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.
- 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].
The free trade vision and its fallacies: The case of the African Continental Free Trade Area
The notion of free trade consists of the idea of a trade policy where no restrictions will be implemented on imports or exports in the respected countries that have signed such an agreement. Some economists argue that free trade is understood through the idea of the free market being forced through international trade. The African Continental Free Trade Area (AfCFTA) is a trade area that was founded in 2018, and it is the most ambiguous project in the history of the continent. This project has plenty of potential successes, as well as fallacies. Particular African nations are either in favor or against this project, and it is a matter of time before the world understands if this project will reflect the true notion behind the idea of a free trade policy.
The African Continental Free Trade Area: The European Union Vision in Africa?
The African Continental Free Trade Area was founded in 2018 in Kigali, Rwanda. It is believed to be the most prestigious project ever created on the continent. It was created by the African Continental Free Trade Agreement and it was signed by 44 countries. Some of the general objectives of this agreement include: The creation of a single economic market, the establishment of a liberalized market, the allowance of free movement of capital and people, diversification of the industrial development in the continent, e.t.c. In some ways, this project can be compared with the European Union and the vision that it represents for a single market and free movement of goods and people. However, due to the size and the geopolitical tensions of the African continent, there are a few obstacles to the achievement of this project. The European Union itself was a project that took more than half a century to be established in its current form, and still, we can see some problems that remain. With that being said, among the 27 member states, there seems to be more or less a coherent economic and political stability. In the case of the African Union, there are far more obstacles, ranging from huge economic differences, political and religious turmoils, and in general a neglected infrastructure; that might not be able to support a mammoth project like this. Any sort of optimism should be also approached with a realistic perspective when it comes to its implementation, which might not be happening anytime soon, certainly not before 2030.
The Relevance of the Free Trade Notion in Africa
It is important to remember that this project deals with the concept of free trade, and free trade itself is something that economists still argue about. Generally speaking, most economists seem to be in favor of free trade. There is an argument that supports the idea of free trade and any kind of reduction in government-induced restrictions on free trade which will be beneficial to economic growth and stability. On the other hand, some economists suggest that the policy of protectionism could be a more lucrative alternative for an economic policy. There is a suggestion that the liberalization of trade will result in an unequal distribution of losses and profit gains while economically dislocating a large number of workers in import-competing sectors.
In the case of the AfCFTA however, the opinion of Ha-Joon Chang, a South Korean economist, might be more relevant. He suggested that if there is going to be any kind of free trade liberalization in the African continent, some prior steps should be taken. For example, the improvement of the institutions in those developing African nations must be achieved to have sustainable economic growth and development. In addition, the idea of demanding from the developing nations to achieve institutional standards that we see in the developed nations such as the U.S or Great Britain, but have never before been achieved in those countries, will only hurt these nations since they might not need or even afford the implementation of these institutions that we see in the West. There is a valid point in the argument because the concept of the AfCFTA might indeed benefit some nations in Africa, but still, it will not develop to its full potential to benefit all 44 countries that have signed the agreement. This is because this project involves countries with different views and needs. Some of them see the AfCFTA as a blessing for the liberalization of the African economy, while other nations are more skeptical about it, thinking that this project will result in African states “biting off, more than they can chew”. This dichotomy is visually striking when we compare some African nations and examine the true reasons why they are in favor or against the AfCFTA.
The African Dichotomy
Rwanda is a small nation in East Africa, having at least 12.5 million people, with a total estimate of its GDP being close to $33.45 billion. A very impressive number, if someone considers the fact that in 1980 its GDP was barely $2.1 billion. It is also the nation that is strongly in favor of the ambitious free trade project in the continent. It is estimated that from 1994 until 2010, Rwanda’s economy grew an average of 6.6%. This is mostly based on the fact that the president of the country, Paul Kagame, led a strong campaign towards the liberalization of the country’s agricultural sector. His reforms allowed the producers to benefit from this liberalization boom while boosting productivity through capital investments. It is clear by now that any sort of project that aims to liberalize the economies of other African nations will be beneficial to Rwanda that aims, as President Paul Kagame mentioned before, to make Rwanda the “Singapore of Africa”.
However, some countries pose some key arguments that need to be addressed for the AfCFTA. There are concerns regarding the massive difference between populations in many African states, as well as the potential of the markets to sustain such a project. With that being said, there is still optimism from some experts that view this project as a win-win situation for Africa since it will allow a trade-led diversification away from Africa’s commodity dependence and focus towards industrial development. On the other hand, this optimism is being taken with a “pinch of salt” from certain African nations, like Nigeria. Nigeria is a nation of at least 205 million people with a total GDP of $1.087 trillion. Nigeria was one of the last nations to sign the agreement, but not before firmly opposing the deal. The strongest argument that Nigeria had against the deal, was the fact that Nigeria could do nothing to undermine the local Nigerian manufactures and entrepreneurs of the country. There was strong domestic opposition to regional trade liberalization and concerns about the government’s ability to implement it effectively. In the same line of thought, Togo’s Foreign Minister Robert Dussey did not hide his concerns. In an interview with Deutsche Welle, Mr. Dussey stressed the fact that many African countries will need to be firstly well-equipped with the right technical tools to meet the challenges of such an enormous project. He shared his views that some rich nations in the West are not so keen to see the potential industrialization of the African continent: “African development is foremost the responsibility of Africans. We have a problem with work for our youth. It is important that we have strong industries to have work for the young”, said Mr. Dussey for Deutsche Welle.
