The fall in the price of crude oil is unprecedented. For a short time, producers had to pay buyers to take oil from their hands as they had nowhere to store it. Surely this is good news for consumers. Or is this too good to be true?
The drop in oil prices is primarily caused by the precipitous fall in global demand as no one really knows when consumer confidence will return.
The airlines, car and large manufacturing industries are among the biggest consumers of oil.
To limit their exposure to the lower demand for their products and services, they have largely stopped buying fuel. As usually happens in times of high volatility, professional as well as retail speculators dabbled in the oil futures market, putting further pressure on the price of crude oil.
It is, however, an oversimplification bordering on populist thinking for politicians to use this drop in the price of oil as a justification for reducing the cost of petrol or electricity to consumers. The present economic uncertainly will not go away anytime soon. Political and business leaders need to hold on to every tool they have to cushion the economic impact of the pandemic crisis, which is so difficult to quantify at this stage of the crisis.
Governments everywhere have announced unprecedented fiscal measures to help businesses recover and keep workers in employment. The European Central Bank and the Federal Reserve have announced extraordinary monetary measures to buy sovereign and corporate bonds to ensure that a debt crisis is avoided in this unstable global economic climate. But will this be enough to support faltering economies and preserve jobs?
Malta’s fiscal position may be somewhat better than that of other EU countries that have had to deal with a debt mountain and budgetary deficits for a long time before the pandemic.
But as predicted by rating agencies, even in the best-case scenario, Malta will need to borrow substantially more to finance the fiscal measures to support employment until the crisis ends.
If the rating agencies’ guesstimates prove to be too optimistic, as some analysts are arguing, the government will need to resort to more firepower for a further round of support for businesses.
Unfortunately, the new power station project has been marred by controversy and allegations of abuse carried out by politicians and their business cronies.
One can, therefore, understand the logic of ordinary people who argue that now is the time to translate the fall in the price of oil into a reduction in the price of petrol and electricity rates. Why shouldn’t the big boys in the electricity-generating business this time around take a step back and let the citizens benefit from the windfall from the oil price crash?
Sadly, this line of logic is fallacious. Every euro borrowed by the state to prevent a bloodbath in the jobs market has to be repaid with interest by taxpayers. The necessary investment in the educational, medical and physical infrastructure cannot be delayed any longer, and such investment comes with a high price tag.
Reductions in the prices of petrol and electricity for households and industry may become necessary if the pandemic crisis proves to be more damaging than is being envisaged at present. In the meantime, though, the government must keep its fiscal armoury well supplied with recession-fighting weapons.