Archive for the ‘Resources’ Category

Tillerson’s tricky confirmation

16/12/2016

A piece discusses the confirmation propsects of Rex Tillerson, “selecting ExxonMobil CEO Rex Tillerson as his nominee for secretary of state Tuesday, President-elect Donald Trump is facing his first major test with Senate Republicans who are wary of his warming relations with Russia — and have warned his cabinet pick is far from assured. Trump is betting Tillerson’s corporate management experience and support from former GOP statesmen will ease the concerns of a handful of Republican hawks over the oilman’s extensive business dealings with Moscow”.

The piece goes on to note “Sen. Marco Rubio of Florida, who lost the Republican presidential primary to Trump after being repeatedly belittled as “Little Marco,” said he had “serious doubts” about the nomination, and alluded to Exxon’s vast global assets. “The next secretary of state must be someone who views the world with moral clarity, is free of potential conflicts of interest,” Rubio said in a Tuesday statement”. The article adds “The Republicans’ slim 52-48 majority in the Senate doesn’t give Trump a lot of breathing room. Rubio sits on the Foreign Relations Committee, which must first clear Tillerson’s nomination before a floor vote. Republicans outnumber Democrats on the panel by just one vote, making Rubio a critical power player if Democrats unanimously seek to block Tillerson’s nomination. Democrats have already criticized Tillerson’s credentials, including Exxon’s opposition to greenhouse gas regulations, questioning of climate change science, and ties to abusive governments in Indonesia and Equatorial Guinea”.

The article notes “The nomination also comes amid reports that the CIA has concluded that Russia interfered in the U.S. election in order to boost Trump’s chances over Hillary Clinton. Lawmakers in both parties have pledged to investigate the matter. Four Republican senators who have needled Tillerson’s Russia ties — Rubio, Lindsey Graham of South Carolina, James Lankford of Oklahoma, and Senate Armed Services Chairman John McCain — are now the focus of an expected and concerted lobbying push by Trump’s allies and aides. Graham, who also challenged Trump for the presidential nomination, called it “unnerving” that Tillerson received the Russian government’s Order of Friendship award in 2013. McCain, meanwhile, has openly questioned the Texas oilman’s loyalties. “I don’t see how anybody could be a friend of this old-time KGB agent,” McCain told CNN Monday, referring to Russian President Vladimir Putin”.

The piece goes on to mention how “Trump, however, has a powerful ally in Senate Foreign Relations Chairman Bob Corker, whom the president-elect also reportedly considered for the role of top U.S. diplomat. In a statement, Corker called Tillerson “a very impressive individual [who] has an extraordinary working knowledge of the world.” But the committee’s Democrats already are gearing up for a fight. Sen. Ben Cardin, the panel’s ranking Democrat, has said he’s “deeply troubled” by Tillerson’s “close personal ties with Vladimir Putin” and vocal opposition to U.S. sanctions against Russia following its annexation of Crimea. Those sanctions gummed up a few of Exxon’s largest deals in Russia, including a Siberia agreement with the state oil company potentially worth tens of billions of dollars. Cardin — who said Tuesday he will give Tillerson a fair nomination hearing — is expected to drill down into the businessman’s views on Russia, Ukraine, and Exxon’s stance on global warming. And other Democrats have made clear they will call out Republicans for hypocrisy if Tillerson is easily approved after years of GOP lawmakers accusing the Obama administration of going soft on Putin”.

It later makes the point “Democratic attacks, however, must contend with a flood of support for Tillerson by GOP House and Senate leaders and elder statesmen, including former Vice President Dick Cheney, former Defense Secretary Robert Gates, former Secretary of State Condoleezza Rice, and former Secretary of State James Baker. Tillerson “would bring to the position vast knowledge, experience and success in dealing with dozens of governments and leaders in every corner of the world,” Gates said in a statement. “He is a person of great integrity whose only goal in office would be to protect and advance the interests of the United States.” Critics were quick to point out that Baker is a partner at a law firm whose clients include Exxon and its Russian business partner, the Rosneft state oil company. Rice and Gates also have connections to Exxon through their consulting firm, Rice Hadley Gates. But their names still resonated with some of Trump’s most prominent critics”.

It concludes “Tillerson’s nomination will also face a tough campaign from liberals and Democratic pressure groups active on climate change issues. “He and other company executives led ExxonMobil in funding outside groups to create an illusion of scientific uncertainty around the overwhelming scientific consensus on climate change,” Neera Tanden, president of the left-leaning Center for American Progress, said in a statement. Throughout his presidential campaign, Trump promised to draw on top private sector talent to run the country, and on Tuesday said Tillerson’s skills are exactly what Foggy Bottom needs. “His tenacity, broad experience and deep understanding of geopolitics make him an excellent choice for secretary of state,” Trump said in a statement. “Rex knows how to manage a global enterprise, which is crucial to running a successful State Department, and his relationships with leaders all over the world are second to none.”

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“For the first time in eight years it would cut back oil production”

16/12/2016

A report discusses the recent news about an oil production cut, “OPEC surprised the world by announcing that for the first time in eight years it would cut back oil production to nudge up crude prices. The deal, to start in January, would see OPEC member countries trim their combined oil output by about 1.1 million barrels a day, to 32.5 million barrels of oil a day, according to a statement released after the group’s ministerial meeting on Wednesday”.

The writer goes on to mention “It’s a long-delayed response to a flood of oil that has outstripped global demand for the stuff and kept prices less than half of what they were in 2014. It’s also an indication that OPEC, and especially Saudi Arabia, the biggest oil producer in the group, is willing to again play a role as market balancer — potentially bringing some longer-term stability back to the global oil market”.

Crucially it notes that “Riyadh, who championed OPEC’s drill-till-you-drop approach two years ago, will take the brunt of the pain, agreeing to an output cut of nearly 500,000 barrels a day from record-high levels of production of 10.673 million barrels a day. Iraq, the cartel’s second-biggest producer, will cut 210,000 barrels a day. In all, OPEC members — famous for their fractiousness and an inability to share the pain — appear to have agreed to trim production by about 5 percent each. Even Russia, which isn’t a member of OPEC but whose breakneck oil production has contributed to the glut, agreed to gradually rein in output by 300,000 barrels a day. In answer, crude oil prices leapt upward by over 10 percent to top $50 a barrel for the first time in a month. While that’s great news for cash-strapped petro states like Iraq and Venezuela — and an early Christmas gift for the U.S. oil patch — it’s a little less cheery for consumers, who will have to pay a bit more at the pump”.

The writer mentions that “Under OPEC’s surprise agreement, one country caught a break: Iran will be allowed to increase production by about 90,000 barrels a day while everyone else cuts back. Tehran has been adamant that it must regain market share that it lost while facing U.S. and Western sanctions that halved its oil exports from 2012 through last year. OPEC’s first agreed cut since 2008 — when oil prices collapsed late in the year after hitting record levels in the summer — comes when the group’s members are reeling. OPEC is on track to earn just $341 billion in oil exports in 2016, down from a record $920 billion in 2012. That has hammered oil-dependent states, making it tougher for Iraq to fight Islamic State, for example, or Venezuela to craft a functioning economy. Even wealthy states, like Saudi Arabia, have felt the pinch, burning through about $180 billion of currency reserves and slashing public-sector salaries in the last two years”.

He goes on to point out, “OPEC’s rediscovery of discipline could be enough to help rebalance the market next year and push up oil prices — if, that is, members actually adhere to it, and if rejuvenated U.S. oil production doesn’t spoil the party before it gets started. OPEC members don’t have a great record of actually sticking to agreements they make. And political feuds between members, notably Saudi Arabia and Iran, had a habit of boiling over into OPEC meetings and torpedoing agreements in the past. “We believe much uncertainty remains with respect to global oil supply in 2017,” said Kevin Book, managing director at ClearView Energy Partners. That’s primarily due to OPEC’s “poor track record of adhering to production quotas and ongoing supply disruptions around the globe,” he added. Another OPEC cut might be needed in the second half of next year, he said. Meanwhile, U.S. oil companies, who need higher crude prices than their Middle Eastern counterparts, have just been waiting for an uptick to drill even more. And thanks to a couple years of belt-tightening, U.S. drillers have gotten great at cutting costs and squeezing out productivity gains, making it easier to thrive in a low-price environment. Renewed U.S. production on the back of rising prices could simply end up prolonging the glut, push prices back down, and end up costing OPEC billions”.

“OPEC agreed to cut output”

14/12/2016

Oil prices on Tuesday fell for the first session since OPEC agreed to cut output last week after data showed crude production rose in most major export regions and on growing skepticism that the cartel would be able to reduce production. After rising over 15 percent over the four sessions since the Nov. 30 OPEC meeting, Brent futures were down $1.25, or 2.3 percent, to $53.69 a barrel at 10:13 a.m. EST (1513 GMT). U.S. crude fell $1.36, or 2.6 percent, to $50.43 a barrel. The Brent front-month has outperformed the U.S. contract since the OPEC meeting, with its premium over WTI reaching $2.29 a barrel earlier on Tuesday, its highest since August. Analysts said the boon from last week’s Organization of the Petroleum Exporting Countries decision has faded as they now look to factors that may undermine the cartel’s promise such as record production, Russia’s plans and the reaction of U.S. shale producers”.

“Putin wants to challenge the notion of a U.S.-led world order”

21/11/2016

A piece warns of how Putin is taking control ofthe Middle East, “Sir Lawrence Freedman defines strategy as “the art of creating power.” This is a useful lens through which to consider one of this year’s key geopolitical trends: Russia’s return to the Middle East. Apart from its close ties to the Syrian regime, which date back to the 1970s, Moscow has had no substantial role in the Middle East since 1972, when President Anwar Sadat kicked Soviet advisors out of Egypt. Why return now? At a general level, it’s clear that Russian President Vladimir Putin wants to challenge the notion of a U.S.-led world order and encourage the return to a multipolar one, though there are certain self-imposed constraints on his ambitions. Although he has intervened in Georgia and Ukraine, he doesn’t seem willing to start a wider war by attacking any Eastern European states that are already members of NATO. In the Middle East, however, Putin has a theater to undermine Western influence, and to create power for himself, without the risk of triggering a war with the West. As any demagogue knows, one way to create power out of nothing is to find a division and then exploit it. In the Middle East, the fundamental division Russia has exploited is the one between the West’s aversion to Islamists, on the one hand, and human rights abuses on the other. The conflict between these aims often produces equivocation in Western foreign policy. It also opens up political space where Russia can operate by investing in repression and discounting democracy”.

The article correctly notes how “Moscow unequivocally supports the current authoritarian regimes in Damascus, Cairo, and Tobruk, which it portrays as bulwarks against the spread of radical Islam. In Egypt, Putin has consistently backed President Abdel Fattah al-Sisi’s actions against the Muslim Brotherhood, for example, in the face of widespread evidence of repressive tactics by his military government. Since 2013, Russia has stepped in to provide arms to the Egyptian government, exploiting U.S. reluctance to provide military hardware that could be used for domestic political repression. Although Egypt continues to depend on much greater levels of financial support from Washington than from Moscow, this action exemplifies Russia’s strategy for exploiting any seam between the United States and its regional allies when Washington equivocates between security and human rights. We see the same thing in Libya and Syria, where Russia does not contend with an established U.S. partner. In Syria, despite human rights atrocities by the Syrian government that have attracted Western scorn, the West has not been able to explain how getting rid of Bashar al-Assad’s regime would improve the country’s security, since that could lead to a rise in Islamist anarchy. Putin has exploited this gap by unreservedly backing Assad, leaving the West arguing for a gradual “transition” away from the Syrian president. And that further boosts the influence of Russia and Iran, the only countries with the leverage to initiate any such transition”.

The piece argues that “Though Putin has tried to insert himself into several other areas of Middle Eastern politics this year, we should not exaggerate his influence. Recall for example that the propaganda value the Russians attached to a Syria bombing raid from an Iranian base in August irritated Tehran, and the Russians were kicked off the base three days later. Likewise, Putin’s attempt to carve out a role in the Israeli-Palestinian peace process this year, which appears primarily designed to challenge the United States as the key broker, is not likely to result in any breakthrough. So is Putin a strategic mastermind or a reckless gambler? The reality is more prosaic. Yes, Russia has made diplomatic gains this year, notably in eastern Libya and Turkey, and has propped up Assad, but this has come at serious long-term economic cost to Russia”.

It expands on this point noting how “As any demagogue knows, the only way to maintain power generated out of nothing through division is to keep stoking the flames of perpetual conflict upon which these divisions depend. But when you make a perpetual enemy out of the West, you can’t be surprised when you seem to be perpetually on the receiving end of economic sanctions and a general wariness by Western firms to invest in your country. It’s possible that Putin believed his actions in the Middle East would give him leverage to bargain sanctions away, despite the fact that Ukrainian and Syrian sanctions are not formally linked. But it’s more realistic to assume that Putin’s encouragement of a state of perpetual conflict with the West makes a relaxation of sanctions unlikely in the near term. If anything, Putin has boxed Russia into a position where it must increasingly orient its economy toward China, and away from the West, which gives Beijing considerable leverage over Moscow. It’s also important to note the role of deception and bluff in Russian strategy. This is a way of generating power out of nothing, but it’s a duplicitous kind of power that in the long run destroys one’s credibility. Take for example Russia’s relationship with Saudi Arabia. Despite being on different sides of the Syrian civil war, Putin has managed to bring Riyadh into its diplomatic orbit through cooperation on oil policy, given how both Saudi-led OPEC states and Russia need substantially higher prices for government budgets to break even”.

It posits that “Moscow has voiced commitment to such cooperation, and the Saudis appear to have bought into this assurance — for without it, Russia could simply gobble up much of any market share conceded by a Saudi production cut. But Riyadh will almost certainly lose out in any such deal. Last month, Igor Sechin, the CEO of Russian state-controlled oil company Rosneft, said his company would not take part in any such cut, implicitly contradicting Putin. Russia seems to want to get the Saudis to sign on to a deal Moscow has no real intention of supporting. But it’s hard to see how long Putin can trick them into doing the heavy lifting. In the short term, the official announcement of an OPEC-Russia oil production deal, which is expected to come this month, will temporarily lift prices. But in the long term, when the deal breaks down, as it must, it will erode Putin’s credibility with Riyadh and OPEC. Gauging the success of Putin’s strategy really depends on the time frame: In 2016, Russia is up in the Middle East; in the longer term, the damage he has done to the Russian economy by breaking with the West will outweigh the value of an alliance with the likes of eastern Libya or even perhaps Turkey. Already battered by low oil prices, the Russian economy can hardly afford to be unplugged from Western capital markets and investment”.

He ends “But maybe Russian international success is entirely the wrong way of thinking about what Putin gains from a strategy of perpetual conflict. Strategy might be the art of creating power, but the power the strategist is most interested in might be at home. Perpetual conflict abroad clearly helps rally popular support among Russians to keep Putin entrenched in the Kremlin, even as his country rots around him”.

Algeria’s shaky post-oil economy

24/10/2016

An article discusses the problems of oil production in Algeria, “Algeria is North Africa’s oil superpower, but its years of steady production haven’t brought prosperity or development. Instead, the country is facing mounting economic, social, and political pressures. The quality of its public services, especially in such critical areas as education, healthcare, and housing, is in decline. The workings of the government in Algiers are opaque, and the country is perceived to be among the world’s 10 most corrupt. Unemployment, particularly among younger Algerians, remains at well over 20 percent. Many of the country’s educated youth say they would leave if they could. In other countries in the region, similar challenges led to the fall of regime after regime during the tumultuous Arab Spring in 2011. That the Algerian government was able to escape a similar fate was due largely to widespread fears that a major political and economic upheaval would trigger a civil war similar to the one that ravaged the country during the “Black Decade” of the 1990s. The government was also able to placate its restive population with subsidies, government jobs, and public sector pay increases — all financed, of course, by oil“.

The article goes on to argue “After oil prices collapsed in 2014-15, however, everything changed. Oil revenues have fallen by more than 50 percent. Fiscal and trade deficits have shot up, international reserves are falling rapidly, and the currency has been devalued by nearly 30 percent. At the same time, the defense budget has more than doubled since 2004, ballooning to over $10 billion to counter instability stemming from the Libyan conflict in the east and terrorist incursions from Mali in the south. On top of all this, since the 1990s, more than 270,000 of the country’s best-educated workers have sought their fortunes abroad. Desperate to create jobs and maintain GDP growth, which is forecasted to fall from 3.7 percent in 2015 to 1.9 percent this year, the country’s authoritarian government has proposed a new development strategy to replace its oil-based system of patronage. The plan — called the New Economic Growth Model — was launched in July. Its overriding goal is to diversify the country’s economy away from its overreliance on hydrocarbons, which accounted for about one-third of GDP, over two-thirds of government revenues, and over 95 percent of exports as of late last year. Unfortunately — thanks to a rumoured power struggle in the inner circles of the government of the aging and seriously ill President Bouteflika — the plan’s precise details are still unavailable”.

The piece mentions how “Among the main components of the new strategy is a law meant to incentivize investment in the non-oil sector by introducing tax breaks and loosening regulations. The hope is that “high value added” sectors such as agribusiness, renewable energy, and information and communication technology will be able to attract significant foreign direct investment. These investments, it is hoped, will generate enough tax revenue to offset what has been lost to the oil price drop. To reduce another costly drain on its budget, the government has also begun raising fuel and electricity prices for the first time in over a decade. Will the new strategy be the stabilizing force the government needs? If Algerian history and international experience are any indication, the answer is no”.

Crucially he posits that “The fundamental problem is that — in a chronically misgoverned country — the new plan takes a highly centralised, bureaucratic approach to economic development, one that leaves no room for participatory methods that would let citizens ensure government accountability. Development plans similar to the one being proposed, and which were successfully implemented in other countries (notably in Japan and Korea, but also in Ethiopia and Rwanda), were drawn up by highly competent technocrats with no vested interest in the envisioned investments. That doesn’t appear to be the case in Algeria. In fact, in Algeria, it’s not even clear who’s in charge of the plan — or, for that matter, of the country. While President Bouteflika is the official head of government, real power appears to lie behind the scenes with what Algerians call le pouvoir, an inner circle composed of the country’s military and security forces and supported by insider businessmen who are set to profit immensely from the plan’s investments”.

The writer goes on to argue “Algeria is particularly weak in rule of law, control of corruption, government effectiveness, and regulatory quality — all areas critical to successful economic development. These measures showed marked improvement from the late 1990s to about 2004, but since then they have largely remained stagnant or declined. Algeria’s score for regulatory quality, which includes such measures as unfair competitive practices, has declined so much since 2004 that it now ranks below Haiti’s. And there is no indication that the government has any plans to address these deficiencies, the results of which are all too evident. Algeria’s poor governance has made for inefficient and uncompetitive markets in labor, goods, and finance. This, of course, is mainly linked to the country’s all-pervasive corruption, where patronage jobs result in overstaffing so severe it exerts a drag on national growth”.

It ends “As in many other oil-based economies, Algeria’s hydrocarbon sector has facilitated the creation and maintenance of an authoritarian and patronage-based political system. Once oil-producing countries become authoritarian, as in Algeria’s case, it is very difficult to steer them back toward democracy, as too many vested interests with a stake in blocking economic, social and political reforms have been created. Since it appears that the new reform plan was designed precisely by such vested interests in the corrupt government inner circle, it is unrealistic to expect the plan to set off a virtuous circle of reforms. If oil prices stay low, the Algerian government will, at some point, no longer have the resources to support its patronage schemes, which will likely lead to increasing instability, potentially ending in an Arab Spring-type uprising. The government’s only realistic option to guarantee the country’s stability and its own survival is to replace the New Economic Growth Model with a broad-based, community-oriented development plan subject to public oversight–perhaps along the lines of the plan successfully implemented in Morocco. Such a plan would not produce the economic windfalls previously provided by oil, but it could potentially set Algeria on a virtuous circle of growth and reform, rather than sinking it further. Due to its unrealistic assumptions, the current plan is a losing proposition that may soon leave Algeria with no option but to accept an International IMF austerity program similar to or harsher than the one recently imposed on Egypt. Should this occur, it is likely that another “Black Decade” will lie ahead”.

 

OPEC, unable to raise prices

20/10/2016

An article posits the end of OPEC, “Like the boy who cried wolf, 2016 might become the year of the oil producers’ cartel that cried “output cut.” If that’s right, and the U.S. shale industry becomes the oil market’s marginal producer, Middle Eastern petro-states and, above all, Saudi Arabia are in for lean and hard years ahead. In February, OPEC called for an oil production “freeze” to raise crude prices in conjunction with Russia. But this effort collapsed at a meeting in Doha, Qatar, in April when Iran refused to join any freeze in order to regain the pre-2012 production levels of close to 4 mbpd it enjoyed before U.S. and European Union nuclear sanctions were imposed, following the removal of certain sanctions after the 2015 nuclear deal. A similar proposal failed at the OPEC meeting in June, again following Iran’s refusal, despite outreach by the Qataris”.

Johnson goes on to argue “Having dashed market hopes and crude prices in February, April, and June, OPEC again called for a form of output cut on Sept. 28 at an extraordinary meeting in Algiers. Markets bit on the news, with Brent prices rising sharply by about 15 percent in the following week, from $46 to $52 per barrel. So should markets now take OPEC seriously? Can action by the cartel sustain higher crude prices over the long term? Probably not. Like a desert mirage, the image of an OPEC resurrection vanishes when approached. OPEC, which has always been dominated by Saudi Arabia, went into hibernation in the summer of 2014. The massive fall in oil prices from over $100 per barrel in early 2014 to under $30 by January 2016 was caused primarily by then-Saudi Minister of Petroleum Ali al-Naimi’s strategy to gain market share for the kingdom and hurt the U.S. tight oil (or “shale”) industry by allowing the market, not OPEC interventions, to set prices. The results have been mixed. While Riyadh has cranked up its production from mid-2014 to today by over a million barrels a day (to a peak of 10.7 mbpd in August this year), its fiscal position has taken a serious blow, with the budget deficit rising from 3 percent of GDP to 16 percent in 2015, given how about 90 percent of government revenue comes from oil”.

