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What can Crude Oil Builds, Futures, and Stock Crashes tell us about the Global Financial System?

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According to the Energy Information Administration (EIA), yesterday, the supply of crude oil crested 15.189 million barrels rounding the first week of December, bringing it ever closer to the 19.25 million barrel inventory that kickstarted an oil price crash in the height of the Coronavirus pandemic (OilPrice.com, 2020). Why is this significant to the global financial system? Stocks, in themselves, are a financial phenomenon and oil—at least at this point in time—fuels global transportation and production at nearly every level, which makes this commodity a prime example to witness politico-economics in action.

The dramatic fall of crude oil stocks in April 2020 presented one the most dramatic drops in any commodity in an exceptionally long time:“…the front month WTI [West Texas Intermediate] contract was sitting at minus $38.45/barrel, down an eye-watering 310.45% on the day” (The Balance, 2020). While it had serious impacts on the oil-exporting countries, the most notable aspect of these effects can actually be seen in the ‘on the spot’ prices (Oil Market Report April 2020) – U.S. Energy Information Administration (EIA), 2020). In other words, the prices that turned negative during this time were actually future prices bought on the Crude Oil Futures Exchange, that is the contracts for the delivery of a specific quantity of crude oil (in terms of barrels) (TheOptionsGuide.com, 2020). Because all of the products were nearly full (particularly with people unable to travel in the height of the pandemic fewer cars, flights, ships needed fuel), the producers then did not know where to store it and found themselves with an egregious surplus and negligible demand.

In this scenario, those who suffered the most from the negative oil prices were not the oil consumers, but those investors who had previously bought futures for April 2020 (Hamilton, 2020). Typically, they can sell these futures for other investors, always in the hope that the price for oil will rise; however, this is precisely what did not happen in April. Instead, the price of oil was very high, but the demand was very low.

Ultimately, the supply surplus due to Coronavirus conditions effectively took millions of barrels out of local demand—and on top of this, a price-war ensued between Saudi Arabia and Russia further exacerbating the phenomenon (CNBC, 2020).Up until this point, both Saudi Arabia and Russia had been dampening production as a means of maintaining a higher price and therefore maximising profits on the basis of high demand. When this tenuous arrangement unraveled in the absence of demand, Saudi Arabia reversed their position (and decided to release supply controls)to become cheaper than Russia which culminated in “the release of another million barrels per day on the global market… causing the price to sink to 18-year lows” (Fortune, 2020).

Although futures bounced back within the month of April, the scenario stirs previously unthinkable hypothetical questions (ETAuto.com, 2020): Would long-term negative futures become an incentive to diversity economies dominated by oil, gas, and petroleum? Or would the surplus of oil on the market lessen incentives to ‘go green’? Although either of these scenarios is unlikely given that that the timeframe was too short for any structural changes such as these to occur, the example illustrates the unique way in which instruments of the finance sector such as “futures” or “options” ricochet into politics – such as we see between major oil producers (like the United States, Saudi Arabia, Canada, and Russia) and major oil consumers (such as the United States, China, India, Japan, and the European Union) (EIA, 2020). Does December’s crude oil build herald a softer price crash? Time will tell, but one thing is certain: the greater the fluctuation in oil prices, the more politics will rattle between oil-producing countries (with and without commodity diversification) as well as with the countries that predominantly consume it.