Can we safely say that the AfCFTA project complies with the economic policy of free trade? Theoretically, it does. The project has the potential to change the socio-economic status of all the countries involved. Even if some nations are more industrialized than others, and can take full advantage of the opportunities for manufactured goods, other nations that might not be so privileged can benefit by linking their economies into regional value chains. This can happen again theoretically if there is a reduction in trade costs and facilitating investments. However, one should not overlook the growing challenges of this project. It is not feasible to suggest a 90% tariff cut, a unified digital payments system, and an African trade observatory dashboard that the AU Commission promises in the next five years. For the simple reason that you cannot have this liberalized economic system when most of the African countries are suffering from socio-political instability. How can a system which in some ways is based on the European Union, work when there is such a striking inequality among African nations? There is a lack of industrial infrastructure to support such a project, and it will be more beneficial to address these regional problems before expanding in a global vision. One day Africa will reach its full potential, but not in the next five years and not in the next ten years. Such an agreement is a blessing, but it needs careful examination before being implemented; otherwise, we will talk about a disaster in the African continent that could potentially bring more inequality and regional tensions.
Turning to sustainable global business: 5 things to know about the circular economy
Due to the ever-increasing demands of the global economy, the resources of the planet are being used up at an alarming rate and waste and pollution are growing fast. The idea of a more sustainable “circular economy” is gaining traction, but what does this concept mean, and can it help save the planet?
1) Business as usual, the path to catastrophe
Unless we make some major adjustments to the way the planet is run, many observers believe that business as usual puts us on a path to catastrophe.
Around 90 per cent of global biodiversity loss and water stress (when the demand for water is greater than the available amount), and a significant proportion of the harmful emissions that are driving climate change, is caused by the way we use and process natural resources.
Over the past three decades, the amount of raw materials extracted from the earth, worldwide, has more than doubled. At the current rate of extraction, we’re on course to double the amount again, by 2060.
According to the International Resource Panel, a group of independent expert scientists brought together by the UN to examine the issue, this puts us in line for a three to six degree temperature increase, which would be deadly for much life on Earth.
2) A circular economy means a fundamental change of direction
Whilst there is no universally agreed definition of a circular economy, the 2019 United Nations Environment Assembly, the UN’s flagship environment conference, described it as a model in which products and materials are “designed in such a way that they can be reused, remanufactured, recycled or recovered and thus maintained in the economy for as long as possible”.
In this scenario, fewer resources would be needed, less waste would be produced and, perhaps most importantly, the greenhouse gas emissions which are driving the climate crisis, would be prevented or reduced.
This goes much further than simply recycling: for the circular economy to happen, the dominant economic model of “planned obsolescence” (buying, discarding and replacing products on a frequent basis) would have to be upended, businesses and consumers would need to value raw materials, from glass to metal to plastics and fibres, as resources to be valued, and products as things to be maintained and repaired, before they are replaced.
3) Turn trash into cash
Increasingly, in both the developed and the developing world, consumers are embracing the ideas behind the circular economy, and companies are realising that they can make money from it. “Making our economies circular offers a lifeline to decarbonise our economies”, says Olga Algayerova, the head of the UN Economic Commission for Europe, (UNECE), “and could lead to the creation of 1.8 million net jobs by 2040”.
In the US, for example, a demand for affordable, high-quality furniture, in a country where some 15 million tonnes of discarded furniture ends up in landfill every year, was the spur for the creation of Kaiyo, an online marketplace that makes it easier for furniture to be repaired and reused. The company is growing fast, and is part of a trend in the country towards a more effective use of resources, such as the car-sharing app Zipcar, and Rent the Runway, a rental service for designer clothing.
In Africa, there are many projects, large and small, which incorporate the principles of the circular economy by using existing resources in the most efficient way possible. One standout initiative is Gjenge Makers in Kenya. The company sells bricks for the construction industry, made entirely from waste. The young founder, Nzambi Matee, who has been awarded a UN Champion of the Earth award, says that she is literally turning trash into cash. The biggest problem she faces is how to keep up with demand: every day Gjenge Makers recycles some 500 kilos of waste, and can produces up to 1,500 plastic bricks every day.
4) Governments are beginning to step up
But, for the transition to take hold, governments need to be involved. Recently, major commitments have been made in some of the countries and regions responsible for significant resources use and waste.