He adds, “As for U.S. shale, the industry has been more resilient than Saudi Arabia expected, as I suggested in my New Year’s prediction. The rig count is down, and only the most profitable new wells — for example in part of the Permian Basin in Texas — can boast of breaking even at less than $35 per barrel. However, U.S. oil production, of which shale accounts for about half, is on track to produce an average of 8.7 mbpd this year, down from a peak of 9.5 mbpd in 2015. Down, but by no means out. The resilience of U.S. shale makes the argument that OPEC has experienced a resurrection a fragile claim. The cartel can probably raise prices in the short term through an output cut, but it will only be so long, perhaps already by mid-2017, before the U.S. shale industry revives and grabs any market share conceded by OPEC in a higher price environment. This will ultimately bring prices lower again, all else being equal”.

Crucially he notes “The OPEC resurrection claim becomes more tenuous when one considers the Algiers announcement, which is only an “agreement to agree” to production cuts at the next OPEC meeting on Nov. 30. Inauspiciously, the specific cuts individual members must make haven’t been agreed upon, but kicked down the road for discussion by a “high-level committee.” Moreover, to reach a provisional agreement in Algiers, Naimi’s successor, Saudi Arabian Energy Minister Khalid al-Falih, had to exempt Iran, Libya, and Nigeria from any participation in production cuts. This represents a major geopolitical concession by Riyadh to Tehran, arguably brokered by Moscow, which will not be an easy position to sustain, given Saudi-Iranian animosity. The provisional deal in Algiers leaves Saudi Arabia having to do most of the heavy lifting. While the kingdom’s production will in any case fall from 10.7 mbpd by about 300,000 barrels per day over the coming months, as seasonal production winds down, it would need to cut substantially more to balance the market. The production target OPEC named in Algiers implies a cut of at least 700,000 barrels”.

Interestingly, he contends that “Within OPEC, while other Gulf Co-Operation states, namely Kuwait and the United Arab Emirates, may be prepared to make a small cut to their production, key producers like Iraq and Venezuela are in too difficult a fiscal position to agree to any major cut. They will more likely agree to a freeze, given that they are already close to maximum production (4.4 and 2.1 mbpd, respectively). Outside OPEC, Russia reached a production record of 11.1 mbpd in August, eclipsing Soviet levels. Being so close to the maximum anyway, Russia has little to lose by supporting the OPEC output cut and agreeing not to raise production further. Yet the Kremlin is unlikely to impose actual cuts on the range of oil companies that operate in the country. So why did Saudi policymakers blink and commit themselves either to sponsoring another failed OPEC deal, or having to take the hit for the vast majority of the actual production-cutting to make the deal work? In the short term, it seems Riyadh’s fiscal position was under such pressure from low oil prices that something had to give. While the kingdom has eased the fiscal pressure by starting to issue sovereign debt, the burn rate through its foreign reserves has been relentless (from about $740 billion in mid-2014 to $550 billion today) as it has attempted to defend the currency in the face of substantial capital flight from the country since the oil price crash in 2014”.

He ends “In the long term, Saudi Arabia’s energetic and ambitious young deputy crown prince, Mohammed bin Salman, appears to see beyond the immediate threat of U.S. shale to the Saudi oil industry. He is focused on the broader need for major reform of the Saudi economy. As OPEC’s first secretary-general Ahmed Zaki Yamani said in the 1970s, “The Stone Age didn’t end because we ran out of stones.” Climate change will plainly be a major problem of the 21st century, and the world is moving away from fossil fuels: game over for an unreformed Saudi Arabia.  Algiers wasn’t a sign of life in OPEC, but a sign of desperation. In truth, there’s little the cartel can do beyond the short term to generate a durable rise in prices from a supply perspective, since shale technology can’t be un-invented. Saudi Arabia will face hard years ahead as the oil market increasingly looks to U.S. shale, not OPEC, as a handrail to oil prices on the supply side. However, this might well be the jolt that Salman needs to push through painful but necessary reforms. Good luck to him.

“An agreement to potentially cap oil production”

16/10/2016

Keith Johnson writes that OPEC is benefitting America through its limits in production, “OPEC, the dysfunctional cartel that has gifted case studies in the “prisoner’s dilemma” to business schools for years, unveiled an agreement to potentially cap oil production this year in what amounts to a last-ditch effort to shore up the price of crude after a costly two-year nosedive”.

He adds that “This week’s announcement, which for now remains little more than a promise among big producers to keep talking in November, is the first indication that the oil exporter’s club might be getting serious about reining in runaway oil production. If implemented — and all the details must still be worked out — such a cap on production could nudge crude prices higher. That would be great news for oil-dependent economies from Maracaibo to Moscow and a huge relief for the battered finances of Persian Gulf monarchies. News of the possible accord goosed markets around the world, sending crude up 6 percent Wednesday and boosting major stock markets as well. But OPEC’s hopes of successfully colluding for once to jack up the price of oil are also getting a rousing welcome in a more surprising place: the United States, still the world’s biggest consumer of crude oil”.

The article notes that “Since the OPEC oil embargo and gas lines of the early 1970s, the United States has tried to convince Saudi Arabia, Venezuela, Russia, and other big producers to keep the taps open so that oil remains abundant and affordable. But almost a decade into a major U.S. energy boom-and-bust cycle, many parts of the United States now stand to benefit — just like Saudi sheikhs do — from rising prices at the pump. “Since we’re in a bust phase, and we’re so dependent on energy production for growth, and because it’s hurting so badly, now [a price hike] looks like just what the doctor ordered,” said Robert McNally, the founder and president of the Rapidan Group, an energy consultancy”.

Johnson writes that “This year, many major U.S. producers were crowing about the “death” of OPEC, after the oil-producing cartel seemed to have shot itself in the foot by flooding the global market with cheap oil since November 2014. Yet some of those same wildcatters, including Harold Hamm — the chief executive of Continental Resources and energy advisor to Republican presidential nominee Donald Trump — have spent recent weeks begging OPEC to slash production to shore up prices. That’s because the prolonged spell of cheap oil has hammered U.S. oil companies that require higher prices to stay afloat; as a result of the drop, tens of thousands of oil patch jobs have evaporated. It is a spectacular turnaround for a country historically scarred by OPEC embargoes, supply manipulation, and price spikes. The 1973-74 embargo led to long gas lines, spiking prices, and eventually Jimmy Carter’s sweaters. In 2008, as oil prices hit an all-time high, President George W. Bush implored Saudi Arabia to open the spigot and bring relief to embattled American consumers”.

Crucially Johnson argues “Today, U.S. oilmen are asking for just the opposite — proof of how fundamentally the fracking revolution has transformed the United States from a gas-guzzling importer into a major producer (and exporter) of crude oil. “It’s notable that a large part of the industry, of the U.S. oil patch, is now rooting for Saudi Arabia and the rest of OPEC to come together and manipulate the market and push up prices,” said Jason Bordoff, the founding director of the Center on Global Energy Policy at Columbia University and a former Obama administration energy advisor. “That’s something we used to lament.” OPEC’s plans, if consummated, could take on a political tenor during this election year. The vast majority of U.S. oil production is concentrated in states that typically vote Republican, such as Texas, Oklahoma, and North Dakota. That’s one reason Trump’s campaign has been trying to convince global oil producers to throttle back so that oil prices can recover and jobs could return to hard-hit areas in West Texas and the Bakken shale fields in North Dakota. The Trump campaign did not respond to requests for comment”.

Johnson mentions how “The downside risk, though, is for the rest of the economy. Higher oil prices would mean rising prices at the pump, just as Americans are returning to the road in force with record-high demand for gasoline this summer. Bordoff noted that despite the importance of oil drilling to regional economies, cheap energy is still better, on net, for the U.S. economy as a whole. In other words, what’s good for the goose in the oil patch and parts of many red states, may not be good for the gander that is the rest of the country. To be sure, OPEC’s big announcement won’t by itself take care of the world’s oil glut, which since the summer of 2014 has knocked crude prices from about $115 a barrel to roughly $40. The big producers inside the cartel agreed in principle to cap their combined oil output at between 32.5 million and 33 million barrels a day by the end of the year. If successfully carried out, that would represent a slight decline from the all-out summertime production of recent months, which technically would make it OPEC’s first cut in almost a decade”.

Pointedly Johnson ends “even the tougher production target would do little, McNally said, to erase the overhang of crude oil sloshing around. That’s because OPEC expects the world to consume about 32.5 million barrels of OPEC crude per day anyway, meaning the market won’t start eating into the massive stockpiles of crude stored in tanks and tankers around the globe. More to the point, OPEC members have agreed only to meet again in November to try to hammer out all the painful details, such as which countries will reduce production by how much. Those are the very same shoals of self-interest that have sunk untold OPEC agreements over the last half-century. At the same time, two of OPEC’s biggest players — Saudi Arabia and Iran — are still at loggerheads, making a lasting agreement even tougher to secure. After sloughing off economic sanctions this year, Iran is racing to boost oil production and exports and regain lost market share. That makes it much less willing to stomach production cuts for the benefit of OPEC rivals, especially Riyadh. Yet even with all those uncertainties, coloured by OPEC’s own dismal track record of maintaining internal discipline, benchmark crude prices continued rising Thursday to tickle $50 a barrel”.

Uzbekistan’s balancing act

27/09/2016

An interesting article discusses the balancing act in Uzbekistan, “After Islam Karimov, Uzbekistan’s longtime autocratic president, was officially declared dead following a stroke, the country’s parliament appointed Prime Minister Shavkat Mirziyoyev acting president on Thursday, in the latest sign of growing consensus among the country’s elites over succession. Mirziyoyev, who has been Uzbekistan’s prime minister since 2003, was widely considered the favourite to succeed Karimov, who was the former Soviet country’s first and only president, and his appointment as the caretaker president is the clearest sign yet that Mirziyoyev is looking to make it permanent. During Karimov’s lavish funeral, state TV showed footage of Mirziyoyev assuming official duties, including organizing the massive event and interacting with foreign dignitaries in attendance; as well as meeting Russian President Vladimir Putin, who visited Uzbekistan on Tuesday”.

The report notes how “Under the constitution, Senate leader Nigmatilla Yuldashev should have taken over the interim position ahead of elections within three months, but reportedly declined. According to a statement released on the Uzbek government’s official website, Yuldashev broke with procedure during the parliamentary session, and in an indication of Mirziyoyev’s growing behind-the-scenes power, asked lawmakers to appoint the prime minister instead of himself due to the prime minister’s “many years of [government] experience.” As interim president and Karimov’s probable successor, Mirziyoyev will have to tackle a host of issues facing Uzbekistan, including economic stagnation, mass migration, and the shadow of Islamist extremism. But Mirziyoyev’s most challenging task could be navigating Uzbekistan’s complex, and often turbulent, relations with major powers like Russia, the United States, and China, as well as its four Central Asian neighbours — Kazakhstan, Kyrgyzstan, Tajikistan, and Turkmenistan — as Moscow, Beijing, and Washington jostle for influence across the region”.

The article mentions “Mirziyoyev has already received a warm welcome from Putin. During his visit, Putin pledged his support for Uzbekistan and portrayed Russia as Karimov’s closest ally, telling the interim leader that he could count on Moscow as one of his “most reliable friends.” The Kremlin and Karimov had a complicated, and at times fraught, relationship during the 25 years after the collapse of the Soviet Union. In the 1990s, Tashkent was wary of its former patron in Moscow and sought to cement its own independence, even later becoming an unsavory ally of the United States in the global war on terrorism. “Karimov was a very effective ruler that was able to carve out independence for his country,” Paul Stronski, a Central Asia expert at the Carnegie Endowment for Peace, told FP. “Whether the next person is able to have that same sort of vision for a space that isn’t in Russia or the West’s pocket is the big question.” Uzbekistan’s ties with Washington have also had their ups-and-downs. Closer relations were sealed with U.S. access to an air base used to move materiel and personnel to the ongoing war effort in Afghanistan. That relationship was derailed following Washington’s criticism of the Andijan massacre, in which Uzbek security forces shot and killed unarmed protesters in 2005. Following the incident, Tashkent evicted the United States from the air base in Uzbekistan and Putin quickly moved to rekindle ties with Karimov and has been courting Tashkent ever since”.

Interestingly he adds how “China remains the largest economic player Central Asia and has heavily invested in infrastructure across the region to promote its “One Belt, One Road” project, a 21st-century version of the Silk Road that’s intended to connect China to Europe through the Central Asian countries. But while Beijing is an important economic force, it has so far largely refrained from playing a larger political or security role in the region. The United States, meanwhile, has significantly scaled back its footprint in Central Asia following the drawdown of operations in Afghanistan and the closure of U.S. air bases in Uzbekistan and neighbouring Kyrgyzstan. Moscow, in contrast, has pushed to solidify its influence in Central Asia through regional organizations like the Collective Security Treaty Organization, a Russia-led military bloc, of which Kazakhstan, Kyrgyzstan, and Tajikistan are members, and the Eurasian Economic Union, which Kazakhstan and Kyrgyzstan have joined. Uzbekistan has so far resisted membership in these organizations, despite Putin’s entreaties, and whether Mirziyoyev opts for closer ties with Russia will have a major effect on Uzbekistan’s future”.

It ends “Relations with Uzbekistan’s Central Asian neighbors will also loom large over Mirziyoyev in the coming months. Nursultan Nazarbayev, the president of Kazakhstan, and Almazbek Atambayev, the president of Kyrgyzstan, both skipped Karimov’s state funeral in the ancient Silk Road city of Samarkand. Nazarbayev and Karimov have been competing for regional leadership. Kazakhstan, in large part thanks to its oil wealth, emerged as the richest country in Central Asia, fueling the rivalry between the two autocratic heads of state. Uzbekistan’s relations with Kyrgyzstan have been even more delicate, with Karimov halting the supply of natural gas several times to his smaller neighbour to cow Kyrgyz leadership into changing policies that he did not like. In 1999, for example, the Uzbek leader demanded that former Kyrgyz president Askar Akayev stop democratic reforms he was carrying out or face having the country’s energy supplies cut off. According to Stronski, how Uzbekistan’s next president decides to deal with other countries in Central Asia could be an important way for the new leader to leave his mark on the country and cement his hold on power”.

 

Fixing Brazil

23/09/2016

A piece in Foreign Affairs looks at how to fix Brazil, “Brazil has rarely had it so bad. The country’s economy has col­lapsed: since 2013, its unemployment rate has nearly doubled, to more than 11 percent, and last year its GDP shrank by 3.8 per­cent, the largest contraction in a quarter century. Petrobras, Brazil’s semipublic oil giant, has lost around 85 percent of its value since 2008, thanks to declining commodity prices and its role in a massive corruption scandal. The Zika virus has infected thousands of Brazilians, exposing the frailty of the country’s health system. And despite the billions of dollars Brasília poured into the 2014 World Cup and this year’s Olympic Games, those events have done little to improve the national mood or upgrade the country’s urban infrastructure. Meanwhile, many of Brazil’s long-standing problems have proved stubbornly persistent: half of all Brazilians still lack access to basic sanitation, 35 million of them lack access to clean water, and in 2014, the country suffered nearly 60,000 homicides. But Brazil’s biggest problems today are political. Things first came to a boil in the summer of 2013, when the police clashed with students protesting bus and subway fare hikes in São Paulo. Within days, some 1.5 million people took to the streets of Brazil’s big cities to protest a wider set of problems, including the government’s wasteful spending (to the tune of some $3.6 billion) on the construction and refurbishment of a dozen stadiums for the World Cup. In the months that followed, when Brazilian President Dilma Rousseff appeared on television to soothe the unrest, Brazilians across the country drowned out her voice by rattling pots and pans from their balconies. In October 2014, after promising to increase public spending and bring down unemployment, Rousseff managed to win reelection by a thin margin. But she quickly backtracked on her major pledges, announcing a plan to cut state spend­ing and rein in inflation. The public’s anger mounted”.

He writes that the coalition led by Rousseff’s party collapsed with impeachment proceedings against her that were later successful. He adds that Brazil’s constitution allows the president powers to break gridlock between executive and legislature through decree as well as “dislodge pending legislation from congres­sional committees, force Congress to vote on urgent measures, and veto bills in part or in whole. Those powers have long helped Brazil’s presidents avoid deadlock and pass many needed reforms. It would be a mistake, however, to assume that Brazilian presidents are all-powerful. To the contrary: their ability to avoid gridlock comes at a high price. Because Brazil’s Congress has more than two dozen political parties, it’s nearly impossible for a single one to win a majority. That forces Brazil’s presidents to form coalitions in order to govern effectively. And that’s where the problems start. Brazil’s political parties lack coherent ideological agendas; instead, they are loosely knit alliances whose members have no qualms about forming or dissolving coalitions at any time”.

The author goes on to mention how “Brazil’s electoral rules allow candidates to switch parties relatively easily, undermining any chance of ideological unity within coalitions. And candidates are elected to Congress based not on the number of votes they receive individually but on the total number their party pulls in. That creates an incentive for politicians to change allegiances on a regular basis: jumping ship for a party led by a popular candidate can often boost less popular aspirants to office (or keep them there). Brazilian politicians thus tend to ride on the coattails of powerful allies instead of focusing on party loyalty, ideological consistency, or the details of policy”.

He also cites numerous inefficiencies, which pale “in comparison to the other big problem engendered by Brazil’s flawed political rules: endemic corruption. In many cases, the pork and patronage doled out by presidents prove insufficient to win Congress’ support; presidents therefore often sweeten the pot by allowing legislators to appoint their allies to plum jobs in Brazil’s powerful state-owned companies and regulatory agencies. Once in these posts, the new officials gain a say over which companies will receive lucrative government contracts. And many of them have proved all too happy to make those decisions based on bribes, which they then share with their patrons in Congress”.

He goes on to mention that “Unlikely as it may seem, Brazil’s current troubles might just have a silver lining: business as usual has become so costly that many Brazilians have finally accepted that the system has to change. Operation Car Wash has laid bare the misdeeds of the country’s political class, and for the first time, dozens of politicians and business leaders have gone to jail. In the past, officials were able to shrug off corruption investigations by relying on a lenient justice system, a weak congressional ethics committee, and a public that seemed inured to graft. That is no longer possible. The judges, investigators, and prosecutors running Operation Car Wash represent a new generation of civil servants, with new values, and they are using a new set of rules and tactics, including the threat of serious sentences and the carrot of leniency deals, to break the silence that politicians and businesspeople have maintained for decades. Just as important, according to public opinion research by the polling group Datafolha, most Brazilians now believe that corruption is their country’s biggest problem. And whereas the protests in 2013 were mostly about irrational government spending, more recently, Brazilians have taken to the streets specifically to protest official corruption. For all his shortcomings, Temer seems to understand the need for change. He is pushing for Brazil’s first-ever cap on public spending, a measure that would limit government expenditures to current levels for the next 20 years, thereby forcing interest groups to compete for a fixed amount of resources instead of pushing for tax hikes or bigger deficits. He has introduced measures that will allow the government to reward efficient bureaucrats across the vast expanse of the Brazilian state. And crucially, he has raised the possibility of constitutional reforms that would reduce the number of political parties and restrict their ability to merge their electoral lists. Both measures would make it easier to get things done in Congress without graft”.

He goes on to suggest that “In short, lawmakers must rewrite the rules of the game so that elected officials stop working only for their backers and start focusing on good governance for the majority of the population. Academics, policymakers, and pundits have offered a number of ideas for how they might do so. One radical proposal would have Brazil drop its presidential system in favor of a parliamentary one akin to the United Kingdom’s. By fusing Congress and the executive, that change would make legislators directly responsible for the success or failure of the government, and since lawmakers would be threatened with fresh elections if they challenged the government’s major decisions, such a reform might reduce corrupt dealmaking and encourage the development of stronger political parties. Other experts have argued for a semi-presidential system, in which a prime minister accountable to the legislature conducts day-to-day politics and a president retains the power to dissolve parliament and call new elections. Shifting to such a system could make lawmakers more accountable for the results of policy decisions while preserving the president’s status as a national figurehead. Yet another proposal would keep Brazil’s current presidential system intact but reduce the number of existing parties to between six and eight and push them to commit to coherent policy platforms, in part by abandoning the open-list proportional representation that defines today’s electoral system”.

He concludes “It is too early to say which of these proposals would be most effective. What is certain, however, is that Brazil’s political system will remain dysfunctional until the country’s president and legislators can work together effectively—in the name of party platforms, not clientelistic bargains. To get there, Brazil must reduce the number of parties in Congress and empower them to discipline their own members. Operation Car Wash, Rousseff’s impeachment, and the overall economic decline have created an opportunity for Brazil to pursue just this kind of reform. Now the country’s politicians must seize the rare opening these cascading crises have afforded them”.

Brazil after the Olympics

01/09/2016

A piece notes the problems of Brazil after the end of the Olympics, “The Olympic torch was extinguished Sunday night in a carnival of song and dance, the good times rolled. But it is too early to determine whether or not the games were a success or just a muddling through difficult days. Swimming pools turned green. Some 85,000 soldiers and police were mobilised to provide security, but instances of muggings,stray bullets, and petty theft made headlines. The pollution in Guanabara Bay sickened at least one athlete. And, of course, six-time Olympic gold medalist Ryan Lochte and three of his fellow swimmers embarrassedthemselves. But the enthusiasm of many Cariocas — as Rio de Janeiro’s residents are called — partially compensated for the long lines to enter venues, food shortages, and challenging transportation delays. However the games will be remembered, it has at least been a temporary respite for Brazilians from the ongoing political and economic crises that have gripped the nation”.

More importantly it mentions “As the games end, the impeachment of President Dilma Rousseff will move to closure with Aug. 25 cited as the day the last phase of the process will open. Rousseff faces charges of violating budget laws by authorizing credit lines without congressional approval. That is the formal indictment. But there are many other elements involved in the accounting of her very public national downfall. Rousseff, by most accounts, was a terrible politician. Brazil is a multiparty political system, and the only way to get legislation approved is to constantly build short-term coalitions in Congress; instead, she refused and played to her base. Even worse, she was often petty: In particular, she sought to prevent the re-election of Eduardo Cunha as the speaker of the lower house. In retaliation, it is said, he initiated the impeachment process. Many blame her government for the economic and financial crises that now plague the country. By most accounts, she appointed mediocre functionaries to important cabinet posts. And her Workers’ Party (PT) never encountered a welfare program it didn’t like. As a result of massive public sector spending, the economy overheated. Inflation increased, as did unemployment. Foreign direct investment fell”.

