Question

Economies around the world are being battered by two “black swan” events at the same time: the COVID-19 virus and the oil price war between Russia and Saudi Arabia. Naturally, the countries of the Middle East and North Africa (MENA) are also affected, although each in different ways. Those that are net users of energy, which could have benefitted substantially from the vastly lower energy prices, are getting hit hard by COVID-19, while oil and gas producers are suffering from an all-out oil price war made worse by the steep decline in worldwide demand caused by the pandemic.

A. What are the two “black swan” being mentioned in the article. Explain your understanding about these events.

B. If the two “black swan” will affect Oman, discuss any four impacts of these crises to the producers/sellers. Oman.

C. Discuss how the government will intervene in the problem to help the buyers and sellers.

Answer 1

A.

The two back swan events that are being monitored in the article are the COVID-19 pandemic and the oil price war between Russia and Saudi Arabia.

The COVID-19 pandemic has brought the entire world into a hault as nations have temporarily suspended all economic activities and gone into lockdown to stop the spread of the virus. People all over have been encouraged to work from home, and the informal sector has suffered major loss of jobs as well as income. With exports and most other forms of economic activity being on the stop, the nations have lost millions of dollars worth of income as they battle tirelessly to come out of the pandemic situation.

The seconf Black Swan is the oil price war between Russia and Saudi Arabia. This started in March 2020 when Saudi Arabia reduced the price of oil in response to the refusal by Russia to reduce their production of oil which would have facilitated the prices of oil to remain at the moderate levels. As a result, oil prices have declined steeply reducing the revenue earned by the major oil exporting nations, as the demand for oil has also been low due to the pandemic.

B.

The impacts of this on the producers/sellers of Oman can be as follows -

1.) The aggregate demand in the economy will fall as a result of the low per capita incomes due both the crisis, and hence the income of the producers and sellers wil also fall.

2.) The aggregate supply will be low as a result, and the producers and sellers will be forced to reduce the labour employed in the economy into productive activities.

3.) The producers and sellers will also have lower profits as the fixed costs of production cannot be reduced in the short run even as the demand for their goods and services have reduced.

4.) The producers and sellers will in turn have less demand for raw materials with which they produce their goods and services as this is the only variable component of their cost of production that they can reduce.

C.

The government has to intervene in the follwing three major ways -

1.) Reduce tax so that the disposable income of the people can increase and that can fuel the domestic demand and raise the income of the people by boosting the domestic economy. Give enough subsidies to promote small and medium sector enterprises in the economy.

2.) Create jobs by indulging in infrastructure projects as it will be important to increase the aggregate demand in the aftermath of the pandemic

3.) Reduce the interest rates to oump investment nto the economy to increase the aggregate supply to match the aggregate demand increase to avoid inflation in the economy.

4.) Have constructive dialogue with its political allies in other national economies to put pressure on Russia to reduce its oil output and help stabilise the oil export market and increase the price of oil.