References

  • CNBC. 2020. Charts that Explain the Saudi Arabia-Russia Oil Price War So Far. [online] Available at: <https://www.cnbc.com/2020/04/01/5-charts-that-explain-the-saudi-arabia-russia-oil-price-war-so-far.html> [Accessed 10 December 2020].
  • DNA India. 2020. In Historic First, US Crude Oil Price Plunges Below Zero As COVID-19 Pandemic Hits Demands. [online] Available at: <https://www.dnaindia.com/business/report-in-historic-first-us-crude-oil-price-plunges-below-zero-as-covid-19-pandemic-hits-demands-2821871> [Accessed 10 December 2020].
  • Eia.gov. 2020. Frequently Asked Questions (Faqs) – U.S. Energy Information Administration (EIA). [online] Available at: <https://www.eia.gov/tools/faqs/faq.php?id=709&t=6> [Accessed 10 December 2020].
  • Eia.gov. 2020. Oil Market Report (April 2020) – U.S. Energy Information Administration (EIA). [online] Available at: <https://www.iea.org/reports/oil-market-report-april-2020> [Accessed 10 December 2020].
  • ETAuto.com. 2020. Oil Prices Bounce Back, After Ending Negative for The First Time In History – ET Auto. [online] Available at: <https://auto.economictimes.indiatimes.com/news/oil-and-lubes/oil-prices-bounce-back-u-s-crude-futures-trade-above-zero/75262811> [Accessed 10 December 2020].
  • Fortune. 2020. ‘Unreal’: Oil Prices Go Negative for The First Time In History. [online] Available at: <https://fortune.com/2020/04/20/oil-prices-negative-crash-price-crude-market/> [Accessed 10 December 2020].
  • Hamilton, J., 2020. Oil Prices, Exhaustible Resources, and Economic Growth. National Bureau of Economic Research. [online] pp.1-32. Available at: <https://www.nber.org/system/files/working_papers/w17759/w17759.pdf> [Accessed 10 December 2020].
  • The Balance. 2020. Crude Oil Impacts Everything You Buy. [online] Available at: <https://www.thebalance.com/crude-oil-prices-trends-and-impact-on-the-economy-and-you-3305738> [Accessed 10 December 2020].
  • Theoptionsguide.com. 2020. Crude Oil Futures Trading Basics | The Options & Futures Guide. [online] Available at: <https://www.theoptionsguide.com/crude-oil-futures.aspx> [Accessed 10 December 2020].
  • Oil, C., 2020. Oil Plunges After EIA Reports Huge Crude Build | Oilprice.Com. [online] OilPrice.com. Available at: <https://oilprice.com/Energy/Crude-Oil/Oil-Crashes-After-EIA-Reports-Largest-Crude-Build-Ever.html> [Accessed 10 December 2020].
  • Sek, S., Teo, X. and Wong, Y., 2015. A Comparative Study on the Effects of Oil Price Changes on Inflation. Procedia Economics and Finance, 26, pp.630-636.
  • Worldoil.com. 2020. Saudi Arabia And Russia End Their Oil-Price War with Output Cut Agreement. [online] Available at: <https://www.worldoil.com/news/2020/4/9/saudi-arabia-and-russia-end-their-oil-price-war-with-output-cut-agreement> [Accessed 10 December 2020].

J.M. Jakus is an independent writer, researcher, and editor with a focus on Human Rights, Geopolitics, Global Political Economy (GPE), and International Relations. With a background in photojournalism, empirical research, and long-form academic publications, Jakus is currently pursuing a postgraduate degree from Boğaziçi Üniversitesi in İstanbul, Turkey with the program, International Relations: Europe, Turkey, and the Middle East. More about Jakus' writings can be found at www.jmjakus.live.

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The Economic Conundrum of Pakistan

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The State Bank of Pakistan (SBP) is due to convene on 20th September 2021. The Monetary policy Committee (MPC) will be announcing its policy rate after retaining it since March 2020. As the world deals with the uncertainty of the delta variant along with the dilemma between inflation and growth, it is a plenary to watch as Pakistani policymakers would join heads to decide the stance on the economic situation. However, the decision would be a tough one. Primarily because the mixed signals could either lead to burgeoning inflation and subsequent financial deterioration or they should guide the central bank to strangulate the growth prematurely. Either way, the policymakers would have to be cautious about the degree of inclination they lean to each side of the argument – economic contraction or growth with inflation.

A poll conducted by Topline Research shows that about 65% of the financial market participants expect status quo; the MPC to maintain the policy rate at 7% to further accommodate economic growth. Pakistan has barely mustered a 4% growth rate after the contraction of 0.4% last year. In this regard, Mr. Mustafa Mustansir, head of Research at Taurus Securities, stated: Visible signs of demand-side pressure are still quite weak. In another survey conducted by Policy Research Unit (PRU): a policy advisory board of the Federation of Pakistan Chamber of Commerce and Industry (FPCCI), 84% of the market participants believe there will be no change in the policy rate. The sentiment implies that the researchers and the business community don’t expect a rate hike in this week’s policy meeting.