It adds importantly, “the hallmark of the current crisis was the discovery that the state oil company, Petrobras, had become a major source of bribes and kickbacks that were used to finance party politics. Most of the country’s major construction companies were involved, and a host of political leaders across the party spectrum have been implicated in the scandal. It did not help Rousseff’s credibility that she served as the minister of mines and energy and chair of Petrobras while many of the crimes were committed. Of course, she denies any knowledge of what occurred. But the scandal is so large as to deem that defense laughable. A new generation of federal prosecutors have arrested or indicted many of the alleged participants of the conspiracy. Dozens of senior politicians and private sector officials sit in jail. Some are involved in plea bargains; most will serve some time in prison. For economic and political elites who believed they could act with impunity, the new reality that crimes will be punished is a shock — but one that will serve Brazil well in the future. The cozy, often crooked ties between the private sector and the huge, inefficient public sector have been dealt a serious blow”.

It goes on to point out that “though the sins of an economic giant are being laid bare, the country’s finances are still in great distress. A decade ago, Brazil was seen as a rapidly emerging economy — one of the skyrocketing BRICS (Brazil, Russia, India, China, and South Africa) that would own the future. Those were heady days, especially for Brazil. A sharp increase in demand for Brazilian raw materials and commodities, particularly from China, provided an ever-increasing amount of foreign exchange. Investment flowed in. Brazil was upgraded by all the rating agencies. But the PT didn’t understand that the economy was actually neither productive nor competitive globally. Priorities such as physical infrastructure were overlooked. Rigid labour laws, many on the books since the 1930s, made it difficult to fire unproductive workers and hire new ones. Skills were subpar; both technical training and general education languished. Public health, while universal, was substandard. Social security coverage extended benefits to both public sector employees and the private sector, but deficits ballooned and reform was postponed. Brazil’s tax collection was in disarray — leveed at the union, federal district, state, and municipal level, the burden surpassed 33 percent of the country’s GDP. Meanwhile, government grew bigger and bigger as the PT sought to employ as many of its party members as possible, often with little thought to their competence”.

The author mentions that “The acting president, Michel Temer, if confirmed at the end of August as the new chief executive, apparently wants to undertake a reform program. The first priority is to rein in government spending, cutting pensions and workers’ benefits. As might be imagined, the unions are outraged; there will be massive protests if the government decides to move forward”.

He points out its rising debt, partly due to an aging population, “Compounding the problem of a stable social safety net is Brazil’s profound inequality. There is a tremendous gap between the very rich, a struggling middle class, and the poor. The Olympics captured that disparity: As sweeping aerial shots panned from the beachfront condos of Ipanema to the mountainside favelas, or slums, the media didn’t shy from reports on the inability of the favelados to afford tickets for the events. Many of the favelas lack sanitation — a major cause of the pollution in Guanabara Bay, since raw sewage runs directly into the water. Promises to install processing plants have been on hold for decades. Security was frequently highlighted in the media coverage. While tourists and middle- and upper-class Brazilians cheered in the Maracanã Stadium, the favelas were home to the ongoing drug war between the gangs and the security forces”.

It concludes “As the games end and the impeachment process terminates, probably with the dismissal of Rousseff, the grim questions that mark Brazil’s present predicament will resurface. Can public education and health facilities be reformed to give security and opportunity to those in need? Can a corrupt, inefficient, and immense federal government be downsized? After decades of out-of-control growth, are there too many political interests at play to allow for meaningful reform? Can Brazil reinvigorate industry to provide new export products in a world where commodity prices will probably be flat for some time? The short answer is that changes are possible — but not without government reforms first. Most observers agree that much of the gridlock in Brasília is due to the dysfunctional political party system. Remarkably, ideology isn’t the problem: Politicians move from party to party with little regard for loyalty. But changing the system — creating electoral districts and reducing the number of political parties — will require congressional approval. Few analysts believe that there is a broad enough coalition in Brasília that will forgo perks and patronage to make selfless decisions for the good of the state”.

It ends “Local elections are scheduled for October of this year; the results may provide some insight into the impact of the current situation on the average voter. The expectation is that Rousseff’s PT will do poorly at the expense ofpersonalist parties. National elections will take place at the end of 2018. Temer has already said he will not be a candidate. The PT’s former two-term president, Luiz Inácio Lula da Silva, looks increasingly like a liability — and he may well be indicted as part of the ongoing scandal. Will new reform-minded candidates emerge? That is the hope — but there is no guarantee that fresh faces will be able to successfully address the reform agenda. Some argue that economic growth will begin to return in late 2017 or in 2018. If Temer becomes president after the impeachment, he has promised to work with Congress to approve much needed fiscal reforms. Brazil would also be helped if global commodity and raw material prices recover. Surely, Brazil’s working and lower classes will cheer, but the welcome relief may only delay the inevitable reckoning with the painful realities that need to be addressed”.

 

Saudi’s increasing production?

04/08/2016

A piece from Foreign Affairs examines Saudi Arabia’s oil strategy, “The world is already awash in oil, and yet there may soon be more Saudi crude flowing to market. This month, just after scuttling a “production freeze” among major oil exporters, the Saudis fired long-serving oil minister Ali Naimi, who was a rare, reassuring fixture in the unpredictable oil market. Naimi had wanted to retire, but his support for the freeze contradicted the position of his superiors and probably hastened his departure. Along with naming a replacement minister—Khalid al-Falih, the former CEO of the state oil giant Saudi Aramco—the Saudis also announced a significant shift in oil market strategy. The kingdom would not only maintain its brisk pace of oil production of 10.2 million barrels per day but increase it further. Amin Nasser, the current CEO of Aramco didn’t stop there. He said that the theoretical ceiling on Saudi oil production capacity—12.5 million barrels per day—could be expanded in the future. In some respects, signs of the Saudis’ strategy shift were there all along: The country is locked in a battle for market share in the face of a U.S. shale boom, a re-emerging Iran, and a glut of non-OPEC crude. Longer term challenges, such as the threat of hitting a ceiling on global oil demand—perhaps in response to climate change—probably also shape thinking at Aramco headquarters in the eastern city of Dhahran. With 260 billion barrels of proven crude oil reserves still underground, the risk of stranded assets is a scary proposition in Saudi Arabia”.

The article goes on to point out that “Saudi production decisions are subject to painstaking deliberation over the optimal pace for depleting the kingdom’s reserves. Aramco calibrates output from individual fields so that recoverable oil is exhausted gradually, over a minimum of 30 years. This has a constraining effect on the market. Since 2000, the kingdom’s output has hovered at about 13 percent of global supply, a self-imposed limit that has forced oil prices up. This has allowed higher-cost “fringe” producers to meet remaining demand with costlier oil. That calculus could change, however, if Saudi energy policymakers believe there will be threats to the long-term value of crude oil, especially in oil’s viability as a transportation fuel. In such a case, the kingdom could recalibrate its depletion strategy. One threatening scenario stems from efforts to respond to climate change. Some climate-focused scholarship has sought to quantify the amount of “burnable” fossil fuels as a portion of global reserves, given the goal of limiting the rise in temperatures to two degrees Celsius. One recent paper calculates that adhering to the two-degree limit means that the Middle East will see more of its reserves stranded underground—at 38 percent—than the global average of 33 percent. This is due to the large size of Middle Eastern resources relative to its hitherto modest rate of production. By contrast, the United States may find itself with the smallest level of stranded reserves. Only six percent of U.S. conventional crude reserves were estimated as “unburnable,” probably because of the relatively small amount of remaining oil and comparatively high rates of production. From this perspective, Saudi prudence looks risky”.

It points out that “Based on such calculations, it is in producer countries’ interests to beat the trends by stepping up production and shortening the timeframe for converting underground reserves into above-ground assets. This would, if all else held constant, reduce global oil prices and increase demand. For Riyadh, this approach could potentially transfer the risk of stranded assets to higher-cost producers, including those in North America, whose investment plans might be derailed by expectations of low oil prices. Higher production might also allow Saudi Arabia to reduce its risk from a related “peak demand” scenario.  Naimi and other Saudi officials have voiced fears for at least a decade about “security of demand” whether from climate factors or Washington’s rhetoric around “energy independence.” U.S. diplomatic cables released by WikiLeaks revealed some of these concerns, as do Naimi’s public statements and those of an adviser, Mohammed al-Sabban, who predicted that global demand would peak by 2025″.

Interestingly he goes on “By forcing prices down, Aramco might delay the onset of peak demand, prolonging oil’s dominance in transportation while nudging higher-cost producers out of the market. Low prices might also push emerging economies to increase their dependence on oil by making investments that lock in higher levels of long-term demand. That’s because cheap oil also encourages urban sprawl. When cities become less dense, they require more energy: commutes lengthen, homes are more spacious, and private car ownership grows. Politically, Saudi Arabia may also view a more dominant role in global crude oil markets as beneficial to its geopolitical status. It could better hedge against Iran as its cross-Gulf rival emerges from decades of economic isolation. And more oil could even revive Riyadh’s flagging “oil for security” relationship with the United States. Conversely, a declining role in crude markets may diminish the kingdom’s strategic importance“.

Incorporating a domestic view the article notes, “Another reason why Saudi Arabia may be increasing production is due to the dangerous rise in domestic oil demand. If this trend continues, it may force Saudi Arabia to forfeit its spare production capacity and divert oil from export into the domestic market within a decade or two. Saudi Arabia could avoid that outcome by either halting growth in domestic demand or by increasing supply. The kingdom’s recent energy subsidy reforms are aimed at reducing demand. But in the event they don’t succeed, Aramco has prepared for major upstream investment. In 2015, Aramco forecasted on its website that it would make capital investments of about $334 billion between 2015 and 2025, with most of it earmarked for oil and gas drilling. In addition, the government’s recent subsidy reform policies are expected to increase domestic oil revenues, which could be reinvested in raising production capacity. In January, the Saudi government took the extraordinary step of raising prices on natural gas, water, electricity, gasoline, and diesel fuel, which probably represents its biggest reduction in citizen welfare benefits since the current system was established in the 1970s. Although energy prices in the kingdom remain substantially below world market levels, the increase is expected to raise $7 billion while reducing growth in domestic energy demand. Another source of capital could come from the splashiest initiative of all—the unprecedented sale of a portion of Saudi Aramco in an initial public offering next year”.

He ends “most worrying, a rise in Saudi output could trigger a period of global oversupply that would exacerbate climate damage. This could play out in a number of ways. On the one hand, it might unfold in a rational manner, deterring competitors from investing in higher-cost resources and pushing high-cost oil out of the market. On the other, it could cause other producers to panic about stranded assets, triggering a glut of cheap oil that would tempt consumers away from conservation and green technologies. Another scenario could see things swing the other way. By raising production, Saudi Aramco could publicize the kingdom’s fears that the world is preparing to move beyond oil and inadvertently encourage investment in alternate technology such as electric vehicles. Other scenarios are possible as well. In the long term, the oil business is entering an age of increasing risk, since progress on climate change endangers the dominance of fossil fuels in the global energy market. Although no one has yet devised a viable replacement for oil-fueled transportation, governments are increasingly seeking alternate fuels and technologies, regardless of oil prices. This understanding will most likely prompt at least some holders of large reserves, like Saudi Arabia, to move their crude to market before the world moves on.

Libya, reopening oil ports

23/07/2016

Libya’s government of national unity is working to reopen four of the OPEC country’s biggest oil ports after securing a deal to help unify the fractured nation’s state energy company. Four ports accounting for about 860,000 barrels a day in crude-exporting capacity have been shut due to political turmoil and fighting. A July 2 deal to unify rival administrations of the National Oil Corp. was meant to end the conflict over who can control oil sales in Libya, where factions are working to set up a Government of National Accord to help rebuild the country after five years of strife.

Israel, selling gas to Turkey?

17/07/2016

A report notes the possibility of Israel-Turkey energy deals, “and Turkey agreed to normalize diplomatic relations Monday, six years after an Israeli raid on a Turkish aid ship sent to Gaza opened a bitter divide between two Mediterranean countries that had long been friendly. And while shared security concerns were apparently the biggest driver of the rapprochement, the deal could potentially pave the way for Israel to use its abundant reserves of natural gas to become a major energy supplier to Turkey in the years to come. The reconciliation announced by Israeli and Turkish officials, in separate press conferences, marked the culmination of years of informal talks ushered along by the European Union and by U.S. officials including President Barack Obama and Secretary of State John Kerry”.

The writer goes on to make the point “Speaking to reporters in Rome, Israeli Prime Minister Benjamin Netanyahu stressed the “strategic importance” of the deal, especially at a time of deepening insecurity across the eastern Mediterranean. The five-year old civil war in Syria continues apace, while terrorist attacks have hammered both Turkey, and to a lesser extent, Israel in recent months. “Energy diplomacy has been crucial in lubricating the relationship and giving them a non-controversial platform for contacts in recent years, but I think the reconciliation is definitely about security,” said Brenda Shaffer, a Georgetown University expert on the region. Under the terms of the deal, Israel will pay Turkey $20 million in compensation for the victims of the 2010 raid, but it won’t lift the naval blockade on Gaza. Turkey, for its part, will ship aid to Gaza through Israel, rather than unilaterally, and promised to ensure that Hamas only carries out political activities on Turkish soil, rather than plotting attacks against Israel”.

Johnson adds that “After the governments in Israel and Turkey ratify the final agreement, the two sides will exchange ambassadors and unwind some economic sanctions. That will pave the way for greater security and intelligence cooperation. For Turkey, reconciliation with Israel comes not just as the region is unraveling, but while Ankara’s ties to other once-close friends have frayed. Turkish relations with Russia went into a nosedive last year after Turkish jets shot down a Russian bomber that briefly crossed into its airspace. That chilled ties between the two, hammered Turkish tourism and trade, and put Turkish-Russian energy projects on ice. On Monday, Turkish President Recep Tayyip Erdogan apologized to Russian President Vladimir Putin for shooting down the jet, and indicated that Ankara is ready to normalize relations with Russia. For Israel, and especially for Netanyahu, healing the breach with Turkey has been a primary objective for years, but has gained urgency as the Syrian crisis continues to worsen. The prime minister spoke of Monday’s reconciliation as creating “islands of stability” around Israel; since Turkey shares a border with Syria, closer cooperation between Israel and Turkey could help minimise the fallout from the civil war and the terrorist petri dish it has created. But for Netanyahu, restoring normal ties with Turkey could also bring an economic benefit: a potential new market for Israeli energy exports. Late last year, the Israeli prime minister pressed the case for exporting Israeli gas — rather than keeping it all for the domestic market — by touting the geopolitical benefits of energy exports. One of the prizes he flagged? Closer ties with Turkey”.

It adds later that “Netanyahu again emphasized Israel’s hoped-for role as a supplier of natural gas to neighbours around the region, including Turkey, as well as to countries in Europe. The reconciliation, Netanyahu said in joint remarks with Kerry, “has also immense implications for the Israeli economy – and I use that word advisedly – immense implications for the Israeli economy, and I mean positive immense implications.” The prime minister said that Israeli gas, especially at the large Leviathan field off the Israeli coast, could supply enough energy for domestic use as well as exports to Egypt, Turkey, and European countries desperate to find suppliers other than Russia. Israel has already explored some deals to sell gas to neighbours like Egypt and Jordan. But there are technical and commercial obstacles to big gas deals with Turkey. Building a pipeline in the deep waters of the Mediterranean would likely be very expensive, as would building a terminal to ship gas by tanker. At the same time, the world is awash in natural gas right now, and Turkey has increasing options to meet its future energy needs, including piped gas from countries like Iran and Azerbaijan, as well as gas from the Middle East or the United States shipped by tanker”.

End of low oil prices?

27/06/2016

Keith Johnson argues the end of low oil prices is coming, “In the past two years, a flood of crude has pushed down oil prices, battering corporate balance sheets and wreaking havoc with budgets in oil-dependent countries from Russia to Iraq. That’s beginning to change thanks to the double whammy of rising demand and pinched supplies of oil — especially unplanned outages and disruptions in places like Canada, Nigeria, and Libya. Expect prices to start rising in response. On Tuesday, the International Energy Agency said it expects the oil market to be balanced for the rest of the year, meaning the world will pump roughly as much oil as it consumes. That should nudge prices higher. Oil is currently trading around $50 a barrel, double the nadir reached earlier this year. If the oil market is getting closer to a normal balance of supply and demand, it’s no thanks to major producers inside OPEC — especially Saudi Arabia — that have kept pumping with abandon even as prices plummeted”.

Johnson writes “Rather, the market can thank global disruptions of oil supplies, which in May reached their highest level in five years. The production declines were in large part due to wildfires in Canada that knocked some oil sands production in Alberta offline. Other oil-producing regions have also been reeling: A new generation of militants in the Niger delta in southern Nigeria are targeting crude production facilities there, while Libya’s continued political disintegration has kept oil production and exports there at a fraction of prewar levels. Other major oil-producing countries, especially Venezuela, face severe economic and political stresses; plenty of energy experts figure Venezuelan exports could tumble sharply later this year. Altogether, those outages, attacks, and wildfires knocked 3.7 million barrels of oil production a day offline. That helped push oil prices to their yearly high. For the past two years, the world was so awash in oil that the market could afford to shrug off the virtual disappearance of the Libyan oil industry, for example, or watch the return of Nigerian rebels with equanimity. Now, though, outages are set to cause bigger ripples in a tighter market”.

He mentions that “While the wildfires in Canada, which at their worst took off more than 1 million barrels a day of production, are winding down, disruptions in Nigeria and Libya are likely to be long lasting, the IEA said. And those outages have done what OPEC chose not to do: Close the spigot a bit. “The spate of disruptions have helped put a more solid floor under crude prices and accelerated the rebalancing in global supply and demand,” said Robert McNally, founder and president of the Rapidan Group, an energy consultancy. Nigeria is a particular concern because of both the scope of the disruption — vandalism and attacks knocked out close to 1 million barrels per day of production in May — and because the new generation of militants seems unwilling to negotiate with the government as their predecessors did”.

Johnson concludes “Those outages by themselves wouldn’t necessarily be cause for concern, or at least they haven’t been for the past two years. But now that demand for oil is also rebounding — that’s particularly true in India as well as in the world’s two-biggest oil consumers, China and the United States — there’s less slack in the system if something goes wrong. And that’s especially the case given Saudi Arabia’s flat-out oil production policy. The kingdom is still pumping oil at near-record levels, producing 10.2 million barrels a day. That means Saudi Arabia has a lot less ability to “surge” oil production to meet global needs; the more it pumps on a daily basis, the less spare production capacity there is inside OPEC. And since spare capacity is essentially the shock absorber for the global oil market, the world could soon be in for a very bumpy ride”.

“A fresh referendum on independence”

25/06/2016

A piece from the Guardian notes the reaction to the British exit from the European Union with another Scottish independence referendum, and the breakup of the United Kingdom likely, “Scotland is on the brink of staging a fresh referendum on independence after Nicola Sturgeon requested talks with the EU on separate membership after the UK’s vote to leave. The first minister said she believed a second referendum on independence was highly likely after Scotland voted overwhelmingly to remain within the EU, but was unable to prevent the leave campaign winning by 52% to 48% across the UK as a whole. Sturgeon said that was a “democratic outrage” and constituted the clear, material change in Scotland’s circumstances referred to in the Scottish National party’s carefully worded manifesto commitment in May to hold a second independence vote if needed”.

The report mentions that “Sturgeon announced that she was instructing Scottish government officials to draft fresh referendum legislation for Holyrood, only two years after her party lost the first independence vote in 2014, to ensure it could be held quickly if enough Scottish voters backed it. UK government sources said David Cameron, who quit as prime minister after the referendum defeat, was anxious that his successor make sure the Scottish, Welsh and Northern Ireland government were closely involved in the UK’s Brexit negotiations to avoid increasing Scottish grievances and fuelling the case for independence. Sturgeon’s cabinet will meet in emergency session on Saturday morning at her official residence Bute House, and is expected to agree plans to put forward referendum legislation in September’s programme for government. Holyrood would need Westminster’s legislative approval to stage an official referendum, as it did in 2014. Cameron had previously said no UK government would give that again so soon, but Sturgeon said on Friday it would be inconceivable for Westminster to ignore a democratic vote by MSPs requesting that authority”.

Crucially the report adds “In a significant boost to her strategy, MSPs in the Scottish Green party indicated she could win the six Scottish Green votes in the Scottish parliament that she needs to ensure a Holyrood majority, as momentum behind a second vote sharply rose after the UK result became clear. The most recent polls suggest independence does not yet have clear majority support, but SNP sources and activists within Women for Independence (WFI) said there had been a surge in membership requests on Friday, with people offering to campaign and donating money. The SNP said it had been inundated with emails from previous no voters now pledging their support for independence after the conclusion of the EU referendum. The Radical Independence Campaign, which was heavily involved in registering first-time and alienated working-class voters during the last referendum campaign, likewise reported an increase in donations. “The surge is back on,” said one WFI activist. A number of prominent former no voters have declared themselves ready to consider supporting independence should another referendum be called. The novelist Jenny Colgan, who wrote for the Guardian in September 2014 of the joy of Britishness, tweeted that she was weeping with relief as Sturgeon promised to fight for the interests of Scots who had voted to remain”.

Crucially it mentions “Echoing earlier remarks by her predecessor Alex Salmond, Sturgeon said it made clear logical sense for those powers to be in place quickly and before the UK’s exit from the EU was completed by an expected deadline of 2018. There will be added urgency to that timetable after senior European commission and parliament figures said they wanted the Brexit talks speeded up, and for the UK to leave as soon as possible to lessen the uncertainty now facing the EU. Sturgeon said pressing ahead with an independence bill would ensure a seamless transition for Scotland from having EU membership as part of the UK to having it as an independent nation. She said her primary concern was to ensure that Scotland’s vote to remain in the EU, by 62% to 38%, was brought into effect. She said she would “take all possible steps and explore all options to give effect to how people in Scotland voted. In other words, to secure our continuing place in the EU and in the single market in particular.” Sturgeon is writing this weekend to all EU member states to set out her case for Scotland remaining in the UK and to press for urgent talks in Brussels with the European commission president, Jean-Claude Junker, during which she will emphasise Scotland’s strong pro-European vote”.

