IMF: ‘oil price to remain low for years to come’
The International Monetary Fund (IMF) sees ‘extreme uncertainty’ about the economic recovery after the corona pandemic. The question is what impact the recovery measures will have, and there is a range of variables. The oil price, for instance, which the IMF expects to remain low for years to come. It all depends on the global course of the disease, and when a vaccine will be found.
On Wednesday, the Internation Energy Agency (IAE) confirmed the prediction of the IMF by stating that it expects demand for oil dropping by 9,3 million barrels per day in 2020. It will reduce worldwide oil consumption to roughly 90,6 million barrels per day, bringing it back to the level of 2012 during the first six months of this year.
The IMF identified three alternative scenarios. In the first scenario, it takes much longer to contain the virus. In the second scenario, there is the second outbreak in 2021. The last scenario is a combination of the first two. These three scenarios lead to an additional growth reduction of 3 to 8% in 2021.
In recent weeks, the policy of lockdowns has often been criticized because of the economic damage. According to the IMF, countries where the outbreak is severe, lose 8% of working days as long as the restrictive measures are in place.
Chief Economist of the IMF, Gita Gopinath, defends the measures taken. She says they can “help prevent an even more severe and prolonged downturn, and pave the way for economic recovery.”
The IMF is positive about the support measures taken by governments and central banks in recent weeks. IMF boss, Kristalina Georgieva, calculated that countries around the world have now earmarked some $8 000 billion to cushion the blows.
According to Gopinath, policymakers must ensure that society does not grind to a halt, and businesses can restart once the acute phase of the pandemic is over. This requires substantial fiscal, monetary, and financial measures.
Role of governments to increase
As a result, the role of governments and central banks in the economy will increase ‘during the crisis and possibly for longer’. The effect of incentives is likely to be more significant when the outbreak is already on its way back. Governments should also help businesses when the economy gets back on its feet.
Despite all the gloomy figures, Gopinath sees some hopeful signs that this crisis is coming to an end. She hopes that governments around the world will match the “courageous deeds” of doctors and nurses “so that together we can overcome this crisis”.
The IMF still foresees relatively low oil prices in the coming years as a result of the corona crisis. Based on forwarding contracts, the institution estimates the price for a barrel of Brent oil at around $45 at the end of 2023. That is roughly $15 more than the current price, but still historically low. In January, a barrel of Brent was still close to $70.
The predictions are surrounded by significant uncertainties, the IMF warns. For example, the oil price could fall even further if the economy continues to deteriorate, or if the Opec+ countries do not keep their promises.
Rising food prices
A quick end to the pandemic could lead to higher oil prices. The situation also puts pressure on the demand for biodiesel and ethanol, and the prices of the crops from which these biofuels are made.
The prices of wheat, rice, orange juice, and coffee have been raised by hoarding consumers. The IMF warns that export restrictions and border delays caused by corona could lead to rising food prices. On average, the IMF does not expect food prices to rise significantly: by 2,6% in 2020 and 0,4% in 2021.