Oil price collapse: threat or opportunity for SMEs

The Brent oil barrel price has gone down under USD 20 due to the sudden fall of the global demand during the coronavirus outbreak. Before the coronavirus, the Brent oil price could have reached a level of over USD 60, and there was a strong hope for stimulation in the global economy after the most recent global financial crisis. Today, it has started climbing up again while the reopening processes have begun in many countries. Subsequently, the price level of oil is considered a sign of a healthy and active economy. However, it means something different for SMEs because the oil price is an essential factor influencing their production costs directly and indirectly.

Low oil-price has been the result of the low global demand. The graphs indicate that the oil price follows global exports and global imports. Considering that the volume of international trade is vital in determining the oil price, SMEs would prefer a lively global demand. Thus, it seems like a relatively higher oil price is something desired by SMEs. However, SMEs' capacity is limited, and even small changes in their production costs might be destructive. For instance, the 1970s oil crisis was a massive supply shock for SMEs. A large number of businesses went bankrupt because of the dramatic increase in oil prices. The OPEC countries used the price of oil as a weapon against the developed countries. Nowadays, the oil price is not a reliable weapon because of the global financial crisis's undesired adverse influences on global demand. But it is still an essential factor influencing SMEs.

The coronavirus outbreak and the potential virus risks in the world will cause a structural transformation in production and trade shortly. SMEs producing for their local markets might face a harsh challenge of competing against international companies with their weak organizational and financial structures. The developing countries have developing markets because these countries have a relatively higher potential to improve their income generation. Increasing income in these countries might bolster their demand. The multinational companies would be more interested in these countries because stimulating the markets in the developed countries will take a longer time. Subsequently, the SMEs in the developing countries need to develop a strategy to tackle the high competition in their markets.

SMEs in developing countries still have the advantage of having relatively lower production costs because these countries have lower wages as compared to the wages in the developed economies. The low oil price prepares a critical opportunity for these SMEs to minimize their production costs, and offer more competitive prices in international trade. The coronavirus has also damaged the supply chains of multinational companies. SMEs in the developing countries might steal some share from the giant global companies with a well-planned growth strategy, including minimizing production costs, cooperating with other SMEs, and exporting.

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