It ends “Sturgeon was careful to avoid giving any guarantee, however, that a second referendum would be held, stressing that the challenges of leaving the UK were complex and still unclear because the UK-EU negotiations had not yet begun. The SNP would face significant economic, legal and political questions about leaving the UK. With the collapse in oil prices but high levels of public spending, it has a structural deficit of £15bn, and a weak economy hovering close to recession. It would need to strike a deal with London about paying off its share of the UK’s £1.6tn debt. It would also face losing Scotland’s share of the UK rebate, having to find the cash needed for Scotland’s contribution to the EU, and require the EU’s agreement on its currency. EU members may expect Scotland to join the euro”.

 

Saudi’s Vision 2030

23/06/2016

A piece argues that the recent reforms will cause problems for the Saudi kingdom, “Saudi royal family has gambled its prestige on a bold economic reform plan, meant to revive an economy battered by sharply lower oil revenues. But the prescriptions of “Saudi Vision 2030” are fraught with risk, not least because it threatens to dissolve the social contract that binds the House of Saud to the Saudi people. Vision 2030, formally ratified this week by the Saudi cabinet as the National Transformation Program, provides a blueprint for a kingdom that offers less charity and more austerity. It calls for Saudi Arabia to reduce its dependence on the energy sector, privatise state-owned enterprises, and cut state largesse. The long-term objective is to prepare Saudi society for life in the twilight of the oil age. “We have an addiction to oil,” admitted Deputy Crown Prince Mohammed bin Salman, who leads the pro-reform camp within the ruling House of Saud. “This is dangerous. It has delayed the development of other sectors.” He hopes that, within two decades, the world’s greatest petro-state will derive most of its revenues from global investments and a diverse range of industries rather than energy”.

The report notes “The initiative amounts to future shock for a conservative society. Specific targets include tripling non-oil revenue by 2020, to roughly $141 billion, and the creation of 450,000 jobs outside the government sector. In a country where two-thirds of workers are on the state payroll, public sector wages will be reduced to 40 percent of the budget, down from the current level of 45 percent, over the same time frame. To finance these changes, public debt is expected to substantially rise by $200 billion over the next five years. No explanation was offered as to how any of these targets could be realistically achieved within their timeframe. Saudi Arabia is adopting Vision 2030 for the very simple reason that its current economic model is unsustainable. In the two years since oil prices tanked, wreaking havoc on the economies of major energy exporters, the kingdom finds itself trapped by the rising waters of a liquidity crisis. Last year, the country’s gross domestic product shrank 13 percent and net foreign assets plunged $115 billion as the government burned through cash to plug a $100 billion budget deficit. Though oil prices have rebounded to around $50 per barrel, the national budget calls for a break-even price of $66.70 this year — sharply down from last year’s $94.80 and a sign of the urgency to bring spending under control”.

It mentions that “In an effort to stem the hemorrhaging, the Saudi government in March signaled its willingness to take out billions in bank loans. Even so, the IMF issued a dire prediction of national bankruptcy in four years if current patterns of spending continued. Saudi Arabia’s fiscal woes date back to its ill-fated decision in the fall of 2014 to pump surplus crude into a buyer’s market. Though oil prices were set to tumble anyway — the market was oversupplied and consumer demand had slowed — Saudi intervention accelerated and intensified the collapse, driving prices down to levels not seen since the early years of the century. The Saudis insisted their action was motivated by the need to defend market share, but never hid their glee that lower prices would hurt the economies of geopolitical foes Iran and Russia (not to mention production rivals, especially the United States). But prices tumbled much lower and for far longer than they predicted, blowing a hole in state finances”.

Interestingly it notes “The situation was made worse by the fact that Saudi coffers had already been drained by a raft of new social and defence expenditures. Three years earlier, fearing the spread of the Arab Spring revolts against authoritarian rule, the Saudi royal family had announced lavish new subsidies and welfare programs estimated to cost $130 billion. The U.S. decision to not rescue traditional allies, like Egyptian President Hosni Mubarak, prompted Riyadh to launch a conservative counter-revolution — pouring tens of billions of dollars in aid and arms to allies threatened by social, political, and religious unrest. The kingdom committed billions more to defence expenditures meant to counter its archrival, Iran. This year, Saudi Arabia replaced Russia as the world’s third-biggest military spender, with $56 billion allocated to equip its armed forces”.

It continues “Saudi Arabia’s spending binge coincided with the emergence of the ailing King Salman’s young son, Deputy Crown Prince Mohammed, as the pre-eminent voice dictating policy in the kingdom. In less than a year, and to the obvious distaste of older members of the royal house, the ambitious, voluble 30-year-old prince has pushed for changes on issues ranging from the economy and defence to women’s rights and political reform. Germany’s intelligence service warned in a leaked report of the “latent risk that in seeking to establish himself in the line of succession in his father’s lifetime, [Mohammed] may overreach.” Some say he already has. In addition to his role as second in line to the throne and chief of the royal court, Prince Mohammed’s decisive interventions in military and economic affairs have earned him the moniker “the prince of war and oil.” With no apparent experience in military affairs, foreign policy, or strategy, his decision to take over the defence portfolio placed his family’s prestige and reputation squarely on the outcome of two open-ended wars in Syria and Yemen. It was a remarkable gamble: He did this knowing that the kingdom ranked well down the global pecking order in terms of military effectiveness”.

The piece concludes “But it’s in the economic realm where Prince Mohammed’s influence has been felt most acutely. With a bachelor’s degree in law under his belt, the prince decided that he should not only lead the effort to restore short-term fiscal solvency but embark on the monumental task of transforming Saudi Arabia from a rentier state to an industrialized economy freed from the constraints of the commodity markets. And his goal couldn’t be more ambitious: Saudi Arabia, he predicted, will be weaned off oil revenues within a generation. The Saudi template for reform titled “Vision 2030” mirrors an earlier reportthat appeared in December on the website of McKinsey & Co., a global consulting company that provides neoliberal solutions for real-world problems. Salman has admitted that the Saudi government works closely with the company. Saudi critics — and there are many — sneer that the Planning Ministry should be renamed the “McKinsey Ministry.” In recent years, McKinsey has cultivated a generation of young Arab princelings enamored with Western-style economic reforms, and with thoroughly mixed results. As one of the company’s more trenchant critics recently pointed out, “Many of the countries who drank the McKinsey Kool-Aid became epicenters of the Arab Spring. Bahrain, Egypt, Libya, Yemen — each was convulsed by demonstrations, often animated by economic grievances.” McKinsey’s approach to reforming foreign governments is dangerously flawed. The company’s school-lunch approach to economic reform — one size fits all, regardless of appetite and culture — makes no effort to consider each country’s unique history or social background. It also fails to consider whether the recipient’s political structures are robust enough to withstand the unrest that often emanates from job losses, privatization of state-owned enterprises and social services, subsidy cuts, and increases in the cost of living”.

It ends “In an interview with the Economist, Salman declared himself an admirer of former British Prime Minister Margaret Thatcher. But unlike Britain in the 1980s, Saudi Arabia today has no free press, no elected parliament, and no right to assembly. It lacks flexible political structures that might absorb and channel explosive social energies away from the center. Was the prince aware that even with these systems in place, his idol was eventually deposed? He did not say. Nor did the prince offer a convincing answer when asked if the Saudi people would continue to accept taxation without representation. “This is not a decision from the government against the people,” he insisted. “This is the decision of Saudi Arabia. With the government that represents the people.” Boiled down to its essence, that amounts to the classic autocrat’s response:L’état, c’est moi.”

OPEC rejects production ceiling

11/06/2016

OPEC will stick to its policy of unfettered production after members rejected a proposal to adopt a new output ceiling, but ministers were united in their optimism that global oil markets are improving. While crude prices dipped briefly after Thursday’s meeting, there was little of the rancor that punctuated last December’s gathering. The more harmonious atmosphere meant the group was able to appoint a new secretary-general — Nigeria’s Mohammed Barkindo — something it hadn’t been able to agree on since 2012.  “The atmosphere in today’s meeting was calm without any tensions,” Iranian Oil Minister Bijan Zanganeh, whose disagreements with his Saudi counterpart had unsettled previous meetings. There is “very good unity” among members, he said. The change of mood reflects two developments: a Saudi Arabian oil minister determined to make his first meeting a success and, more importantly, the 80 percent rally in oil prices since January that’s made ministers confident OPEC’s two-year old strategy of trying to win market share from higher-cost producers is working”.

“Iran is close to regaining normal oil export volumes”

07/06/2016

OPEC’s thorniest dilemma of the past year – at least from a purely oil standpoint – is about to disappear. Less than six months after the lifting of Western sanctions, Iran is close to regaining normal oil export volumes, adding extra barrels to the market in an unexpectedly smooth way and helped by supply disruptions from Canada to Nigeria. But the development will do little to repair dialogue, let alone help clinch a production deal, when OPEC meets next week amid rising political tensions between arch-rivals Iran and oil superpower Saudi Arabia, OPEC sources and delegates say. Earlier this year, Tehran refused to join an initiative to boost prices by freezing output but signaled it would be part of a future effort once its production had recovered sufficiently. OPEC has no supply limit, having at its last meeting in December scrapped its production target”.

Saudi Arabia and America divorce

03/06/2016

Simon Henderson writes that about the long divorce between Saudi Arabia and America, “The initial defining moment of President Barack Obama’s attitude toward Saudi Arabia, for many people, was when he bowed to King Abdullah as he shook his hand at the London G-20 summit meeting in April 2009. The gesture, which the White House vehemently denied was a bow at all, was variously interpreted as the new president groveling toward an important ally, or an early sign of Obama’s capacity to charm. The Saudis themselves probably weren’t fooled. They would have known of Obama’s 2002 speech in Chicago, just over a year after the terror attacks of 9/11. That speech is most famous for Obama’s opposition to President George W. Bush’s planned invasion of Iraq, which he referred to as a “dumb war.” But the then-state senator also had a pointed message about the two countries that formed the pillars of U.S. influence in the Middle East. “You want a fight, President Bush?” Obama asked. “Let’s fight to make sure our so-called allies in the Middle East – the Saudis and the Egyptians – stop oppressing their own people, and suppressing dissent, and tolerating corruption and inequality.” So much has changed in the world since that awkward bow in 2009, never mind since 2002, and the nature of the U.S.-Saudi relationship has changed along with it”.

Henderson writes that “As the eight years of George W. Bush came to an end, the oil price was less than $50 per barrel, and would climb to well over $100 in 2014. Few people had heard of shale oil — mention of the possibility of U.S. energy independence, which the oil could soon make possible, would have been met with derisive laughter. In the Middle East, Egyptian President Hosni Mubarak was very much in power, as was Syria’s Bashar al-Assad. It would be two more years before uprisings would seize those countries, and Washington’s response in both cases would dismay Saudi officials. Obama will meet King Salman in Riyadh on April 20, during what will likely be his final trip to Saudi Arabia during his presidency. Such meetings between national leaders are usually used for discussions about common interests rather than detailed agendas. The common question is: Are the allies on the same metaphorical page? But with the United States and Saudi Arabia today, it will be more interesting to see whether they can plausibly suggest they are still reading from the same book”.

Henderson makes the point that “Although the upcoming visit is being touted as an effort in alliance-building, it will just as likely highlight how far Washington and Riyadh have drifted apart in the past eight years. For Obama, the key issue in the Middle East is the fight against the Islamic State: He wants to be able to continue to operate with the cover of a broad Islamic coalition, of which Saudi Arabia is a prominent member. For the House of Saud, the issue is Iran. For them, last year’s nuclear deal does not block Iran’s nascent nuclear status – instead, it confirms it. Worse than that, Washington sees Iran as a potential ally in the fight against the Islamic State”.

Despite the possible pitfalls, both sides will have assembled lists of “asks” for the visit. These will probably be expressed in side meetings, given the king’s increasing delegation of his powers to Crown Prince Muhammad bin Nayef, known as MbN, and particularly his son, Deputy Crown Prince Muhammad bin Salman, aka MbS. Besides the Islamic State and Iran, the topics are likely to include Yemen, where the kingdom is increasingly bogged down, though there is hope for peace talks. The crucial interlocutor will be MbS, the 30-year-old who is increasingly expected to become king sooner rather than later – though the notional succession currently in place would first hand the crown to his cousin, MbN. MbS is known for touting his vision of a modernized Saudi Arabia with an economy that has moved beyond oil. Obama’s attitude toward Saudi Arabia does not seem to have changed since his 2002 speech, and his comments about the kingdom’s rulers will be an elephant in the room during these talks. The president’s criticism of America’s “so-called allies” is a recurring theme in Jeffrey Goldberg’s cover story for the Atlantic, “The Obama Doctrine.” The 19,000-word article begins with Obama’s retreat from his “red line” after Bashar al-Assad’s forces used sarin gas against civilians in 2013 – an event that shocked U.S. allies in the Middle East and forced them to reconsider what U.S. security guarantees actually meant, but which the president described as a decision that made him “very proud.””

Correctly Henderson makes the point that “Why Obama decided to give the interview now — rather than, say, in April 2017 — is a mystery to many, who see it as damaging his diplomatic credibility. The profile will cast a dark cloud over Obama’s meetings in Riyadh and make the platitudes of his public statements less convincing. Counterterrorism cooperation, for instance, will be a key element in the talks – but in the Atlantic, Obama questioned “the role of America’s Sunni Arab allies play in fomenting anti-American terrorism,” Goldberg wrote, and “is clearly irritated that foreign-policy orthodoxy compels him to treat Saudi Arabia as an ally.” When Malcolm Turnbull, the new Australian prime minister, last year asked Obama, “Aren’t the Saudis your friends?” Goldberg writes: “Obama smiled. ‘It’s complicated,’ he said.” Obama’s scepticism appears to have permeated his entire administration. It’s gotten to the point where Saudi officials fear that the administration prefers their rivals in Tehran to their longstanding ally”.

Crucially Henderson argues that “Obama simply doesn’t seem to share the view of many Middle East leaders that the Islamic Republic of Iran wants to diminish U.S. influence and change the balance of power in the region. Saudi leaders increasingly fear the president has no interest in constraining Iran’s regional ambitions. The single line that probably generated the most apoplexy in Riyadh when the Atlantic profile was published was when the president implored Iran and its rivals “to find an effective way to share the neighborhood and institute some sort of cold peace.” Saudi Arabia has no interest in sharing the Arab world with its archrival. It sees Iran as challenging its leadership of the Islamic world and undermining its standing in the Arab world. Given Iran’s nuclear agreement and its revival in oil production, Riyadh’s status as a leader of the energy world is also threatened — even if it will be years, if ever, that Iran can rival its standing as the world’s largest oil exporter”.

Crucially Henderson again proves his expertise noting, “These fundamentally different perspectives on the Middle East may be the cause of the tensions between Riyadh and Washington, but Obama and King Salman will face other problems when they come face-to-face this week. Meetings with the 80-year-old Saudi monarch are carefully choreographed to obscure, at least to the public gaze, Salman’s increasing infirmity. Obama has already encountered this. When he came to Riyadh early last year to offer condolences on the death of King Abdullah, he had a conversation with Salman during which the king simply walked away without warning. Aides attempted to excuse him, saying he needed to break for prayers. Last September, when King Salman visited the Oval Office, he brought his favourite son, Muhammad bin Salman, to do the talking. For most meetings, King Salman has a computer screen, often obscured by flowers, in front of him, serving as a teleprompter. With a recent U.S. delegation, the royal court devised another stratagem – the king spent the meeting looking beyond the group at a widescreen television suspended from the ceiling. An aide off to one side furiously hammered talking points into a keyboard”.

The piece ends “the starkness of the president’s criticisms in the Atlantic probably make rapprochement to the former levels of diplomatic and economic intimacy between the United States and Saudi Arabia impossible, in any case. The president certainly doesn’t intend to travel to Riyadh to sign the death certificate of the relationship. Nevertheless, the Obama administration may have ushered in a new era in ties between Washington and Riyadh – one more distant and marred by suspicion than in years past. One way or another, it will be a historic trip”.

“King Salman has removed the country’s veteran oil minister”

28/05/2016

Saudi Arabia’s King Salman has removed the country’s veteran oil minister as part of a broad government overhaul. Ali al-Naimi has been replaced after more than 20 years in the role by former health minister Khaled al-Falih. Saudi Arabia, the world’s largest crude exporter, unveiled major economic reforms in April, aimed at ending the country’s dependence on oil. About 70% of its revenues came from oil last year, but it has been hit hard by falling prices. The government shake-up, announced in a royal decree, sees a number of ministries merged and others, such as the ministry of electricity and water, scrapped altogether. A public body for entertainment is being created, and another for culture.

“Aramco is finalising proposals for its partial privatisation”

24/05/2016

Saudi Arabia’s state-owned oil giant Aramco is finalising proposals for its partial privatisation and will present them to its Supreme Council soon, its chief executive said about the centerpiece of the kingdom’s efforts to overhaul its economy. The company has a huge team working on the options for the initial public offering (IPO) of less than 5 percent of its value, which include a single domestic listing and a dual listing with a foreign market, CEO Amin Nasser said on Tuesday. They will be presented “soon” to Aramco’s Supreme Council, headed by Deputy Crown Prince Mohammed bin Salman, who is leading an economic reform drive to address falling oil revenue and sharp fiscal deficits by boosting the private sector, ending government waste and diversifying the economy. Nasser stressed that even after the listing, the Saudi government would retain sole control over Aramco’s oil and gas output levels. “Production is sovereign,” he said. Riyadh has traditionally kept an expensive “spare cushion” of excess production capacity, allowing it to raise or reduce levels to influence prices according to the government’s market strategy. Private oil companies, by contrast, do not hold back output for strategic gain”.

“It’s more a fight for fish than for oil”

22/05/2016

The simmering maritime disputes and land grabs in the South China Sea have long been seen as a battle over its potentially vast undersea deposits of oil and natural gas. That’s not quite true: There is a sometimes violent scramble for resources in the region, but it’s more a fight for fish than for oil. The latest evidence came Tuesday, when Indonesia blew up 23 fishing boats from Vietnam and Malaysia that it said were poaching in Indonesian waters. It wasn’t the first time Indonesia’s flamboyant, chain-smoking fisheries minister, Susi Pudjiastuti, has literally dynamited her way to international headlines: The country demolished 27 fishing boats in February and has scuttled more than 170 in the last two years. But the move is significant all the same, because it underscores how central fishing is to the simmering territorial disputes that are turning the South China Sea into a potential global flash point — and how far countries are willing to go to defend their turf, or at least what they claim is theirs.

Mohammed bin Salman, remaking Saudi Arabia?

04/05/2016

A report from Foreign Policy notes that “Saudi Arabia on Monday unveiled a sweeping plan to diversify its economy and wean its excessive reliance on crude oil exports by 2030, a blueprint that represents the most ambitious effort yet to drag Riyadh and its ruling class into modernity. “The kingdom can live in 2020 without any dependence on oil,” Saudi Deputy Crown Prince Mohammed bin Salman told Al-Arabiya News Channel in an extensive interview Monday. “The Saudi addiction to oil has disturbed [the] development of many sectors in past years.” Prince Mohammed, a 30-year-old who has rapidly consolidated power in the kingdom nominally ruled by his father, oversees both Saudi economic affairs and defense policy and has aggressively sought to overhaul the oil-dependent and secretive state”.

The report goes on to mention, “Among the reforms he announced Monday are continued reduction in state subsidies for oil, electricity, and water, a hugely expensive drain on public coffers but long considered the birthright of Saudi citizens; raising more revenue from taxes; and opening up the country to more expatriates and tourists, a tough sell given stringent religious restrictions banning alcohol and sharply limiting the jobs and public roles available to women. The Saudi government on Monday laid out in extensive detail its plans for economic and financial rejuvenation, calling them “an ambitious yet achievable blueprint.” The Saudi government on Monday laid out in extensive detail its plans for economic and financial rejuvenation, calling them “an ambitious yet achievable blueprint.” The centerpiece of Saudi Arabia’s economic transformation is the planned public listing of Saudi Aramco, the world’s biggest oil company. Prince Mohammed said that the state would list less than 5 percent of the oil giant and that revenues from the sale would help feather Riyadh’s planned $2 trillion sovereign wealth fund. He said the oil company could be valued as high as $2 trillion — though many industry experts believe Aramco will fetch a lower price — and said, in the official launch of the programme”.

The piece goes on to mention, “The plan comes at a delicate moment for Riyadh, which has seen its relationship with U.S. President Barack Obama’s administration steadily deteriorate amid deep Saudi concern that Washington is moving closer to Tehran at its expense. The kingdom is also being forced to revisit its connection to the 9/11 terrorist attacks, with U.S. lawmakers in Congress from both parties pressing the administration to release a long-classified portion of the 9/11 inquiry that could highlight greater Saudi participation in the attacks. Closer to home, meanwhile, the Saudi military is locked in a grinding conflict in Yemen that has resulted in significant civilian casualties without accomplishing its stated goal of dislodging the Iranian-backed Houthi regime now controlling most of the country. Prince Mohammed launched and has overseen that campaign, leading some observers to worry that the world’s youngest defense minister may have bitten off more than he can chew”.

It adds “Saudi Arabia has mulled plans to diversify its economy away from excessive reliance on oil for a quarter-century, though crude sales remain the lifeblood of the regime. But cheaper oil puts more pressure on Saudi authorities to make changes. Thanks to a glut of supply — due to continued production by Saudi Arabia, among other countries — oil prices today hover around $35 a barrel. That has cost oil-exporting nations in the region about $390 billion in the past year, the International Monetary Fund said, and helped knock a $120 billion hole in the Saudi budget. “Oil around $30 is a blessing for the kingdom, because it forces them to move from being a rentier state to a regular state,” said Jean-François Seznec of the Atlantic Council’s Global Energy Center, who has writtenextensively on the looming Saudi economic transformation. Even the public listing of Aramco, which will mean opening up its books to public scrutiny, is part and parcel of modernizing Saudi Arabia’s opaque ruling culture, which is still haunted by the specter of Arab Spring-style protests of the sort that brought down governments in Tunisia, Egypt, and Libya and sparked a five-year civil war in Syria”.