The US Government’s American Jobs Plan, for example, includes measures to retrofit energy-efficient homes, electrify the federal fleet of vehicles, including postal vans, and ending carbon pollution from power generation by 2035.
In the European Union, the EU’s new circular economy action plan, adopted in 2020, is one of the building blocks of the ambitious European Green Deal, which aims at making Europe the first climate-neutral continent.
And, in Africa, Rwanda, Nigeria and South Africa founded the African Circular Economy Alliance, which calls for the widespread adoption of the circular economy on the continent. The Alliance supports African leaders who champion the idea, and creates coalitions to implement pilot projects.
5) Squaring the circle?
However, there is still a long way to and there is even evidence that the world is going backwards: the 2021 Circularity Gap Report, produced annually by the Circle Economy thinktank, estimates that the global circularity rate (the proportion of recovered materials, as a percentage of overall materials used) stands at only 8.6 per cent, down from 9.1 per cent in 2018
So how can the world be made “rounder”? There are no easy answers, and no silver bullet, but Ms. Algayerova points to strong regulation as a big piece of the puzzle.
“I am proud that for the automotive sector, a UN regulation adopted at UNECE in 2013 requires 85 per cent of new vehicles’ mass to be reusable or recyclable. This binding regulation influences the design of around one quarter of all vehicles sold globally, some 23 million in 2019.”
“It’s a step in the right direction, but these kind of approaches need to be massively scaled up across all sectors”, she adds. “Shifting to the circular economy is good for business, citizens and nature, and must be at the heart of a sustainable recovery from the COVID-19 pandemic.”
Pandemic: A Challenge for the Globalization
The vaccination process across the world is underway, and after almost complete vaccination of the world population, we will see a post-pandemic world that is going to be different from the pre-pandemic world, especially in the context of Globalization and the role of states in the world.
In the post-1980 world, Globalization became the prevailing phenomenon that impacted the whole world and its functioning. Whether it was the realm of society, power politics, or economics of the world, whether, in the context of domestic affairs or global affairs, Globalization has been unavoidable and un-resistible until the ongoing pandemic has erupted after which many changes have been brought to the world. Social distancing and travel restrictions protocols posed challenges but that is temporary, but what offered concerns to the policymakers and businesses of the world that how fragile the functioning of the global economy is, and how the economies of states are depending on this fragile mechanism.
The interdependence and interconnectedness between national economies as well as multinational corporations and organizations in the global economy are in such a way that if only a single link breaks down, a series of collapses will occur. This has happened during the pandemic.
When China was hit by the pandemic, two-third of its economy stopped working, consequently, the world witnessed a sharp decline in the global supply. The same happened when the pandemic was at its peak in the West. In this way, the worst impact on the global economy was in the form of a major recession, depriving people of employment, and increasing poverty, across the world as no nation could remain unaffected.
When such pandemics exploded at a place somewhere before the era of Globalization, other parts of the world were unaffected economically. Another point of pondering is the fact that in the case of China it is not because of the involvement of Chinese firms in the rest of the world but because global companies have some of their production lines installed in China. Globalization lets it happen. This is well explained by famous sociologist Anthony Giddens, who says that it is the major characteristic of Globalization that distant localities are linked with each other in such a way that one event at a place shapes events at other places.
Notice that if it is thought that virus pandemics erupt once in a lifetime and therefore most of the time Globalization will be dominating and decisive, it is not the case. The future of Globalization was at stake in the recent crisis when both the economic giants China and the USA engaged in a trade dispute because of which world economy faced contraction in its GDP which would have been turned into a global economic recession if the trade war continued.
Like pandemic exposed the vulnerability in the economic structure of Globalization, so it did by revealing the dangers on the political front. In Globalization, governments were subjected to cooperation which reduced the political tensions between them, however, pandemic reactivated their political motives, which means that in case of an emergency governments failed to cooperate. Such a severe blame game was started when some countries lashed out at China, calling it responsible for the global spread of the pandemic, while China refused all accusations and blamed the US for politicizing the health crisis. The political tussle made faces at Globalization.
International and regional organizations which are the key aspects of Globalization failed too. The World Health Organization is the case in this regard that how it crumbled. It not only faced criticism but the US even withdrew its financial support from it. Likewise, other international and regional organizations could not maintain cooperation among nations. In this way, Globalization could not even handle the crisis adequately.
Globalization brags about free trade but now people are asking the question that what is the benefit of free trade if it cannot even function when it is needed the most. When there was more need for cooperation between governments, Globalization failed again and it was also exposed in the role of organizations. That’s why one may argue that the post-pandemic world would be the era of de-globalization and states would strive to gain more and more power as they do not want to rely only on Globalization anymore. Likewise, people are now more careful in their spending, while corporations are now more conscious about their dependence on Globalization, therefore, they are going for precautionary measures.
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