However, the macroeconomic indicators paint a bleak picture for Pakistan’s economy: warranting a tougher policy response. The external trade figures released by the Pakistan Bureau of Statistics (PBS) project a debilitating situation for the national exchequer. According to the data, Pakistan’s trade deficit has increased to $7.5 billion in the first two months (July-August) of the fiscal year 2021-22. The deficit stands at $4.1 billion: 120% higher than the same period last year. Due to the accommodative policies implemented by the government of Pakistan, the trade deficit has already climbed 26% up to the annual target of $28.4 billion, set in the fiscal budget 2021-22. Despite excessive subsidies, the bi-monthly exports have only grown by 28% to stand at $4.6 billion. And while it is an increase of nearly a billion dollars compared to the same months in the preceding year, the imports have more than perforated the balance of payments.

During the July-August period, the imports have grown by a whopping 73% to stand at $12.1 billion: 22% of the annualized target. What’s more worrisome is the fact that despite a free-float currency mechanism, the exports have failed to turn competitive in the global market. According to the data released by PBS, Pakistan’s exports have dropped from their previous levels for three consecutive months. And despite a 39% net currency depreciation in the past three years, the exports continue to drift sluggish around the $2 billion/month mark. Yet, the imports are accelerating beyond expectation: clocking a 95% increase last month alone. Clearly, something is not working.

Moreover, while the forex reserves with the State Bank stand at a record high of around $20 billion, the rapid depreciation in the rupee is gradually damaging the financial viability of Pakistan. According to Mettis Global, a web-based financial data and analytics portal, the rupee recently slipped to its all-time low of 168.95 against the greenback. While the currency reserves are at their peak, the rupee continues its losing streak as the State bank has refrained from intervening in the forex market to artificially buoy the currency. Primarily because the IMF program stands contingent on letting the rupee float and find equilibrium. As a result, the rupee is touted to breach the 170 rupees against the US dollar mark by next month. The bankers around Pakistan have urged the State Bank for an intervention to put an end to “abnormal volatility in spite of increased reserves.” However, an intervention seems highly unlikely as the SBP Governor, Dr. Reza Baqir, already warned regarding currency devaluation in the last policy meeting: citing supply constraints, debt repayments, and increased imports as primary reasons for the temporal slump.

Nonetheless, almost 10% of the market participants, according to the survey, expect a rate hike of 50 basis points in the policy rate to hedge against inflation. Furthermore, analysts at Topline Securities expect a hike of 25 basis points to counter “vulnerabilities in the current account and control inflationary pressures.” Regardless of the prudent beliefs in the market, however, a few players actually believe that a rate cut of 50-100 basis points is plausible in the meeting. They argue that while the Consumer Price Index (CPI) – a national inflation measure – refuses to let down, the core inflation of Pakistan has dropped perpetually down to 6.3% in August. A stratum of the business community, therefore, also believes that the policy rate should be gradually brought down to 5% to match the regional dynamics.

I somehow find this notion ironic, as the government has already doled billions of dollars in subsidies, provided lucrative loans, and slashed taxes periodically. Yet, the exports have stayed relatively redundant. While it may not be the most effective time to hike the policy rate and tighten the monetary policy, in my opinion, a cut in the policy rate would be detrimental – catastrophic for the current account and incendiary for prevailing inflation.

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Global Revolution in the Crypto World: Road to Legalization

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The raging popularity of virtual currencies is hardly unheard of in today’s day and age. If not by the damning crackdown in China, price swings in cryptocurrencies – especially bitcoin – are definitely deemed perpetual and inherent: unlikely to go away. And while the volatility does bring along a unique thrill to retail investors, the experienced pundits of the financial world are expectedly skeptical. Regardless of the apparent discomfort and resistance to tap into the pool of virtual currencies, policymakers across the world are aware that the future is digital. Therefore, while digital fiat seems to be the direction of most developed economies to counter the decentralized giants, the economic gurus are preparing to harness the mania on another front as well – before the craze overtakes the globe.

The first – and most popular – cryptocurrency is undoubtedly bitcoin. In the aftermath of China’s crackdown on mining activities, bitcoin lost more than half of its valuation. However, acceptance around the world in the past few weeks has helped the currency to buoy past the slump. Bitcoin currently stands at a market cap of $863.8 billion: flirting with the $46,000 mark. Naturally, the rest of the crypto world flows in tandem as fanatics have placed bets for the currency to breach the $50,000 psychological mark again in the following months. However, the rally is largely attributed to the blooming acceptance by governments around the world; something the officials were wary of to avoid risks and uncertainty. However, I still don’t understand the change of perception given the market is more volatile than ever.