The report  notes “Some of the main drivers of the economic overhaul — such as a dysfunctional labour market, unskilled workers, and high unemployment — are also among the biggest obstacles to transformation. Saudi nationals make up less than 10 percent of the private sector workforce and less than half the workforce overall; foreign labour dominates many sectors, especially construction. Labour participation is especially low for women in Saudi Arabia, for religious and cultural reasons: Only about 20 percent of Saudi women work, roughly the same level as in Afghanistan or Pakistan. Those cultural and religious barriers — including prohibitions on alcohol and a strict crackdown on what clerics view as deviant behaviour — are some of the obstacles to Prince Mohammed’s planned opening, making it unlikely that Saudi Arabia will become the next Dubai, a glittering trading entrepôt open to expats and tourists alike. And the financial and banking systems are only now opening up to foreign investors. The Saudi stock exchange, where Aramco will be listed, only just allowed direct market access to foreign investors last summer. The retail sector is still largely closed off”.

The writer adds “there are some reasons for optimism. Saudi Arabia’s oil wealth birthed a vibrant petrochemicals industry, led by Saudi Basic Industries Corp., one of the sector’s global leaders. The country has plenty of potential in mining and has cheap and abundant reserves of bauxite used in aluminum production. It’s also strong in phosphates and fertilizers. The plan also calls for Saudi Arabia, the world’s third-biggest buyer of arms, to domestically manufacture half of its defense needs by 2030, potentially giving it both an industrial boost and geopolitical insurance for future defense procurement needs in an increasingly tense neighbourhood. Consultants at McKinsey & Co. have advised the Saudi government on its economic transformation. And the McKinsey Global Institute, which published a study last year on the Saudi economy, listed eight key sectors — including metals and mining, petrochemicals, manufacturing, and tourism — as vital to doubling Saudi GDP by 2030. Not coincidentally, most feature in the formal plan, and Prince Mohammed explicitly talked up the prospects of many of those sectors in Monday’s Al-Arabiya interview”.

 

“Saudi Arabia hates Iran even more than it hates losing money”

21/04/2016

A report notes the plan of Saudi Arabia to punish Iran by not agreeing a freeze in oil production, “OPEC’s failure over the weekend to reach a deal to freeze oil production at current levels, and thus nudge oil prices back up, shows that Saudi Arabia hates Iran even more than it hates losing money. That will make it harder for OPEC to take any meaningful steps to soak up the glut of oil that is keeping prices low and straining state coffers. Riyadh, the largest producer inside OPEC, and other big oil producers had spent months talking up the weekend meeting in Doha, Qatar. But the Saudis made clear they couldn’t sign on to any production freeze that didn’t include Iran. And Tehran didn’t even bother to send its oil minister to the freeze meeting, since Iran is busy throwing off years of sanctions and fighting to regain its share of the global oil market — and has no interest in nipping its nascent recovery in the bud. As a result, initial expectations for a deal in Doha evaporated by late Sunday — even though that will mean more financial pain in the short term as oil prices go back down. Crude oil fell in New York and London on Monday and would likely have fallen more but for a strike by Kuwaiti oil workers that knocked out half that country’s oil production”.

The article adds “The rivalry has only grown since the West and Iran reached a deal last year to halt progress on Tehran’s nuclear weapons program. That deal will enable Iran to access tens of billions of dollars in frozen assets, as well as return to the oil market as a major producer and exporter. Saudi Arabia fears Iran will parlay those increased resources into greater regional influence. Riyadh and Tehran are currently fighting proxy battles in Syria, Iraq, Lebanon, and Yemen. Relations between the two oil-producing titans took a turn for the worseearlier this year, after Saudi Arabia executed what it called a dissident Shiite cleric, sparking an angry response in Iran and the suspension of diplomatic relations. And that bad blood continued into last weekend’s Doha summit. The big oil producers, including OPEC heavyweights like Saudi Arabia and Iraq, as well as producers outside the cartel, namely Russia, had reached a preliminary deal to maintain oil output at present high levels but not to keep adding even more oil to an already glutted market. Iran would love other big producers to freeze production — but refuses to hamstring its own oil output, which is just now returning to pre-sanctions levels”.

Johnson adds that “And with Iran unwilling to help shoulder the burden, the Saudis reportedly torpedoed the whole conference, showing they are willing to countenance continued financial pain rather than do anything that could benefit Tehran. Saudi Arabia does have the deepest pockets in OPEC and still has cash reserves of $582 billion to help it weather a prolonged period of lower prices. But even so, Saudi Arabia’s finances have been badly dented by the fall in oil prices: Saudi currency reserves stood at about $730 billion just two years ago. That’s a reflection of lower income from oil exports and rising expenditures elsewhere, including a nearly 20 percent increase in the Saudi defense budget every year since the Arab Spring ignited in 2011. And while the country is taking big steps to try and save cash — including cutting subsidies and government salaries and selling off huge state assets like Saudi Aramco — Riyadh’s decision to punish Iran by keeping oil prices low could boomerang and undermine its own regional strategy”.

China’s special envoy for Syria

17/04/2016

China on Tuesday appointed its first special envoy for the Syrian crisis, a career diplomat who has served as ambassador to Iran, as it seeks a more active role in the Middle East. While relying on the region for oil supplies, China tends to leave Middle Eastern diplomacy to the other permanent members of the U.N. Security Council, namely the United States, Britain, France and Russia. But China has been trying to get more involved, including recently hosting both Syria’s foreign minister and opposition figures, though at different times”.

“Creating the world’s largest sovereign wealth fund”

13/04/2016

Saudi Arabia is getting ready for the twilight of the oil age by creating the world’s largest sovereign wealth fund for the kingdom’s most prized assets. Over a five-hour conversation, Deputy Crown Prince Mohammed bin Salman laid out his vision for the Public Investment Fund, which will eventually control more than $2 trillion and help wean the kingdom off oil. As part of that strategy, the prince said Saudi will sell shares in Aramco’s parent company and transform the oil giant into an industrial conglomerate. The initial public offering could happen as soon as next year, with the country currently planning to sell less than 5 percent. “IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil,” the prince said in an interview at the royal compound in Riyadh that ended at 4 a.m. on Thursday. “What is left now is to diversify investments. So within 20 years, we will be an economy or state that doesn’t depend mainly on oil.” Almost eight decades since the first Saudi oil was discovered, King Salman’s 30-year-old son is aiming to transform the world’s biggest crude exporter into an economy fit for the next era. As his strategy takes shape, the speed of change may shock a conservative society accustomed to decades of government handouts”.

“Gradual weakening — and possible implosion — of Africa’s petrostates”

09/04/2016

Keith Johnson writes that the African petrostates are “imploding”.

He starts, “Africa’s petrostates are crashing hard. A cool $115 in the summer of 2014, a barrel of Brent crude, the international pricing benchmark, now fetches below $40. And having failed to build massive foreign exchange reserves like Saudi Arabia or other Gulf monarchies, African oil exporters are now being forced to grapple with depreciating national currencies, mounting inflation, and deep cuts in government spending. Some of these states are now dangerously unstable, staring down popular unrest or domestic insurgencies that left unaddressed could set them back years, if not decades, in development terms. The “Africa rising” narrative, built on climbing income levels and an emerging middle class on the continent, is now under strain”.

Johnson argues that “instead of across-the-board decline, Africa is witnessing a gradual shift in the continental balance of economic power — away from petrostates like Nigeria and Angola and toward less flashy but more diversified economies like Ethiopia and Tanzania. After decades of lavishing attention on the oil-powered economies of West Africa, investors are now flocking to the economies of East Africa, which have demonstrated their resilience to lower commodity prices and challenged outdated perceptions of Africa as resource-dependent and burdened by irredeemably poor governance. The origins of Africa’s tectonic shift were remote — the shale boom in the United States, a refusal of Saudi Arabia and OPEC countries to cut production, and the economic slowdown in China — but its effects have been profound”.

Johnson goes on to make the point that “Less than two years after it claimed the title of Africa’s largest economy, Nigeria is in an economic tailspin. The euphoria that swept the country after its first-ever democratic transfer of power last year has quickly given way to worries about the plummeting price of oil, which accounts for 70 percent of government revenue. The new president, Muhammadu Buhari, has been forced to slash spending and seek $3.5 billion in emergency loans from the World Bank and African Development Bank. Economic growth in 2015 dropped to 3 percent — half the level of the previous year — and foreign exchange reserves are quickly running out. Even the president’s much-heralded efforts to weed out corruption are coming up short — in part because there’s no money to fund them, according to Nigeria’s Presidential Advisory Committee on Anti-Corruption”.

He adds that a consequence of this Nigerian collapse is that it could harm its security, “Not only do fewer petrodollars make Buhari’s pledge to wipe out Boko Haram seem even more far-fetched, future belt-tightening could reinvigorate an old insurgency in the restive Niger Delta region”.

He moves onto Angola that “has also felt the sting of plummeting oil prices. No other petrostate in Africa — perhaps not in the world — benefitted from the dramatic surge in oil prices over the past decade as much as Angola. Emerging from a devastating civil war in 2002, the West African nation watched the price of crude rise more than three-fold at the same time as its production doubled to nearly 2 million barrels per day. Between 2002 and 2014, the country generated a staggering $468 billionfrom its oil industry. But the petrodollars were squandered. Pervasive corruption within the ruling party and a construction boom in the capital, Luanda, that ignored the rest of the country did little to develop other sectors of the economy or reduce Angola’s dangerous dependence on oil. When the bottom fell out of the oil market last year, the government was forced to slash its budget by 25 percent”.

He points out that “Other major oil producers in Africa, like Equatorial Guinea, Gabon, Sudan, and South Sudan, though never regional juggernauts, are now in similarly precarious situations. But their slumping economies have opened up space for a new group of more balanced emerging economies, including Ethiopia and Tanzania, to emerge as leaders on the continent. Ethiopia is Africa’s second-most populous country after Nigeria. An oil importer, Ethiopia grew at an astonishing rate of nearly 11 percent annually between 2004 and 2014, according to government figures. Technological advancements in its agriculture industry in particular spurred development, helping decrease the number of people living in poverty by 33 percent over the past decade. (By contrast, even with tens of billions of petrodollars pouring into its coffers, Nigeria actually experienced a rise in poverty over the same period.) Taking its cue from China, Ethiopia made significant investments in infrastructure and created special industrial zones to attract foreign investment as rising wage and production costs push low-skilled manufacturing out of Asia”.

He notes that “But authoritarianism is not the only political model in Africa producing positive economic results. Tanzania is another non-oil-driven African economy on the rise. Newly elected Tanzanian President John Magufuli, unlike his counterpart in Angola, José Eduardo dos Santos, commands widespread popularity as a result of his anticorruption drive and thrifty thinking on government spending. (He slashed the salaries of high-level civil servants.) His predecessor, Jakaya Kikwete, oversaw a gradual reduction in poverty during the last decade, accompanied by steady economic growth. Although Tanzania is partially reliant on exports of gold, it is budding construction, communication, and finance sectors that have driven its roughly 7 percent annual GDP growth over the past three years, a pace that is predicted to continue”.

He ends “As growth in Africa’s petrostates fades, the persistent gains in the more robust economies of East Africa will increasingly attract the attention of multinational corporations and international investors in search of new opportunities. Overall, foreign direct investment in Africa fell by a third in 2015, but it continues to surge into sectors like telecommunications and financial services — and it is East Africa’s more diversified economies that are better positioned to cash in on rising private equity investment in these sectors”.

He concludes “None of this discounts the fact that some sectors in Africa’s petrostates, like the entertainment industry in Nigeria, offer pockets of growth. But it will be East Africa that leads the way. Countries like Ethiopia, Kenya, and Rwanda have transformed into regional powerbrokers and are increasingly becoming key international partners for the United States, the European Union, and China. If oil prices stay where they are, the gradual weakening — and possible implosion — of Africa’s petrostates will shift the center of economic power on the continent from west to east, redefining international perceptions of Africa’s potential and reinvigorating hope for its future in the process”.

“Russia may be on the verge of deep instability, possibly even collapse”

05/04/2016

An article from Foreign Affairs argues that Putin’s regime is going to collapse, “Russian President Vladimir Putin used to seem invincible. Today, he and his regime look enervated, confused, and desperate. Increasingly, both Russian and Western commentators suggest that Russia may be on the verge of deep instability, possibly even collapse. This perceptual shift is unsurprising. Last year, Russia was basking in the glow of its annexation of Crimea and aggression in the Donbas. The economy, although stagnant, seemed stable. Putin was running circles around Western policymakers and domestic critics. His popularity was sky-high. Now it is only his popularity that remains; everything else has turned for the worse. Crimea and the Donbas are economic hellholes and huge drains on Russian resources. The war with Ukraine has stalemated. Energy prices are collapsing, and the Russian economy is in recession. Putin’s punitive economic measures against Ukraine, Turkey, and the West have only harmed the Russian economy further. Meanwhile, the country’s intervention in Syria is poised to become a quagmire. Things are probably  much worse for Russia than this cursory survey of negative trends suggests. The country is weathering three crises brought about by Putin’s rule—and Russia’s foreign-policy misadventures in Ukraine and Syria are only exacerbating them”.

Correctly he writes that “First, the Russian economy is in free fall. That oil and gas prices are unlikely to rise much anytime soon is bad enough. Far worse, Russia’s energy-dependent economy is unreformed, uncompetitive, and un-modernized and will remain so as long as it serves as a wealth-producing machine for Russia’s political elite. Second, Putin’s political system is disintegrating. His brand of authoritarian centralization was supposed to create a strong “power vertical” that would bring order to the administrative apparatus, rid it of corruption, and subordinate regional Russian and non-Russian elites to Moscow’s will. Instead, over-centralization has produced the opposite effect, fragmenting the bureaucracy, encouraging bureaucrats to pursue their own interests, and enabling regional elites to become increasingly insubordinate—with Ramzan Kadyrov, Putin’s strongman in Chechnya, being the prime example. Third, Putin himself, as the linchpin of the Russian system, has clearly passed his prime. Since his catastrophic decision to prevent Ukraine from signing an Association Agreement with the European Union in 2013, he has committed strategic blunder after strategic blunder. His formerly attractive macho image is wearing thin, and his recent attempts to promote his cult of personality by publishing a book of his quotes and a Putin calendar look laughable and desperate”.

The writer goes on, “The problem for Putin—and for Russia—is that the political–economic system is resistant to change. Such a dysfunctional economy is sustainable only if it is controlled by a self-serving bureaucratic caste that places its own interests above those of the country. In turn, a deeply corrupt authoritarian system needs to have a dictator at its core, one who coordinates and balances elite interests and appetites. Putin’s innovation is to have transformed himself into a cult-like figure whose legitimacy depends on his seemingly boundless youth and vigour. Such leaders, though, eventually become victims of their own personality cult and, like Stalin, Hitler, Mao, and Mussolini, do not leave office voluntarily. Russia is thus trapped between the Scylla of systemic decay and the Charybdis of systemic stasis. Under such conditions, Putin will draw increasingly on Russian chauvinism, imperialism, and ethnocentrism for legitimacy. Since none of this mess will be resolved anytime soon, Russia appears poised to enter a prolonged “time of troubles” that could range from social unrest to regime change to state collapse. It might be foolhardy to predict Russia’s future, but it is clear that the longer Putin stays in power, the worse things will be for the country. Putin, who claimed to be saving Russia, has become its worst enemy. For now, the United States, Europe, and Russia’s neighbours must prepare for the worst”.

The key drivers of instability, the author contends are that “Some analysts dismiss the possibility of massive instability in Russia on the grounds that the opposition is weak, its leaders lack charisma, and Putin’s popularity is high. These factors are not as important as they are assumed to be. Most revolutions have come as a result of deep structural crises; few have been made by self-styled revolutionaries. Charismatic leaders emerge in the course of systemic instability as often as they predate it. And country-wide popularity is never as important for a movement or leader as power in the capital city and among key political and economic elites. Imagine that the three crises noted above continue to deepen, as they in all likelihood will. In that case, nearly every sector of Russian society will get closer to rebellion. As inflation and unemployment rise and living standards fall, dissatisfaction will grow among workers and social unrest will increase. Political and economic elites, too, will grow increasingly unhappy as Russia’s three crises deepen. Their status and wealth will increasingly become vulnerable, and their willingness to countenance alternatives to Putin and his system will grow. Urban intellectuals, students, and professionals will likewise rediscover their voices and provide intellectual guidance to the forces of instability”.

He goes on to posit that “With more systemic chaos and elite stasis, patriotically-minded elements within the armed forces (army, militia, and secret police) will search for alternatives to Putin and his ruinous system of rule. And soldiers and mercenaries now fighting in Ukraine and Syria may return home and promote radical views throughout the country. Outside Russia, the Russian Federation’s 21 non-Russian republics will assert their authority. For 18 years, Putin could defuse discontent by the three means all elites use to stay in power. He bought popular support with the windfalls from rising energy prices. He strengthened the forces of coercion and repressed discontent. And, by projecting manliness and vigour and promising to remake Russia in his own image, he created ideological incentives to support him and his regime. Thanks to his mistakes and the system’s decay, however, Putin no longer has the material resources he once possessed and his image has been greatly tarnished. And thanks to Russia’s transformation into a rogue state incapable of defeating Ukraine and increasingly mired in the Middle East, the vision of renewed Russian greatness is losing its appeal. As a result, Putin now relies almost exclusively on the forces of coercion to stay in power and sustain his regime. He thus depends on their willingness to go along with his rule. And Putin, whose regime recently adopted legislation permitting the secret police to shoot protestors, knows it”.

The writer argues that “Relying on the armed forces could be a dangerous bet. For one, they might be unwilling to employ coercion if they face large numbers of protestors drawn from the general population. This is true for all repressive regimes, which tend to emphasise the elite nature of policing and deploy officers far away from their homes. Given Putin’s popularity and the relatively greater difficulty of organizing mass protests in the Russian provinces, the greatest likelihood of such a scenario playing out is in Moscow, which witnessed mass demonstrations in 2011–12″.

He posits that revolutions are impossible to predict but as each year passes there will be a greater chance of one occurring. He notes that the loyalty of Russia’s elites cannot be assumed, “Russian elites know that, like Mikhail Khodorkovsky, the Russian businessman-turned-opposition figure who incurred Putin’s ire and several years imprisonment for fraud, they could be punished for stepping out of line, but they also know that, in times of troubles, the Kremlin needs them as much as, if not more, than they need the Kremlin”.

He adds later, “Elite loyalty depends on Putin’s ability to pay them off. Just as political and economic elites flocked to Putin during the years of plenty, between 1998 and 2013, so too, will they be tempted to abandon him during the coming years of scarcity. Meanwhile, non-Russian elites—and especially those in oil-rich Tatarstan and diamond-rich Yakutia—may be the first to loosen their ties to Moscow, because they may have nationalist ambitions, and are farther from the center and thus less susceptible to threats. Once elites see that they can get away with criticizing the regime, things will reach a tipping point and anti-Putin bandwagoning could take place. Some may even plot against Putin and try to have him forcibly removed or killed”.

He goes on, “The third scenario is that coercion might prove inadequate to quell discontent if the opposition resorts to violence and the armed forces are too weak to respond. Armies that lose wars or experience battlefield humiliation are prone to such weaknesses. The Russian army is currently involved in two wars—in Ukraine and in Syria. Additional incursions, in the Baltic States or in Central Asia, may also be in the offing, as Putin tries to sow disarray within NATO and protect Russia from the Islamic State (also known as ISIS). Despite Russia’s formidable advantages, the Russian war against Ukraine has ended, thus far, in the annexation of two economically destitute regions, Crimea and the eastern Donbas, with little hope of rapid recovery. More important, Moscow’s New Russia project, which aimed at annexing all of Ukraine’s southeast, has failed. In sum, despite several tactical victories, the Russian armed forces have suffered defeat”.

AFTER THE STORM

He turns to a post-Putin Russia, “Russia is on the edge of a perfect storm, as destabilizing forces converge. Under conditions such as these, mass disturbances are highly probable. Revolutions, palace coups, and violence will be increasingly likely. The result could be the collapse of the regime or the break-up of the state. Whatever the scenario, Putin is unlikely to survive. What should the West and Russia’s neighbours do? They cannot stop Putin and they cannot prevent Russia’s disintegration, just as they could not prevent the USSR’s disintegration. The best option is containing the damage that results from mass instability. In particular, they will have to worry about mass refugee flows, the spillover of violence, and the problem of loose nukes. The non-Russian states will be able to deal with the first two issues only by strengthening their own state borders, armies, police forces, and administrative apparatuses. The West must view them (Belarus, Ukraine, and Kazakhstan, in particular) as allies or client states whose stability and security are vital to the stability and security of the West. After that, the West should support a stable pro-Western democracy in what remains of post-Putin Russia. Western policymakers will be tempted to support the Russian armed forces, especially after mass instability breaks out. That would be counterproductive: In a lost cause, supporting the forces of coercion will only prolong the fighting, bloodshed, and instability and thereby increase the likelihood that loose nukes will fall into the wrong hands”.

Using nothing but wishful thinking he concludes “Sooner or later, Russia’s time of troubles will end. After the dust settles, a smaller and weaker Russia and a host of newly independent non-Russian regions-turned-states might make for a more stable world, at least inasmuch as Putin’s Russia, which has become a major threat to world peace, will have disappeared and rump Russia may finally abandon the imperial aspirations that enabled Putin to come to power. Whatever the outcome, the best immediate guarantee of stability and security in the post-Putin, post-Soviet space will be Russia’s current non-Russian neighbours, in particular, Ukraine, Kazakhstan, and Belarus. If they are strong, much of the damage will be contained. If they become weak, the damage will spread to the West. The best time to strengthen them is now—before the deluge”

 

China, killing off coal

01/04/2016

A article argues that China is lessening its use of coal, “Chinese government is halting construction of hundreds of coal-fired power plants across the country, a major move that highlights the sudden and accelerating death throes of the fuel that powered the creation of the modern world. Beijing’s decision to build fewer coal plants than planned is the latest blow to the prospects of coal, which alongside crude oil remains the globe’s most important energy source. In the United States, which after China has the second-largest electricity sector, natural gas use in the power sector will surpass coal this year for the first time ever. In the United Kingdom, where coal launched the Industrial Revolution, Scotland this week shuttered its last coal plant; this month, England sealed off its very last coal mine. Huge coal companies like Peabody and Arch are tottering into bankruptcy, and major international banks are fleeing from coal projects in many countries. What initially began as a series of pinprick setbacks for coal in the aftermath of the global financial crisis, in other words, seems to be turning into a rout”.

