million bpd for the months of May and June. 8 million bpd would be the baseline period for the months of June through December 2020, and 6 million bpd from January through April 2022. It is not enough to make up for the demand reduced overall, although it would stabilize oil prices.
Now, Russia and Saudi Arabia are relatively insulated against the oil price slump. Nations such as Iran, Venezuela, Nigeria, Angola, Kazakhstan, Oman among other petrostates, however, are facing disastrous consequences.
Petrostates and macroeconomic tools
Generally, any state reliant on fossil fuels as their main source of income is characterized by certain factors. Known as petrostates, these are nations whose political institutions are weak, corrupt and unstable, where the economic and political power rests in the hands of the upper echelon. Their governments are usually authoritarian or absolute monarchs. Most petrostates display glaring inequality in the standards of living of its citizens. Moreover, particularly the gulf states see a huge influx of migrant workers who hail from South Asia, other Middle Eastern countries, African citizens and the Philippines.
Macroeconomic policies implemented usually have the worst impact on these workers. On a macroeconomic level, there are two major types of policies that an economy relies on with respect to the business cycle – monetary and fiscal. Since these nations rely on oil markets, their business cycle wavers frequently, implying that these nations revise their policies almost continuously at times. The article will focus on fiscal policy and its effects.
Fiscal policy is of particular importance to petrostates. It involves government spending and tax reforms in order to influence aggregate demand and supply in an economy, in turn affecting the inflation and employment rates. However, fiscal policy relies on strong governments with stable political institutions in order for the effects to trickle down to the other sectors of the economy, efficiently. In petrostates, power is the driving force of governments and seldom responsible governance. Many nations including Algeria, Nigeria, Iran, Kazakhstan have already announced budget cuts, in response to the OPEC decision to slash oil production. The petroleum industry is state-owned in most cases and reeling with the dampened oil demand. The most immediate form of fiscal measure is reduction in budget spending. The tax rates ideally cannot be higher in these times since there is already a deflationary risk in most petrostates.
Here’s how it will trickle down to the workers: unemployment will starkly rise. Business Today estimates 51,000 job losses in the oil industry in March 2020 alone. The numbers would be amplified today with the global oil demand still minimal from most countries. Lower spending will directly affect the following public sectors: healthcare, infrastructure, transportation, education, among others. This means that the nations will prefer their own citizens over those migrant workers. These migrant workers fall under two categories: those who work in the construction zones and female domestic workers. Lured by the prospects of money, these workers find themselves stranded in the worst environments.
In 2019, an estimated 46% of the Gulf countries are constituted of migrant workers who remit around $121bn back home. However, the pandemic having halted production, and the OPEC nations promising to cut down production by large amounts the migrant workers are the worst affected. Lower spending means cramming people in atmospheres that will be frowned upon by the Human Right Bodies. This increases the risk of infection spreading. Since the governments are less conducive of these workers, personal protective equipment, along with standard care of affected workers would be negligent and many could be left to die. Racial discrimination, particularly towards Asians is seen to have risen. This further cripples direct spending and care for these workers.
Laying off workers also means lower living standards since they are not paid their full salaries, if at all. Construction projects having come to a halt, would make the workers redundant and coming back home would not be the safest choice or viable since the pandemic is still raging. The World Bank expects remittances to fall by almost 20% which is brutal for the sustenance of the families who depend on them. In India, Kerala alone receives 1/5th of the remittances with around 2-2.5 million workers in the Gulf states. Special repatriation could be arranged but with severe contraction of the economy across the world, the extent to which they will safely return home is uncertain.
In the case of other nations that are not dependant on migrant workers, the political situations are not in favour of its workers. In Oman, the sultanate is trying to consolidate power at a time when the infections are at a staggering 80,000 as of August 6, 2018, rising sharply. Algeria is allegedly facing a crisis of ‘multi-dimensional’ nature and with its discontented citizens, Europe might see an influx of its citizens post-pandemic. Iran, facing sanctions from the US, already has its export prospects lowered. Furthermore, Iran stands 11th in the world ranking of COVID cases, making it difficult to tackle the health front. Nigeria’s government is precarious with different religious and elite groups competing for government funds at the time when the nations announced ‘emergency plans’. All of these budget cuts would impact the citizens in a manner, similar to the migrant workers.
The long-term effects of the dual nature of the crisis would see structural changes in the oil industry itself, further exacerbating the future of migrant workers and those that work in the oil industry: how will they train to equip themselves with newer skills mandated by the newer technology. The pressing concern involves allocating adequate funds to take care of those affected by the pandemic, not only in terms of job losses but also their health. At a time where contractionary fiscal seems to be the answer, the government is compelled by the pandemic to employ expansionary fiscal measures, in order to primarily take care of its citizens, before devising alternative strategies to diversify their economies.
Studying standard macroeconomic theory often cuff readers in making hasty assumptions about the consequences of policies based on the usually predicted principles. Therefore, macroeconomic impacts of petrostate policies might seem obvious to various key players in the economy. It is equally important to explore how it reaches the least advantaged sectors in any economy: in the case of petrostates, the migrant workers and its own economically disadvantaged citizens.
Tejaswini Vondivillu, a rising second-year student from Ashoka University, pursuing Philosophy, Politics and Economics as her major and International Relations as her minor