Last week’s headlines were all about El Salvador and its adoption of bitcoin as a legal tender. The fiasco that followed was hardly a surprise. Though the incident bolstered the crypto critics, the event projected nothing that was a mystery before the launch. A glitch in the virtual wallet, called “Chivo Wallet,” was one of the countless impediments that had already been warranted as risky by economists around the globe. While the problem was resolved in a matter of hours, the price of bitcoin nosedived by 19% from the 4-month high of $53,000. President Nayib Bukele boasted about “buying at a dip” yet overlooked a crucial aspect from a broader perspective. He failed to realize that a minor glitch in his small nation was significant enough to send the currency spiraling; that in mere hours, billions of dollars were wiped from the global market. All because the app couldn’t appear on the designated platforms for a few hours.

What happened in El Salvador is a vital example to analyze. The resulting confusion is exactly why a passage of regulation is being placed. If the domestic and international markets are to rely upon cryptocurrencies in the near future, then the need for a detailed framework becomes even more amplified.

Recently, Ukraine became the fifth country in weeks to legalize bitcoin. However, while the Ukrainian parliament adopted a bill to legalize the cryptocurrency, regulations are put into place to handle its precarious and volatile nature. Unlike the loose move by El Salvador, Ukraine did not facilitate a rollout of bitcoin as a form of payment. Moreover, the parliament has refrained from placing bitcoin on an equal footing with Hryvnia – Ukraine’s national currency. Primarily because adding another currency prone to unprecedented and wild swings in value could prove complex in policymaking matters including drafting fiscal budgets and taxation planning. And while Kyiv is pushing to lean further into bitcoin to gain more access to global investment, the authorities are prudent. Therefore, unlike the brazen entry by El Salvador, the Ukrainian authorities are underscoring a strategy to learn about the crypto world before bitcoin is etched into Ukrainian law forever.

Meanwhile, the United States is proving rather stringent against the rise of bitcoin – and the crypto world – as nightmares of another financial crisis are caging a progressive adoption. The lawmakers are already vigilant to put braces on the market before it blooms beyond control. The Infrastructure Bill recently passed by the senate provides a hint of direction being adopted by the US legislators. The tax provision, estimated to collect $28 billion over a decade, has been placed as a regulation of the crypto market that stands at a valuation of $2 trillion. The Treasury directives are driven to mobilize the Internal Revenue Service (IRS) to tax crypto brokers while monitoring mandated reporting requirements. The goal is obvious: gradually tighten the screws before regulating the uncharted territory as any other capital market. However, the bill is purposefully vague regarding market actors deemed as brokers under the new law. Naturally, the frenzy follows as miners are left scrambling to define the meaning of a broker in an extremely complex and unorthodox market mechanism. It is clear that prominent lawmakers, like Senator Elizabeth Warren, are the main driving forces to put a leash on the emerging market.

Furthermore, the US Security and Exchange Commission (SEC) has been vocal about Treasury’s long-awaited intervention in the crypto market. Allegedly the virtual currencies have come across as a key tool for tax evasion in the United States. Therefore, much of the lobbying to amend the tax provision in the infrastructure bill is to limit the strictness of application rather than simplifying the vague terminologies. Moreover, the Treasury Department has also been active in discussing the financial stability of Stablecoin – crypto assets pegged to the US dollar and other fiat currencies. While extreme volatility is not a risk in this scenario, the Federal agencies – particularly the Financial Stability Oversight Council (FSOC) – have been keen to set tougher regulations over the market with more than $120 billion in circulation. The move has been swift since the tax provision made its way into the Senate debate. The main intent to regulate stablecoin – particularly Tether – is to harness the market, primarily because the sector acts as an unregulated money market mutual fund holding massive amounts of corporate debt. A plunge in price is enough of a spark to send ripples through the fixed income markets: posing a financial threat to the entire market. Thus, the FSOC is touted to be mobilized soon to probe and regulate the market as it continues to grow.

The crypto world has been cited by global lenders such as IMF as a haven for money laundering and tax frauds. Such tags could lead to negative credit ratings and ineligibility to gain investment and aid packages, especially when debt-ridden countries like El Salvador dabble along without any fixed legal framework. However, with broader regulation, like the steps taken by the US and Ukraine, the risk could be minimized. Another area is to initiate with experienced investors before gradually easing market restrictions for retail investors. A prime example is Germany which recently allowed institutional investors to invest as much as 20% of their holdings in bitcoin and other crypto-assets. While the portion still congregates to billions of dollars, such deft institutional investors are trained enough to manage and monitor trillions of dollars in a vast array of capital markets. Moreover, such large-scale institutional investment firms already have strict regulatory requirements and thus, by default, are bound to consciously maintain conservative holdings.