The piece adds”Chinese media reported that government officials ordered the halt of more than 250 coal-fired power plants slated for construction in more than a dozen provinces. The measure will scupper planned power plants with a combined capacity of 170 gigawatts — or as much generation capacity as there is in all of Germany. The move is part of China’s ongoing plan to cap the use of dirty energy like coal that has contributed to massive air pollution and, in turn, sparked major protests by a growing Chinese middle class. Late last year, China announced a freeze on opening new coal mines, and is closing thousands of smaller mines. Other environmental concerns — such as the massive consumption of water by coal plants in water-stressed regions such as northern China — also played a role. As did economics: A burst of cleaner energy options in China, including renewable energy such as hydroelectric power, has made coal plants increasingly economically unviable. Many coal plants in the areas targeted by Beijing’s new order operate less than half the time”.

Interestingly he makes the point that “huge gains in energy efficiency mean economies in both the rich world and the developing world are squeezing more growth out of less energy, making investments in huge, centralized power plants something of a black elephant. Even so, coal’s not dead yet. It still accounts for the bulk of Chinese electricity generation, and will probably continue to do so for years, if not decades, to come, because power plants can operate for half a century. Even in Chinese provinces targeted by the new order, hundreds of coal plants will forge ahead, dismaying environmental campaigners. And halting the construction of newer, more efficient coal plants could paradoxically end up leaving older, dirtier coal plants operating for longer, said John Deutch of the Massachusetts Institute of Technology”.

He notes that “coal’s future isn’t limited to China. India is massively expanding its electricity sector. Although India has very ambitious goals for solar power, the bulk of investment is headed for traditional coal-fired plants. Coal may have an even brighter future in Southeast Asia. The International Energy Agency recently forecast coal consumption there to soar by 2040, including the addition of as much coal-fired capacity as China is removing today. Even advanced economies like Japan have turned their backs to coal power — albeit with new, state-of-the-art plants — in the wake of the 2011 Fukushima nuclear meltdown. From the point of view of limiting the greenhouse gas emissions that cause climate change, coal’s dimmer future prospects don’t do much to clean up those smokestacks today. Despite all the advances in clean energy, efficiency, and market shifts in recent years, the world is pumping 10 times more carbon into the atmosphere every year than at the time of one of the worst climate cataclysms in the geologic record, about 66 million years ago”.

“Average Iranians won’t feel change in their daily lives”

24/03/2016

An important article discusses the dangers of too much excitement about the Iranian economy after the recent election victory for the centrists, “I couldn’t help but smile at Kaveh as I climbed into the backseat of an old, white Iranian Peugeot taxi on a warm May evening in 2014. By any measure, my friend should have been stressed: He had spent the last 90 minutes winding his way through Tehran’s congested traffic trying to find me. The Iranian capital’s infamous crush of Peugeots, Kia Prides, and motorbikes is often endearing for a newcomer to the city, but, for any resident, an hour-and-a-half of driving through the smog and congestion of Tehran’s narrow streets is normally a recipe for a nervous breakdown. But when I saw him nearly two years ago, Kaveh wasn’t just calm, he was beaming. “I’m just happy to see you here,” he replied simply as he climbed back into the taxi. Five years had passed since the last time I had seen Kaveh in Iran amid the Green Movement, the storm of protests that engulfed Tehran in the wake of then-President Mahmoud Ahmadinejad’s contested 2009 re-election”.

The report goes on “Like so many Iranians, Kaveh, a consultant in Iran’s private banking and aviation industries, was disheartened by the subsequent crackdown and dispirited by the economic hardship in the years that followed. In that time, the Islamic Revolutionary Guard Corps (IRGC) had deepened its influence over major sectors of Iran’s economy; firms affiliated with the guard, such as its engineering arm Khatam al-Anbiya, were moving in to replace the major international energy companies that were fleeing the country. As Iran became more economically isolated due to sanctions, corruption reached unprecedented levels.

The piece adds “Hassan Rouhani had been president for almost a year, and Iran and the group of six world powers — the United States, France, Britain, China, Russia, and Germany — had inked an interim nuclear agreement in Geneva. For the first time in years, Kaveh no longer felt hopeless about the future of his country. Members of the business community, like him, believed Rouhani had the political grit necessary to fight corruption and bring economic change. The prospects of a nuclear deal had them revitalized, he told me. Kaveh had become a senior executive at a private aviation firm and was especially excited because sanctions for aviation had been relaxed; his company had launched talks with a European firm to buy new airplanes. International delegations were trickling in for business talks, and there was even talk of trade with America, Kaveh said excitedly. Two years later, in 2016, Kaveh’s attitude has again shifted. Although there are glimmers of hope on the horizon of the Iranian economy, he tells me true change will take longer than he once thought”.

The report notes that “Rouhani has tried to inject a sense of hope among a population disappointed by the lack of immediate economic improvement many thought would come with the historic nuclear accord. But the fact is that many Iranians’ expectations for change greatly outpaced the economic reality: The Iran deal finalised last July will allow the country to harness its vast economic potential in the long term, but average Iranians won’t feel change in their daily lives for some time to come”.

It points out that “Iran is trying to grease the wheels of economic progress. In October 2015, the government launched a $7 billion stimulus plan to boost its sluggish economy by providing credit to local manufacturers and low-interest auto loans to lower-income Iranians. A new low-interest credit card with a cap of $3,000 was introduced to help government employees purchase locally made home appliances”.

It mentions that “Rouhani shored up these initiatives in January with widely publicised trips to France and Italy, where he signed roughly $50 billion in prospective business deals, including a roughly $27 billion agreement with Toulouse-based Airbus to boost Iran’s long-ailing aviation sector with the lease or purchase of at least 114 airplanes. Iran’s leading auto manufacturer, Iran Khodro, also sealed a $440 million joint venture with PSA Peugeot Citroën, with plans to turn Iran into a manufacturing hub for the French automaker. Re-entry to Iran by even one international oil major — such as France’s Total, Royal Dutch Shell, or Japan’s Inpex Corp — would have a huge impact on public morale and improve Rouhani’s standing ahead of presidential elections next year. The European Union has lifted its embargo against purchases of Iranian oil, and the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a Belgium-based private financial clearing and communication system used by most international banks, has reconnected with many of Iran’s banks”.

Naturally he notes that “Iranian politics aren’t the only thing holding up massive foreign investment in Iran — American politics are playing a role, too. Game-changing investments can’t materialise until foreign banks feel comfortable facilitating long-term financing and transactions. But for that to happen, Western European banks will need their home governments to get reassurance from the U.S. Treasury Department that they won’t be penalized or cut off from the U.S. banking system for working with Iran, says Nigel Kushner, chief executive of W Legal, a law firm specializing in international sanctions compliance. And that will largely depend on Washington’s assessment of how Tehran is adhering to its nuclear commitments. In the last decade, European banks have paid billions in fines and settlements for violating U.S. sanctions on Iran, Cuba, and Sudan. In 2014, France’s BNP Paribas paid a record $8.9 billion in fines and was hit with a yearlong ban from conducting U.S. dollar transactions for its oil and gas trade-finance unit. Kushner predicts a large British bank may enter Iran within the next three to six months, if the United States confirms to the British government that the bank won’t be penalised. For the time being, only a handful of small European banks are facilitating money transfers for Iran-related trade. Iran’s national Melli Bank is reportedly able to transfer funds to its branch in London, but Iran’s Central Bank has yet to find a bank willing to engage with it to facilitate transactions. So while Iran has enjoyed higher oil sales to new customers since Europe’s oil embargo was lifted, collecting those revenues and more than $4 billion in old oil debts remains difficult, a senior Iranian oil official told Foreign Policy”.

 

 

Brazil, privatising its energy sector?

22/03/2016

An ill-timed article,given the price of oil, suggests that failing Brazil can use its deep water oil reserves to salvage itself, “Brazil is wracked by the Zika virus, rising inflation, a deep recession, massive political and corporate scandals, and worries that athletes at the 2016 Summer Olympics will have to compete in dangerously polluted waters. Yet, despite it all, Brazil might have cause for celebration — if politics don’t get in the way. That’s because Brasília is finally taking steps to open up its oil and gas sector and make it more attractive to foreign investors, reforms that are as controversial as they are necessary to help the country tap the energy resources it has long eyed but only partially developed”.

He writes “Brazil unveiled new rules meant to kick-start investment in oil and gas production, part of a suite of measures that Energy Minister Eduardo Braga thinks can lure billions of dollars of new investment from foreign firms, including some in the United States and Europe. Even bigger changes are afoot: Brazil’s lower house of congress is wrestling with legislation that, if passed, would throw open the door for foreign oil and gas firms to develop the country’s massive offshore oil deposits without needing to go hand in hand with the debt-ridden and scandal-plagued Brazilian national oil company. That could finally make it possible for Brazil to realize the promises of its potential offshore oil wealth, first discovered almost a decade ago. Those offshore deposits, estimated to hold more than 60 billion barrels of oil — as much as the North Sea fields that fueled decades of British and Norwegian oil exploration — were expected to turn Brazil into one of the world’s big oil producers. As recently as 2013, the International Energy Agency said that Brazil, next to Iraq, would be the world’s biggest source of new oil production for the next two decades”.

He goes on to mention that “The initial promise floundered. Brazil, expecting oil companies to beat a path to its door to tap what could be world-class oil resources, failed to offer enticing terms for investors. Restrictive laws, like strict rules about using locally made oil-field equipment, made it hard for international oil companies to develop the fields. And state-owned Petróleo Brasileiro, known as Petrobras, was forced by law to take the lead in developing all of the offshore fields. But Petrobras today is staggered by a massive corruption scandal and a mountain of debt; it simply doesn’t have the financial or technical muscle to turn the offshore promise into reality. Petrobras has slashed its own investment budget four times just since last summer, and it has repeatedly cut its estimates of future oil production. For a country facing back-to-back years of economic contraction, getting the energy industry back on track is crucial”.

The writer goes on to make the point “The measures are part and parcel of a wholesale reassessment of “resource nationalism” taking place across Latin America, from Mexico to Argentina. For decades, governments in the region have sought to control mineral wealth like huge offshore oil fields and ensure that most of the benefits from those resources go to their people, rather than foreign companies. That formula can work when oil prices are high, and companies are desperate to get their hands on any promising resources, whatever the terms. But when oil prices are low, and there is fierce competition for an ever-shrinking pool of energy investment, those nationalist policies can backfire”.

He notes that in response to low prices Mexico and a host of other nations are reverting to privatisation, “Argentina, under new President Mauricio Macri, is moving quickly to regain the trust of international investors, reaching a deal with creditors and courting foreign players for the country’s potentially vast reserves of shale oil and gas. Now Brazil, prodded by opposition politicians and business groups increasingly frustrated with 14 years of rule by the same party, is on the verge of rewriting its own restrictive laws. That could move the country one step closer to fulfilling its promise as one of the biggest sources of new oil production in the world”.

Crucially he writes that “the Energy Ministry announced a series of changes to the oil and gas investment framework meant to entice the kind of international capital that could turn things around. That includes steps like extending concessions given to foreign firms years ago, giving companies the option to expand their holdings if they see promising potential nearby, and compelling companies sitting on nonproductive leases to drill or get off the pot. At a time when low oil prices make investment decisions tougher for everyone, the ministry said that “new investments in the oil industry require stable and effective rules” that will offer long-term certainty for oil companies struggling with the worst capital-investment climate in decades. But much bigger changes are potentially on the way. Last month, the Brazilian senate passed legislation that would essentially dismantle the administration’s signature approach to resource development, which was to give Petrobras a leading stake in every oil field project. Given Petrobras’s woes — a battered balance sheet and a far-reaching corruption investigation — that has proved a recipe for stagnation, not for quick development of those fields. With Petrobras unable to take on big, challenging new projects, Brazil under the current law can’t auction off any offshore blocks for development. Taken together, the energy minister said, the changes could attract as much as $120 billion in new investment”.

He ends “The political scandals, and public dismay at the state of the economy, have reached such a level that even much-needed reforms like the oil-sector changes could take a back seat to a settling of political accounts: Opposition politicians are increasingly calling for Rousseff’s impeachment. Until Brazil sorts out its political mess, it will be hard to make progress on the energy-sector overhaul”.

Shale production and the problem of finance

16/03/2016

A piece in the Economist argue that rising oil prices will not allow the shale industry to recover, “NO ONE can deny that America’s shale-oil industry is having a hard time. In recent weeks it has suffered the indictment and subsequent death in a car crash of one of its pioneers, Aubrey McClendon; a shellacking from Hillary Clinton, who could become America’s next president; and a warning from Ali al-Naimi, Saudi Arabia’s oil minister, to cut costs, borrow money or face liquidation. The data illustrate the extent of its woes. The American government’s Energy Information Administration (EIA) says oil production in December, of 9.3m barrels a day (m b/d), was lower than a year earlier for the first time since early 2011, weighed down by Texas and North Dakota, the heartlands of hydraulic fracturing (fracking). The EIA said on March 8th that it expects American crude production to fall to 8m b/d before it bottoms out in the latter part of next year”.

The piece goes on to note “Against that bleak backdrop, the mere hint this week that American oil prices were rebounding towards $40 a barrel, up from a low of less than $30 a barrel a month ago, must have felt like a get-out-of-jail-free card. With a chutzpah typical of the industry, some shale executives see $40 oil as the threshold above which they can resume drilling and make money again—even if America is still awash with record amounts of crude in storage. If they are right about that, it could change the entire dynamics of the oil market, quickly smoothing any upward or downward spike in prices. But it is not at all clear that they are”.

The report adds that “In theory, it is not hard for the frackers to increase production rapidly, once it becomes economical. Rig and drilling costs have fallen so fast that some wells could make money with prices around $40-45 a barrel, according to Rystad Energy, a consulting firm. Firms have laid off many workers, but with well-paid jobs hard to find elsewhere, it could be relatively easy to attract them back. In preparation for higher oil prices, producers from the Bakken field in North Dakota to the Permian and Eagle Ford in Texas have reported that they have hundreds of “drilled but uncompleted” ( DUC) wells. DUCs should be anathema to a self-respecting shaleman; they sink cash into the ground in the form of wells, but defer the all-important fracking that breaks open the shale rock and produces the oil. They could be a quick way to resume production, however. In late February Continental Resources and Whiting Petroleum, two big operators in the Bakken, said that above $40 a barrel they may begin fracking their rising inventory of DUCs”.

However the piece goes on to mention that “For most of the industry, however, the problem is not finding oil but finding cash. “No one is sitting on any excess capital,” says Ron Hulme of Parallel Resource Partners, an energy-focused private-equity fund. For years the industry borrowed heavily to finance its expansion, because it was failing to generate enough cash to cover investment in new wells. The supply of credit, whether from banks or the high-yield debt markets, has either dried up or is much more expensive than it was. Capital expenditure has fallen as a result, but not by enough to balance the books. In the fourth quarter of last year, American and Canadian oil firms spent $20 billion, while generating only $13 billion in cashflow”.

The piece goes on to note that only the firms with the most money have the ability to resume drilling but even those that wish to do so may find few takers as investors as more wary of shale companies than before, “The weaker firms are unwilling to sell assets to raise cash because the proceeds would go directly to their creditors. “You’d have to prise those assets from their dying hands,” says Mr Hulme. He notes that even firms that are technically insolvent may have enough liquidity to keep them from such potential fire sales. Not all of them, though. On March 8th Goodrich Petroleum, a shale oil-and-gas company, said it would postpone paying interest on its debt, as it puts pressure on creditors to exchange debt for equity in order to avoid a default”.

It finishes, “To provide a sufficient margin of comfort, prices may have to rally a lot higher than $40 a barrel to lure capital back in. Bobby Tudor of Tudor, Pickering, Holt, an energy-focused investment bank, believes that at $40 a barrel production will continue to decline, at $50 it would flatten out, and only at $60 would it increase. “Drilling wells at today’s commodity prices is still destructive of capital,” he argues. One further wrinkle: as oil prices increase, so can costs. Those, then, who hope that nimble shale producers will be able to move the global oil price up and down just by turning the taps on and off may be disappointed. Their financial backers will be the ones really calling the shots”.

“Oversupply in the oil market will continue into 2017”

10/03/2016

Keith Johnson argues that the cuts in oil production will not occur, “Low oil prices will be a fixture of the world economy for at least the next year, as the big oil producers inside OPEC show zero appetite to rethink their 2014 decision to pump with abandon and let the market sort winners from losers. Saudi Arabian Oil Minister Ali al-Naimi told an industry conference in Houston Tuesday that a cut in production “is not going to happen.” Instead, he said, low prices will themselves drive out “inefficient and uneconomic” producers from the market, slowly bringing some balance to an oil market that remains badly out of whack”.

He goes on to write, “Crude oil prices had rallied on Monday, but gave all those gains back after Naimi dashed any lingering hope that Riyadh might ride to the rescue. Prices dropped about 5 percent in New York and London, putting oil back under $32 a barrel. Another year or more of low oil prices will be bad news not just for Saudi Arabia, which is running budget deficits and scrambling to diversify its economy. Other big producers, like Iraq, are literally running out of money to meet other pressing challenges, such as the eruption of the Islamic State. Venezuela, another country heavily reliant on oil exports, is slowly imploding, and more time with cheap oil simply compounds the pain from sky-high inflation, worthless currency, and a dysfunctional political system. OPEC oil export revenues have plunged from a combined $1.2 trillion in 2012 to an expected $320 billion this year if prices stay near current levels”.

Johnson goes on to argue “Expectations for a sustained period of cheap oil don’t just come from the top dogs at OPEC. The International Energy Agency, in its medium-term oil report released Monday, also said that oversupply in the oil market will continue into 2017. The IEA noted that low prices are indeed poleaxing U.S. shale producers, who need higher prices than their Mideast rivals; the IEA projected U.S. shale oil production will fall this year by about 600,000 barrels a day, the first such contraction since the American energy boom began in 2008. Bankruptcies have already littered the oil industry, and big banks are increasingly setting aside money to cover bad loans to the U.S. oil and gas patch, too. But even a modest growth in demand, primarily from developing economies, won’t be enough to erase the huge supply overhang that exists today. Analysts figure the world pumps between 2 million and 3 million barrels per day more than it consumes”.

The report notes that “Naimi, making his first visit since 2009 to the oil industry’s most important conference, appeared to tender an olive branch to beleaguered U.S. producers, who have suffered the most from OPEC’s risky gamble. “I welcome additional sources of supply, including shale oil,” he said, adding that “nimble” U.S. oil companies will be needed again once demand catches up with global supplies of crude. Yet behind the conciliatory words, Naimi brought a tough message for U.S. producers, many of whom are struggling to stay in the black. Much of the world’s current oversupply, he said, is because oil prices stayed around $100 a barrel for years. Those high prices made pretty much any oil field economically viable, no matter how complicated or exotic, from Canada’s tar sands to Brazil’s ultra-deepwater discoveries to America’s frack-happy boom of the last eight years”.

Interestingly he mentions that “The remedy for what ails the oil market today, Naimi said, is to embrace the market itself and let prevailing prices determine who should be pumping and who should be idling drilling rigs. Saudi Arabia, which can pump oil cheaper than just about any country on Earth, can still make money even if oil prices keep going south. Others, like many in the U.S. shale patch, cannot”.

He ends the piece arguing “Just don’t expect Saudi Arabia and other OPEC members to do the heavy lifting. Naimi said that Saudi Arabia’s experience in the 1980s — when it alone shouldered the lion’s share of production cuts to help balance a glutted market — taught Riyadh a lesson. That’s why, Naimi said, OPEC decided to keep pumping oil flat out in late 2014, even after it was apparent that crude prices were falling off a cliff. That doesn’t mean there’s nothing Saudi Arabia or other big producers can do to stabilize the market. Riyadh and Moscow, two of the world’s biggest producers, have discussed a production “freeze” at current levels”.

Pointedly Johnson adds “The trouble is, both Saudi Arabia and Russia are pumping near-record amounts of crude every day; freezing production at sky-high levels will do little to alleviate the global glut. What’s more, other big oil producers, like Iran, which is desperate to boost oil production and exports to claw back market share after being sidelined by international sanctions for the last half decade, have made clear they have no plans to respect any informal “freeze.” On Tuesday, Iran’s oil minister called the proposed freeze “ridiculous.” None of which is to say that low prices will be here forever, or even through the end of the decade. Every year, said IEA chief Fatih Birol on Monday, the world needs 4 million new barrels per day of oil production: 1 million barrels to meet growing demand, and 3 million barrels simply to replace production declines at old, tired oil fields”.

He concludes “That’s why IEA warned that back-to-back years of investment cuts in the industry could well set the stage for a price spike in a few years’ time, as much-needed projects get delayed or axed altogether. “The risk of a sharp oil price rise” by the end of the decade, the IEA report warned, “is as potentially destabilizing as the sharp oil price fall has proved to be.”

“It is domestic insecurity that is breeding belligerence”

08/03/2016

An interesting piece from Foreign Affairs discusses the coming collapse of China and its implications on Eurasia, “As China asserts itself in its nearby seas and Russia wages war in Syria and Ukraine, it is easy to assume that Eurasia’s two great land powers are showing signs of newfound strength. But the opposite is true: increasingly, China and Russia flex their muscles not because they are powerful but because they are weak. Unlike Nazi Germany, whose power at home in the 1930s fueled its military aggression abroad, today’s revisionist powers are experiencing the reverse phenomenon. In China and Russia, it is domestic insecurity that is breeding belligerence. This marks a historical turning point: for the first time since the Berlin Wall fell, the United States finds itself in a competition among great powers. Economic conditions in both China and Russia are steadily worsening. Ever since energy prices collapsed in 2014, Russia has been caught in a serious recession. China, meanwhile, has entered the early stages of what promises to be a tumultuous transition away from double-digit annual GDP growth; the stock market crashes it experienced in the summer of 2015 and January 2016 will likely prove a mere foretaste of the financial disruptions to come”.

He adds “Given the likelihood of increasing economic turmoil in both countries, their internal political stability can no longer be taken for granted. In the age of social media and incessant polling, even autocrats such as Chinese President Xi Jinping and Russian President Vladimir Putin feel the need for public approval. Already, these leaders no doubt suffer from a profound sense of insecurity, as their homelands have long been virtually surrounded by enemies, with flatlands open to invaders. And already, they are finding it harder to exert control over their countries’ immense territories, with potential rebellions brewing in their far-flung regions. The world has seen the kind of anarchy that ethnic, political, and sectarian conflict can cause in small and medium-size states. But the prospect of quasi anarchy in two economically struggling giants is far more worrisome. As conditions worsen at home, China and Russia are likely to increasingly export their troubles in the hope that nationalism will distract their disgruntled citizens and mobilize their populations”.

Yet there seems to be not enough of this occurring to pressure the respective regimes for change, “As U.S. policymakers contemplate their response to the growing hostility of Beijing and Moscow, their first task should be to avoid needlessly provoking these extremely sensitive and domestically declining powers. That said, they cannot afford to stand idly by as China and Russia redraw international borders and maritime boundaries. The answer? Washington needs to set clear redlines, quietly communicated—and be ready to back them up with military power if necessary”.

These are exactly the kind of guidelines that have not come from the Obama White House. It has had sent confused messages to China about its “islands” in the South China Seas, it has set out red lines, only to break them and done little to reassure allies of its intentions of supporting them. Thus, the world and the United States will be much safer when Obama leaves office. Until such time only hope will suffice.

The author adds “Partly because Russia’s economic problems are far more severe than China’s, Moscow’s aggression has been more naked. After President Boris Yeltsin’s chaotic rule came to an end in 1999, Putin consolidated central authority. As energy prices soared, he harnessed Russia’s hydrocarbon-rich economy to create a sphere of influence in the countries of the former Soviet Union and the Warsaw Pact. His goal was clear: to restore the old empire. But since direct rule through communist parties had proved too costly, Putin preferred an oblique form of imperialism. In lieu of sending troops into the old domains, he built a Pharaonic network of energy pipelines, helped politicians in neighbouring countries in various ways, ran intelligence operations, and used third parties to buy control of local media”.

Correctly he goes on to argue “Not coincidentally, these military adventures have accompanied the sharp reversal of Russian economic power. In 2014, the price of oil collapsed, the countries of central and eastern Europe continued to wean themselves off Russian gas, slow global growth further reduced the appetite for Russian hydrocarbons and other natural resources, and the West levied damaging sanctions on Moscow. The result has been a full-blown economic crisis, with the ruble losing roughly half of its value against the U.S. dollar since 2014. That year, Russian GDP growth fell to nearly zero, and by the third quarter of 2015, the economy was shrinking by more than four percent. In the first eight months of 2015, capital investment declined by six percent and the volume of construction fell by eight percent. Russia’s economic problems run deep, leaving its leaders with few easy options for fixing them. For decades, Russia has relied on natural resource production and a manufacturing sector that makes consumer goods for the domestic market (since few foreigners want to buy Russia’s nonmilitary products)”.

The piece goes on to mention that “Try as he might, however, Putin will not be able to shelter his regime from the fallout of economic collapse. Desperation will spawn infighting among a ruling elite that has grown used to sharing generous spoils. Given the absence of strong institutions, as well as the brittle and highly centralized nature of the regime, a coup like the one that toppled Nikita Khrushchev in 1964 cannot be ruled out; Russia remains Soviet in its style of governance. The country has experienced the crumbling of autocracy followed by chaos before (as during and after the 1917 revolutions), and it’s possible that enough turmoil could cause Russia to fragment yet again. The heavily Muslim North Caucasus, along with areas of Russia’s Siberian and Far Eastern districts, distant from the center and burdened by bloody politics, may begin loosening their ties to Moscow in the event of instability inside the Kremlin itself. The result could be Yugoslavia lite: violence and separatism that begin in one place and spread elsewhere. As Moscow loses control, the global jihadist movement could take advantage of the vacuum and come to Russia’s outlying regions and to Central Asia”.

Turning to China the writer argues that China is on the brink, “Slow growth is also leading China to externalize its internal weaknesses. Since the mid-1990s, Beijing has been building a high-tech military, featuring advanced submarines, fighter jets, ballistic missiles, and cyberwarfare units. Just as the United States worked to exclude European powers from the Caribbean Sea beginning in the nineteenth century, China is now seeking to exclude the U.S. Navy from the East China and South China Seas. Its neighbours have grown worried: Japan, which views Chinese naval expansion as an existential threat, is shedding its pacifism and upgrading its forces, and Malaysia, the Philippines, Singapore, and Vietnam have modernized their militaries, too. What were once relatively placid, U.S.-dominated waters throughout the Cold War have become rougher. A stable, unipolar naval environment has given way to a more unstable, multipolar one. But as with Russia, China’s aggression increasingly reflects its cresting power, as its economy slows after decades of acceleration. Annual GDP growth has dropped from the double-digit rates that prevailed for most of the first decade of this century to an official 6.9 percent in the third quarter of 2015, with the true figure no doubt lower. Bubbles in the housing and stock markets have burst, and other imbalances in China’s overleveraged economy, especially in its shadow banking sector, are legion. Then there are the growing ethnic tensions in this vast country. To some degree, the Han-dominated state of China is a prison of various nations, including the Mongols, the Tibetans, and the Uighurs, all of whom have in varying degrees resisted central control. Today, Uighur militants represent the most immediate separatist threat. Some have received training in Iraq and Syria, and as they link up with the global jihadist movement, the danger will grow”.

Correctly he notes that “Even more so than Putin, Xi, with years of experience serving the Communist Party in interior China, must harbour few illusions about the depth of China’s economic problems. But that does not mean he knows how to fix them. Xi has responded to China’s economic disarray by embarking on an anticorruption drive, yet this campaign has primarily functioned as a great political purge, enabling him to consolidate China’s national security state around his own person. Since decisions are no longer made as collectively as before, Xi now has greater autonomy to channel domestic anxiety into foreign aggression. In the last three decades, China’s leadership was relatively predictable, risk averse, and collegial. But China’s internal political situation has become far less benign”.

He rightly notes that “China’s ambitions reach further than Russia’s, but they have generated less concern in the West because they have been more elegantly applied. Whereas Putin has sent thugs with ski masks and assault rifles into eastern Ukraine, Xi’s aggression has involved much smaller, incremental steps, making it maddeningly difficulty for the United States to respond without appearing to overreact. He has sent his coast guard and merchant ships (rather than exclusively his navy) to harass Philippine warships, dispatched an oil rig into waters claimed by both China and Vietnam (but for only a few weeks), and engaged in land-reclamation projects on contested islands and reefs (but ones that are devoid of people). And since these acts of brinkmanship have taken place at sea, they have caused no hardship for civilians and practically no military casualties. Other Chinese moves are less subtle. Besides expanding its maritime claims, China is building roads, railways, and pipelines deep into Central Asia and is promising to invest tens of billions of dollars in a transportation corridor that will stretch from western China across Pakistan to the Indian Ocean, where China has been involved in port projects from Tanzania to Myanmar (also called Burma). As China’s economic troubles worsen, the elegance of its aggression may wear off and be replaced by cruder, more impulsive actions. Xi will find it harder to resist the urge to use Asian maritime disputes to stoke nationalism, a force that brings a measure of cohesion to societies threatening to fragment”.

The result of this Kaplan says will be chaos, “Policymakers in Washington had better start planning now for the potential chaos to come: a Kremlin coup, a partial breakup of Russia, an Islamic terrorist campaign in western China, factional fighting in Beijing, and political turbulence in Central Asia, although not probable, are all increasingly possible. Whatever form the coming turbulence takes, it seems certain the United States will be forced to grapple with new questions of one sort or another. Who will control Russia’s nuclear arsenal if the country’s leadership splinters? How can the United States stand up for human rights inside China while standing by as the regime puts down an internal rebellion? Planning for such contingencies does not mean planning a war of liberation, à la Iraq. (If China and Russia are ever to develop more liberal governments, their people will have to bring about change themselves.) But it does mean minimizing the possibility of disorder. To avoid the nightmarish security crises that could result, Washington will need to issue clear redlines. Whenever possible, however, it should communicate these redlines privately, without grandstanding. Although congressional firebrands seem not to realize it, the United States gains nothing from baiting nervous regimes worried about losing face at home”.

He makes the point that “In the case of Russia, the United States should demand that it stop initiating frozen conflicts. As Putin attempts to distract Russians from economic hardship, he will find it more tempting to stir up trouble in his neighbourhood. Lithuania and Moldova probably top his list of potential targets, given their corrupt and easily undermined democratic governments. (Moldova is already nearing the point of political anarchy.) Both countries are also strategically valuable: Moldova could provide Russia with the beginning of a gateway to the Balkans, and Lithuania offers a partial land bridge to the Russian exclave of Kaliningrad. For Putin, frozen conflicts carry the advantage of being undeclared, reducing the odds of a meaningful Western response. That’s why the response must be in kind: if Putin makes behind-the-scenes moves in Lithuania or Moldova, the West should intensify sanctions against Russia and increase the tempo of military exercises in central and eastern Europe”.

On the problems in China he argues that “Washington also needs to set clear redlines with China. In the South China Sea, it cannot allow the country’s land-reclamation projects to graduate to the establishment of a so-called air defence identification zone—airspace where China reserves the right to exclude foreign aircraft—as the regime declared in the East China Sea in 2013. Such moves form part of a strategy of deliberate ambiguity: the more unclear and complex a military standoff becomes, the more threatened the United States’ maritime dominance will be. If China does announce such a zone in the South China Sea, Washington must respond by increasing U.S. naval activity in the vicinity and expanding military aid to regional allies. Already, the U.S. Navy has begun freedom-of-navigation operations, however halfhearted, within the 12-nautical-mile boundary of sovereign authority that China has claimed around its man-made islands. If these operations do not become regular and more explicit, China will not feel deterred”.

He ends arguing correctly, for strength, “The president should never expect Israelis, Poles, and Taiwanese, for example, to trust him because he is leading on climate change (as he has intimated they should); they want him to highlight their own geopolitical dilemmas. Although pandemics, rising sea levels, and other global challenges are real, the United States can afford the luxury of focusing on them thanks largely to its own protected geography. Many U.S. allies, by comparison, live dangerously close to China and Russia and must contend with narrower, more traditional threats. Given their own tragic geography, Asian nations want to see more American warships in their waters. As for central and eastern Europeans, they want a muscular and unambiguous commitment to their defense. Now more than ever, because of the way globalization and the communications revolution have made geography more interconnected, an American president risks losing his reputation for power in one theater if he fails to respond adequately to aggression in another”.

He concludes “Containment wasn’t only about restraint, as many now like to believe; it was also about engaging in calculated aggression and consistently reassuring allies. Throughout the Cold War, U.S. presidents prevailed while avoiding nuclear war by understanding that rivalry and conflict, rather than peace, are normal. Today, as China and Russia accelerate down the path of protracted conflict, future U.S. presidents must acknowledge that same truth. And they, too, must apply the right mix of strength and caution as they leave behind the comparatively calm decades of the Cold War and post–Cold War eras and prepare to navigate the anarchy of an unraveling Eurasia.

“Russian government is considering a 5 percent cut in defence procurement”

29/02/2016

The Russian government is considering a 5 percent cut in defence procurement spending this year, sources say, showing not even Vladimir Putin’s plan to restore Moscow’s military might is immune to the pain of a slowing economy. The president has made beefing up the military a national priority, and the fact it is up for discussion is a sign that no area is safe from budget cuts as Russia begins a second year of recession following a fall in oil prices and Western sanctions. The proposal is backed by the finance ministry and has the support of several other ministries and state institutions, enough for it to be put forward for discussion at a cabinet meeting, four official sources said. A 5 percent cut in defense procurement spending would save the government no more than 100 billion roubles ($1.29 billion), according to an estimate by one official who spoke to Reuters.

Iran, capping production?

25/02/2016

Iran appeared Wednesday to back a plan laid out by four influential oil producers to cap their crude output if others do the same, though it offered no indication that it has any plans to follow suit itself. The agreement reached in Doha the day before by Qatar, Saudi Arabia, Russia and Venezuela is aimed at stabilizing global oil prices, which recently plunged to less than $30 a barrel, a 13-year low. But Iran is keen to ramp up exports to regain market share now that sanctions related to its nuclear program have been lifted under a landmark agreement. “Iran supports any measure to boost oil prices,” Oil Minister Bijan Namdar Zanganeh said after talks with his counterparts from Iraq, Venezuela and Qatar “The decision taken to freeze the production ceiling of OPEC and non-OPEC members to stabilize and boost prices is also supported by us,” he added, in comments posted on the ministry’s website late Wednesday”.

Qatari gas to Pakistan

19/02/2016

Pakistan said on Wednesday it had signed a 15-year agreement to import up to 3.75 million tonnes of liquefied natural gas a year from Qatar, a major step in filling Pakistan’s energy shortfall. The deal, Pakistan’s biggest, will help the country add about 2,000 megawatts of gas-fired power-generating capacity and improve production from fertilizer plants now hobbled by a lack of gas, a government official said. “This is a huge and significant achievement because this diversifies Pakistan’s energy mix,” the official said. “This is the single largest commercial transaction that Pakistan has entered into.” Supplies will start in March, Qatar’s state news agency QNA said. They will eventually come to around five LNG cargoes per month, the official said. Pakistan, a nation of 190 million people, can only supply about two-thirds of its gas needs. The ruling party, which campaigned on promises of resolving the energy crisis, wants to ease shortages by expanding LNG shipments before a 2018 general election.

“Venezuela will have to default”

07/02/2016

A piece discusses that Venezuela is “about to go bust”, “Venezuela’s economy is facing a tsunami of bad news. The country is suffering from the world’s deepest recession, highest inflation rate, and highest credit risk — all problems aggravated by plunging oil prices. Despite all its troubles, though, until now Venezuela has kept making payments on its $100-billion-plus foreign debt. That is about to end. In recent days a consensus has emerged among market analysts: Venezuela will have to default. The only question is when”.

The article goes on to mention “A Venezuela meltdown could rock financial markets, and people around the world will lose a lot of money. But we should all save our collective sympathy — both the government in Caracas and the investors who enabled it had it coming. In the last few years, the Venezuelan government has been steadfast about staying in good graces with its lenders. It has paid arrears on its debt religiously, and has constantly asserted that it will continue paying. But it has neglected to implement the reforms Venezuela would need to improve the fundamentals of its economy”.

The writer adds that “Its commitment to socialist “populism” and the complicated internal dynamics within the governing coalition have paralyzed the government. It has repeatedly postponed important reforms like eliminating its absurd exchange rate controls (the country has at least four exchange rates) or raising the domestic price of gasoline (the cheapest in the world by far). Instead, the government has “adjusted” by shutting off imports, leaving store shelves all over the country barren. This strategy now seems unsustainable. According to various estimates, in 2015 Venezuela imported about $32 billion worth of goods. This was a marked drop from the previous year. This year, given current oil prices and dwindling foreign reserves, if Venezuela were to pay off its obligations — at least $10 billion — and maintain government spending, it would have to import close to nothing. In a country that imports most of what it consumes, this would ensure mayhem. That is why all analysts predict default in the coming months”.

He goes on to argue “One of the reasons the coming default will be so messy is the many instruments involved, all issued under widely varying conditions. Part of the stock of debt was issued by PDVSA, Venezuela’s state-owned oil company, which owns significant assets overseas (For example, Citgo is 100 percent owned by the Venezuelan government). Another part of the debt was issued by the national government directly, while another big chunk is owed to China, under secretive terms. The Chinese issue looms large. China’s loans to Venezuela — close to about $18 billion, according to Barclay’s – consist of short-term financing payable via oil shipments. As the price of oil collapses, Venezuela needs to ship more oil to China in order to pay them back. Barclay’s estimates that right now this is close to 800,000 barrels per day, leaving little more than a million barrels per day Venezuela can sell for cash. A default will send ripples beyond Wall Street. Many people have been buying high-risk, high-return Venezuelan debt for years — from pension funds in far-off countries to small banks in developing ones. Most stand to lose their shirts. Yet the signs that this was unsustainable were there for all to see. For years, Venezuela has had a massive budget deficit, sustained only by exorbitant oil prices. For years, analysts have been warning that the Venezuelan government would rather chew nails that allow the private sector to grow. And yes, a lot of that borrowed money was used to help establish a narco-military kleptocracy“.

It ends “In a few months, once the rubble of the Bolivarian revolution is cleared, the discussion will turn to how Venezuela can be helped. It would be smart to remember that aid should come to the Venezuelan people first. As the scarcity of food and medicine grows, Venezuela may become the first petro-state to face a humanitarian disaster. If and when a responsible government in Caracas asks for foreign assistance, solving this urgent issue should be at the top of the agenda. Conditions on financial assistance should privilege the interests of Venezuelans caught in the debacle above the interests of angry hedge fun managers or international bankers”.

 

“It is sometimes more expensive to stop production than to keep pumping”

03/02/2016

An interesting piece  in the Economist notes that falling oil prices have not reduced oil production or assisted global growth.

It begins “Oil traders are paying unusual attention to Kharg, a small island 25km (16 miles) off the coast of Iran. On its lee side, identifiable to orbiting satellites by the transponders on their decks, are half a dozen or so huge oil tankers that have been anchored there for months. Farther down Iran’s Persian Gulf coast is another flotilla of similarly vast vessels. They contain up to 50m barrels of Iranian crude—just what a world awash with oil could do without. The lifting of nuclear-related sanctions against Iran on January 16th puts those barrels at the forefront of the country’s quest to recapture a share of international oil markets that it has been shut out of for much of the past decade. The prospect of Iran swiftly dispatching its supertankers to European and Asian refineries to undercut supplies from Saudi Arabia, Iraq and Russia helped push the world’s main benchmarks, Brent and West Texas Intermediate (WTI), to their lowest levels since 2003 on January 20th; WTI tumbled by 6.7% to under $27 a barrel, its biggest one-day fall since September”.

The author goes on to write “The slide marks the latest act in a dramatic reversal of fortunes for the oil industry that is, in turn, roiling the global economy. Less than a decade ago the world scrambled for oil, largely to fuel China’s commodity-hungry growth spurt, pushing prices to over $140 a barrel in 2008. State-owned oil giants such as Saudi Aramco had access to the cheapest reserves, forcing private oil firms to search farther afield—in the Arctic, Brazil’s pre-salt fields and deep waters off Angola—for resources deemed ever scarcer. Investors, concerned that the oil majors could run out of growth opportunities, encouraged the search for pricey oil, rewarding potential future growth in production as much as profitability. Now the fear for producers is of an excess of oil, rather than a shortage. The addition to global supply over the past five years of 4.2m barrels a day (b/d) from America’s shale producers, although only 5% of global production, has had an outsized impact on the market by raising the prospects of recovering vast amounts of resources formerly considered too hard to extract. On January 19th the International Energy Agency (IEA), a prominent energy forecaster, issued a stark warning: “The oil market could drown in oversupply.”

The piece goes on to mention “Last year the world produced 96.3m b/d of oil, of which it consumed only 94.5m b/d. So each day about 1.8m barrels went into storage tanks—which are filling up fast. Though new storage is being built, too much oil would cause the tanks to overflow. The only place to put the spare barrels would be in tankers out to sea, like the Iranian oil sitting off Kharg, waiting for demand to recover. For oil producers that is an alarming prospect, yet for the most part warnings such as those of the IEA have gone unheeded”.

Crucially the piece notes that “This poses two puzzles. When, in November 2014, Saudi Arabia forced OPEC to keep the taps open despite plummeting prices, it hoped quickly to drive higher-cost producers in America and elsewhere out of business. Analysts expected a snappy rebound in prices. Though oil firms have since collectively suspended investment in $380 billion of new projects, as yet there is no sign of a bottom. Projections for a meaningful recovery in the oil price have been pushed back until at least 2017″.

Interestingly the article mentions that “The economic impact of the oversupply is another enigma. Cheaper fuel should stimulate global economic growth. Industries that use oil as an input are more profitable. The benefits to consuming nations typically outweigh the costs to producing ones. But so far in 2016 a 28% lurch downwards in oil prices has coincided with turmoil in global stockmarkets. It is as if the markets are challenging long-held assumptions about the economic benefits of low energy prices, or asserting that global economic growth is so anaemic that an oil glut will do little to help”.

The author adds that “Iran is the most immediate cause of the bearishness. It promises an immediate boost to production of 500,000 b/d, just when other members of OPEC such as Saudi Arabia and Iraq are pumping at record levels. Even if its target is over-optimistic, seething rivalry between the rulers in Tehran and Riyadh make it hard to imagine that the three producers could agree to the sort of production discipline that OPEC has used to attempt to rescue prices in the past. Even if OPEC tried to reassert its influence, the producers’ cartel would probably fail because the oil industry has changed in several ways. Shale-oil producers, using technology that is both cheaper and quicker to deploy than conventional oil rigs, have made the industry more entrepreneurial. Big depreciations against the dollar have helped beleaguered economies such as Russia, Brazil and Venezuela to maintain output, by increasing local-currency revenues relative to costs. And growing fears about action on climate change, coupled with the emergence of alternative-energy technologies, suggests to some producers that it is best to pump as hard as they can, while they can”.

The writer argues that there have been periods before when lower prices to drive out competitors have been tried before but he notes “there is also a reason for keeping the pumps working that is not as suicidal as it sounds. One of the remarkable features of last year’s oil market was the resilience of American shale producers in the face of falling prices. Since mid-2015 shale firms have cut more than 400,000 b/d from output in response to lower prices. Nevertheless, America still increased oil production more than any other country in the year as a whole, producing an additional 900,000 b/d, according to the IEA. During the year the number of drilling rigs used in America fell by over 60%. Normally that would be considered a strong indicator of lower output. Yet it is one thing to drill wells, another to conduct the hydraulic fracturing (“fracking”) that gets the shale oil flowing out. Rystad Energy, a Norwegian consultancy, noted late last year that the “frack-count”, ie, the number of wells fracked, was still rising, explaining the resilience of oil production”.