In my opinion, the crypto market is the financial future of the technological utopia we aspire to build. The smart choice, therefore, is to learn the system down to its spine. Correct the loopholes and irregularities while monitoring experienced professionals participating in an open market. Sketch and amend the legalities and a financial framework along the way. And gradually let the market settle as second nature.

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CPEC: Challenges & Future Prospects

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Global economy paradigm is shifting from the West to the East while China is torch bearer in this context with it’s master stroke OBOR project. The beauty of this unique project is that it provides a new trade corridor and a new route to at least 60 countries. If we make an educated guess, then about 80% of the world population would get benefit from this project. This project can be divided into “Silk Road economic belt” and Maritime silk road”. For disbursement of funds, five financial institutions are opened so that the complete burden should not fall on China. Now it has been a proven fact that the US, few Western countries and India are lobbying and conspiring against the OBOR project.  

The most important project of this initiative is CPEC as it gives China access to the most important geo-strategic location of Gwadar that had always been dream of Russia and NATO for their strategic, military and economic interests in the region. The only project which gives landlocked countries access to the sea. CPEC certainly can be game changer due to its potential of creating mass industrial productivity, exports, and job creation not only for Pakistan but for entire South Asian region.  

Due to various factors, there are always chances that mistrust may prevail among Pakistan and China, which can have a direct impact on Pakistan’s economy. The economy plays a fundamental role in the development and strengthening of any country, but unfortunately, Pakistan was unable to stabilize this sector for decades. As soon as the situation becomes better, another incident of unrest happens. Attacks like the Dasu hydropower plant in Khyber Pakhtunkhwa or like Serena Hotel Quetta are preplanned efforts of our enemies like India to destabilize the project. Although, it has been accepted by Chinese think tanks on various occasions that the security situation has improved in Pakistan during the recent few years. 

Luckily, due to the US withdrawal from Afghanistan, Indian investment is also dying. There is no doubt that the economic stability that Pakistan will achieve after the completion of CPEC cannot be digested by an eternal enemy like India. India is intensifying its covert operations against CPEC, as its discomfort is growing day by day with the cozying Pak-China relations. Modi’s government believes that once operational, CPEC will reduce its sphere of influence in Central Asia, IIOJ&K, and Afghanistan.  The terrorist network formulated in Afghanistan to create unrest in Pakistan under the garb of diplomatic activities has also been jeopardized. As CPEC passes through Gilgit-Baltistan which India claims as a disputed territory but their claim was rejected out rightly by Pakistan and China. Now India may try to reinstate its sleeper cells inside Pakistan to disrupt CPEC.

CPEC in particular offers a win-win situation for participating nations and it has a strong component of social development, poverty alleviation, and demographic uplift, unlike similar programs offered by other international donors. CPEC would not impact its balance of payments of Pakistan at any stage. The payment schedule is very relaxed. It’s about geo-economics and the establishment of a non-exploitable economic system. Another point is that CPEC is a transparent project with all its details present on its websites. The projects of CPEC are not only confined to specific areas but its network is present in the whole of Pakistan. 

Although, it’s correct that Pakistan has a risky security environment, but Pakistan has taken various positive steps in this regard like raising two “Security Divisions” in Pakistan Army, incorporating special paramilitary forces, increasing intelligence apparatus, and improving local police networks.  

There are eight main core areas linked with CPEC which are ‘integrated transportation system’, ‘information network infrastructure’, cooperation in ‘energy related’ fields, ‘trade and industrial parks’, ‘agricultural development and poverty alleviation, ‘tourism’, ‘social development and non-government exchanges’ and lastly ‘financial cooperation’. CPEC is now attracting other countries around the world who are also expressing their desire to join it. 

In present circumstances, the CPEC projects must be completed as soon as possible so that Pakistan’s geographical location can be truly exploited. Our narrative building part is weaker in International media as India and other lobbies are floating a huge bulk of anti-CPEC stories with fake facts and figures, we have to give proper rebuttal and our side of the story must be backed with verified facts and figures. Another point to be focused on is that a prosperous Balochistan would strengthen CPEC’s foundation. This is a real game-changer and we have to engage maximum countries of the world in this project to get moral, social, and financial support. 

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