The author notes that it is not just shale producers that have tried to stay in business, “Those extracting in more expensive places, such as Canada’s oil sands and Brazilian pre-salt, have too. Canada, whose low-quality benchmark oil, West Canada Select, is trading below $15 a barrel, giving it the ignominious title of the world’s lowest-value crude, is one of the non-OPEC countries expected to add most to global supply this year. So is Brazil, despite debt and corruption at its state oil company, Petrobras”.

Interestingly he mentions that “the oil majors have said they will slash tens of thousands of jobs and billions of dollars in investment, but they too are reluctant to abandon projects that may add to future production. Shell, an Anglo-Dutch company, took the rare decision to abandon exploration in the Arctic and a heavy-oil project in Canada but its current output of 2.9m b/d in 2015 was only just shy of the previous year’s 3.1m b/d. In the industry at large, the incentive is to keep producing “as flat out as you can”, once investment costs have been sunk into the ground, says Simon Henry, Shell’s chief financial officer. He says it is sometimes more expensive to stop production than to keep pumping at low prices, because of the high cost of mothballing wells”.

Pointedly he goes on to argue that “In theory a long period of low oil prices should benefit the global economy. The world is both a producer and a consumer: what producers lose and consumers gain from a drop in prices sums to zero. Conventionally, extra spending by oil importers exceeds cuts in spending by exporters, boosting global aggregate demand. The economies that have enjoyed the strongest GDP growth in the past year have indeed been oil importers: India, Pakistan and countries in east Africa. It is hard to explain the consumer-led recovery in the euro area without assuming a positive impact from lower oil prices. In the IMF’s latest forecast, published on January 19th, the handful of big economies that were spared downgrades to GDP growth—China, India, Germany, Britain, Spain and Italy—were all net oil importers”.

Yet even this logic is being questioned, “There are doubts that this holds true everywhere. America is both a large producer and consumer of oil. At the start of 2015, JPMorgan, a bank, reckoned that cheap oil would boost GDP by around 0.7%—a boost to consumers’ purchasing power equivalent to 1% of GDP, offset by a smaller drag from weaker oil-industry investment. It now reckons the outcome was between a contraction of 0.3% and a boost of a measly 0.1%. Consumers may have saved more of the windfall than had seemed likely and the share of oil-related capital spending in total business investment in America, which had steadily risen for years, has fallen by half. Add in the indirect effects of the downturn in the oil industry and the net impact of cheap oil may even have been a bigger decline than JPMorgan’s most pessimistic estimate”.

Naturally the oil crash has had serious consequences for states like Russia and Nigeria but “Since the start of the year, the supply shock from Iran has also been accompanied by fears of a demand one from China. The bungled handling of China’s stockmarket and currency has raised fears about the economy, which has spilled over into the oil market. As global financial markets have descended into turmoil, there are mounting worries about the resilience of the global economy, too. That, in turn, raises anxiety about future oil demand. Macroeconomic concerns are paramount, but there are also microeconomic ones. Lower fuel subsidies in some oil-producing countries, aimed at plugging budget deficits, are encouraging car owners to drive less miles. China has said that it will not allow petrol prices to fall in line with oil below $40 a barrel, which will have the same effect. Even in the United States, the link between cheap petrol and gas-guzzling is less strong than it was. Part of the reason, analysts say, is that vehicles are more fuel-efficient”.

The piece concludes “After the Paris summit on climate change in December some pundits reckon that the latest oil crisis reflects a structural change in oil consumption because of environmental concerns—what some call “peak demand”. It is true that as climate consciousness grows, oil companies are developing more gas than oil, hoping to deploy it as an energy substitute for coal. But it may be too early to assume that the era of the petrol engine is coming to an end. More likely, the oil price will eventually find a bottom and, if this cycle is like previous ones, shoot sharply higher because of the level of underinvestment in reserves and natural depletion of existing wells. Yet the consequences will be different. Antoine Halff of Columbia University’s Centre on Global Energy Policy told American senators on January 19th that the shale-oil industry, with its unique cost structure and short business cycle, may undermine longer-term investment in high-cost traditional oilfields. The shalemen, rather than the Saudis, could well become the world’s swing producers, adding to volatility, perhaps, but within a relatively narrow range”.

An Asian WTI?

29/01/2016

A piece in the Economist discusses the future of oil benchmarks, “FORTY years ago America, still reeling from the 1973 oil crisis, banned most exports of crude oil. That prohibition was lifted by Congress in mid-December. The first shipment under the new rules set sail on December 31st from the Texan port of Corpus Christi. The renewed flow of crude is already changing how oil is priced”.

Correctly the piece notes that “Not all barrels of oil are alike. Crudes can be viscous like tar or so “light” they float on water. Their sulphur content ranges from the negligible (“sweet”) to the highly acidic (“sour”). Though hundreds of grades are bought and sold, traders use a handful of benchmarks to make sense of the market. Brent, from the North Sea, is the current international standard. Americans prefer to use a similar grade known as West Texas Intermediate (WTI). WTI was once the main global benchmark. It has a number of advantages over Brent. For one thing, it arrives at the delivery point—Cushing, Oklahoma—by pipeline, and so can be sold in batches of variable size. Brent, in contrast, can only be sold by the tankerload. As Brent sees fewer, bigger transactions, generating continuous prices is tricky. The ever-shifting price of WTI can be observed directly, making it more transparent. And Brent is umbilically connected to a declining oil province. It comes from only a handful of oilfields, whereas a WTI contract can be satisfied by any suitable oil delivered to Cushing”.

Interestingly the piece mentions that “WTI had one vital flaw, though. The export ban meant that it could detach from world oil prices if America produced more crude than expected, since the surplus could not be exported. For most of the late 20th century that risk was hypothetical, as America’s output steadily declined. But in recent years the shale-oil boom revived American production. A glut of crude emerged, first at Cushing and then by the cluster of refineries on the Gulf of Mexico. That pushed American crude prices below Brent. The spread peaked in 2011 at $28 a barrel. As the price of WTI began to say less and less about the state of the world market, traders spurned it in favour of Brent. Trading in contracts linked to Brent overtook those linked to WTI in early 2012”.

Naturally the author writes “The resumption of American exports has changed all that. The two benchmarks now trade at more or less the same price. WTI has duly regained its position as the most traded oil benchmark. This back-and-forth, however, may prove a distraction compared with another shift in the oil market: its centre of gravity is moving inexorably eastwards. OPEC, a cartel of oil exporters, expects demand in Asia to grow by 16m barrels a day by 2040. If that happens, Asia would end up consuming more than 46m barrels a day—four times as much as Europe. As Asia grows, it will become the dominant force in the world market. A good benchmark has to reflect supply and demand for oil wherever it is used. WTI may continue to be influenced by bottlenecks in the American market. Brent reflects the market for oil in north-west Europe. That was once a positive, but as Europe’s share of global demand for oil declines, proximity to the continent is no longer the advantage it was”.

The piece ends “That suggests that an Asian benchmark will rise to the fore. The Shanghai International Energy Exchange plans to launch its own yuan-denominated contract this year. The new benchmark will have trouble getting off the ground. For one thing, China’s capital controls make it difficult for foreigners to buy the yuan needed to trade the contracts. The wild swings in China’s equity markets set an unnerving example for investors. But time is on its side”.

Sanctions lifted on Iran

27/01/2016

A report from the Washington Post notes the lifting of sanctions on Iran “Iran reentered the global economy Saturday, as years of crippling international sanctions were lifted in exchange for the verified disabling of much of its nuclear infrastructure. For Iran, implementation of the landmark deal it finalized with six world powers last summer means immediate access to more than $50 billion in long-frozen assets, and freedom to sell its oil and purchase goods in the international marketplace. Tehran has hailed the deal as vindication of its power and influence in the world. “Today marks the moment that the Iran nuclear agreement transitions from promises on paper to measurable progress,” said Secretary of State John F. Kerry”.

The report goes on to mention that “The removal of sanctions comes as President Obama begins his last year in office, and almost seven years to the day since he called on Iran to “unclench your fist” and take steps toward rapprochement with the United States and the world. As a result of the agreement, he said in his last State of the Union speech this week, a “nuclear-armed Iran” has been prevented, and “the world has avoided another war.” The triggering event for implementation was certification by the International Atomic Energy Agency Saturday that Iran had successfully completed all the nuclear steps it agreed to in July: sending the bulk of its enriched uranium outside the country, mothballing most of its centrifuges, and disabling its Arak nuclear reactor, capable of yielding plutonium. The IAEA is also charged with monitoring and verifying Iran’s continued compliance”.

Interestingly the piece goes on to note “IAEA certification of compliance opened the door to announcements and speeches by high-level officials from the negotiating parties. A new U.N. resolution codifying the deal immediately goes into effect. The IAEA begins strict monitoring provisions on the ground in Iran. White House executive orders and implementation guidance issued by the European Union and the U.S. Treasury, along with waivers of certain restrictions signed here by Kerry, will start the wheels of international business and finance turning. To the consternation of critics in the United States — including Republican presidential hopefuls who have called it a dangerous sellout by Obama and vowed to dismantle it — the deal is now done”.

The Obama administration hopes that “In the long term, the agreement is a major milestone in the Iranian revolution, with the potential for far-reaching economic, political and cultural ramifications. The end of Iran’s near-total economic isolation could drive more modernization and open the country to moderating outside influences. More money spent at home to upgrade failing infrastructure and jump-start the economy would allow pragmatist President Hassan Rouhani to showcase the sanctions relief he pledged in his 2013 campaign. U.S. and international opponents, including Israel, Saudi Arabia and other U.S. allies see the agreement as a dangerous gift to an aggressive and duplicitous regime, and have warned that Tehran will use the money to increase spending on terrorist groups that serve as its proxies in a fight for regional dominance”.

Crucially the author notes that “Although Iran has more than $100 billion in available frozen assets — most of it in banks in China, Japan and South Korea — slightly less than half will more or less automatically go to preexisting debts. How the rest is spent will reveal the direction of internal power battles between Iranian hard-liners and pragmatists. That kind of money is too much to be transferred in one fell swoop. Richard Nephew, a former sanctions chief of the U.S. negotiating team, said the Iranians will likely transfer it out in chunks, and may even leave it in place while they decide how to spend it”.

The piece notes the context for the lifting of sanctions, “Despite official rejoicing by the negotiating partners, implementation comes at a particularly inauspicious time for Iran and the United States. Oil is at its lowest price in more than a decade, in part because of expectations Iranian crude will flood the market, and Iran’s currency has declined precipitously. Tehran will be getting far less income than it anticipated when the negotiations took hold in late 2013, making it difficult for the government to deliver the jobs and economic boom Iranians have been told will ensue. Many think it will take years to repair the country’s decrepit energy infrastructure in order for oil to flow at its pre-sanctions rate”.

 

Oil below $30 a barrel

23/01/2016

Brent crude oil prices rebounded on Tuesday from a 12-year low after data showed Chinese oil demand likely hit a record high in 2015, but the recovery was not expected to last amid warnings that the market would stay oversupplied this year. Analysts also attributed much of the bounce from under $28 a barrel to a brief short covering rally after oil prices crashed over 20 percent this year, triggering a record volume of short positions in the week through Jan. 12. “It seems to be a healthy upside correction in an otherwise downtrending market,” said Tamas Varga, oil analyst at London brokerage PVM Oil Associates. Brent crude futures, the global benchmark, posted their strongest daily gains in four months, before easing back to trade up 32 cents, or 1.12 percent, at $28.88 a barrel.

“Asked the United States to hold joint naval patrols”

19/01/2016

The Philippines has asked the United States to hold joint naval patrols, a defense ministry spokesman said on Thursday, amid a territorial dispute with China in the South China Sea. Foreign and defense ministers from the United States and the Philippines met in Washington this week for the second time in more than three years to discuss trade and security, focusing on the South China Sea. “We are suggesting that we also patrol the area together,” Peter Paul Galvez told reporters in Manila. “There is a need for more collaborative presence in the South China Sea.” China claims almost all the South China Sea, which is believed to have huge deposits of oil and gas, and has been building up facilities on islands it controls”.

Remaking the Saudi state?

17/01/2016

A report from the Economist discusses the radical changes planned in Saudi Arabia in the Deputy Crown Prince Muhammd bin Salman, “THE Al Sauds once again hold court in Diriya, their ancestral capital that was laid waste by the Ottoman empire and is being lovingly restored as a national tourist attraction. This is where the Al Sauds forged their alliance in the 18th century with a Muslim revivalist preacher, Muhammad Ibn Abdel-Wahhab—a pact that to this day fuses the modern Saudi state with the puritanism of Wahhabi Islam. And this is where Muhammad bin Salman, the 30-year-old deputy crown prince who is the power behind the throne of his elderly father, King Salman, receives foreign guests in a walled complex. One side of his reception room is decorated with the spears, swords and daggers of tradition. The other is dominated by a large television, showing the casual horrors of the Middle East and the repercussions of his own actions play out on rolling news: the execution of a prominent Shia cleric, Nimr al-Nimr, (and 46 others accused of terrorism and sedition, mostly linked to al-Qaeda jihadists) led to a mob ransacking the Saudi embassy in Tehran and, in retaliation, to the kingdom severing diplomatic relations with Iran”.

The report goes on to mention “Talking late into the night with the news left on throughout, Prince Muhammad discusses his country’s interventionist foreign policy and its uncompromising response to terrorism and sedition. Asked whether the kingdom’s actions were stoking regional tensions, he said that things were already so bad they could scarcely get any worse. “We try as hard as we can not to escalate anything further,” he says; and he certainly does not expect war. But for his entourage, Saudi Arabia has no choice but to stop Iran from trying to carve out a new Persian empire”.

The article notes that “If his defence of Saudi foreign policy was unrepentant, even more striking was his ambition to remake the entire Saudi state by harnessing the power of markets. No economic reform is taboo, say his officials: not the shedding of do-nothing public-sector workers, not the abolition of subsidies that Saudis have come to see as their birthright, not the privatisation of basic services such as education and health care. And not even the sale of shares in the crown jewel: Saudi Aramco, the secretive national oil and gas producer that is the world’s biggest company”.

The writer continues, “At 80, the newish King Salman is part of the same gerontocracy that has run the country for decades. But he has entrusted much of his realm to Prince Muhammad, who is in a hurry to awaken it from its torpor. He knows that, for all its ostentatious luxury, the country faces huge problems. The oil price has plunged. Arab states all around have collapsed. In the vacuum, Iran, the Shia power that has long alarmed Sunni Arabs, has spread its influence across the region, particularly through the militias it grooms—in Lebanon, Iraq, Syria and most recently in Yemen, Saudi Arabia’s underbelly. The Arab world is confronted not just by a Shia Crescent, “but by a Shia full moon”, says one confidant of the prince. As well as Shia militants, Saudi Arabia also faces resurgent Sunni jihadists: a revived al-Qaeda in Yemen to the south, and Islamic State (IS) in Iraq and Syria to the north. Both seek to lure young Saudis raised on the same textbooks and homilies that the jihadists use. The Al Sauds have survived by making three compacts: with the Wahhabis to burnish their Islamic credentials as the custodians of the holy places of Mecca and Medina; with the population by providing munificence in exchange for acquiescence to absolutist rule; and with America to defend Saudi Arabia in exchange for stability in oil markets”.

Interestingly the piece mentions “Yet he knows that change must come, and fast. He has injected new energy into government, and is taking huge gambles. What he lacks in experience and foreign travel, he compensates for with confidence, focus and a battery of consultants’ reports. He reels off numbers and policies with ease, pausing only to take a call from John Kerry, America’s secretary of state. He speaks in the first person, as if he were already king even though he is only second in line. Over five hours King Salman is mentioned once; his cousin, the crown prince, Muhammad bin Nayef, does not figure at all, though he is in charge of internal security and may be biding his time”.

The writer goes on to mention that “Such is Prince Muhammad’s frenetic activity that officials reel and outsiders regard him as a bullock in a china shop. Just weeks after his father made him defence minister, fighter jets from Saudi Arabia, the Arab world’s richest state, led a coalition into action against the Houthi militias of its poorest, Yemen. To critics who say he was rash to intervene in a land that has bloodied foreign armies before, Prince Muhammad says the action, if anything, came too late: the Shia Houthis, with Iran’s help, had taken the country and sophisticated weapons, such as jets and Scud missiles. Scuds are occasionally fired at Saudi targets; thousands of Saudis living near Yemen have been evacuated to avoid rockets and artillery fire. In Syria he plans to send special forces against IS”.

Crucially he author adds “Prince Muhammad’s most dramatic moves may be at home. He seems determined to use the collapse in the price of oil, from $115 a barrel in 2014 to below $35, to enact radical economic reforms. This begins with fiscal retrenchment. Even after initial budget cuts last year, Saudi Arabia recorded a whopping budget deficit of 15% of GDP. Its pile of foreign reserves has fallen by $100 billion, to $650 billion. Even with its minimal debt of 5% of GDP, Saudi Arabia’s public finances are unsustainable for more than a few years. His budget, unveiled in December, cuts subsidies on water, electricity and fuel. These were aimed mostly at big consumers, including the myriad royal princes. “I don’t deserve these subsidies,” he says. Even so, Saudis witnessed the rare sight of people queuing to buy petrol before the prices rose by 50% on January 1st. This month Saudis accustomed to leaving on the air-conditioner when going on holiday will receive dearer electricity and water bills. Within five years, the plan is that Saudis should be paying market prices, probably with compensation in the form of direct payments for poorer citizens. Ministries have halted expenditure on cars, furniture and showcase projects. The government is scrutinising allowances and overtime claims to save money. Soon Saudis will for the first time pay value-added tax of 5% on non-essentials, in a move co-ordinated with other members of the six-country Gulf Co-operation Council. Prince Muhammad is adamant that there will be no income or wealth taxes, but he plans to balance the budget in five years”.

Importantly it notes that “Under his “Transformation Plan 2020”, set for publication by the end of the month, the prince wants to develop alternatives to oil and drastically to cut the public payroll, which acts as a form of unemployment benefit. To do so he wants to create jobs for a workforce that will double by 2030. Ministers speak of doubling private education to cover 30% of students, establishing charter schools and transforming public health care into an insurance-based system with expanded private provision. In addition to Aramco, the prince wants to sell stakes in state assets from telecoms to power stations and the national airline. The government is to sell land to developers, such as the 4m square metres it owns around Mecca, the most expensive real estate in the world. The prince sees huge promise in developing Islamic tourism to the holy sites; he hopes to boost the 18m annual visitors to 35m-45m in five years. Sceptics abound. Reform has long been talked about but never implemented. Prince Muhammad’s ministers are astute, have PhDs from Western universities and speak the jargon of key performance indicators, but much of the government is deadweight. Even the unemployment figures are subject to doubt. “Few bits of the bureaucracy actually function at a high level,” says a Western diplomat. Even senior advisers question the kingdom’s capacity to find and absorb the trillions of dollars on which the plan is predicated”.

The piece presents problems when it mentions that “In Jeddah, the commercial capital on the Red Sea, some businessmen remain sceptical, and speak more of exporting their wealth than investing it in the country. There is also suspicion of hidden motives. With each new elderly monarch, they say, favoured sons have indulged in self-aggrandisement, leaving courtiers to disguise their acquisitions as privatisations and economic reforms. Media reports of Prince Muhammad’s lavish parties in the Maldives and the crown prince’s house-hunting for a Sardinian villa worth half a billion euros are fodder for social media, of which Saudis are keen users. As the man who ultimately controls the Public Investment Fund, the destination for many assets to be sold, and who has taken direct oversight of Aramco, the prince is already the subject of some muttering. What is true is that, for all his talk of transparency, his government continues to treat royal and state expenses as one and same; the royal component is a state secret”.

The political ramifications for this are noted when “A bigger challenge for the reformers is the fact that the prince’s dizzying changes amount to, in effect, a rewriting of the Saudi social contract. Why, mutter some Saudis, should we tighten our belts when the princes continue to enjoy untold riches? And for all his boldness in economic matters, he remains obtuse when it comes to political liberalisation that might help secure consent for the economic revolution. A tiny number of women have recently campaigned for and won seats in municipal elections, under changes brought in by the late King Abdullah; who more than a decade ago had promised Saudis “true democracy” in 20 years. It is nowhere in sight”.

Further to this the plan to transform the country come across internal problems, “In a country where concerts, public movies and female performances are banned, the prince talks of the “entertainment crisis”, and about his own children lacking things to do. Here and there, he seems ready to try to loosen the grip of the clerics. His latest education minister, Ahmed al-Eissa, is an academic whose book on the dreadful state of Saudi schools, which he blames in part on the restrictions placed by “religious culture”, remains banned in the kingdom. Private schools, still barred from teaching evolution, would have a freer hand to set their curriculum and choose pedagogic materials beyond those designed by the clerics”.

It ends noting the importance of the United States, “for a Saudi royal with no Western education, Prince Muhammad speaks about America passionately. “The United States has to realise that they are the Number One in the world, and they have to act like it,” he says; the sooner America steps back into the region—even with boots on the ground—the better. Prince Muhammad’s schemes do not appear to be inspired by ideology. Many of the ideas he is pursuing have lurked in ministers’ drawers for years. Others follow examples from elsewhere, be it charter schools in America, public-private partnerships in Britain or the abolition of fuel subsidies in Egypt (and Iran). Instead they are born of necessity. The conjunction of a fall in oil prices, a geopolitical crisis and a hyperactive prince afford a once-in-a-generation chance to modernise the country. The Arab spring has shown time and again that post-colonial Arab states are singularly dysfunctional (see page 41). That raises serious doubts about Saudi Arabia’s ability to reform. But the regime has little choice: its survival may depend on it”.

 

“Oil fell briefly below the widely watched $30-per-barrel”

17/01/2016

“Oil fell briefly below the widely watched $30-per-barrel level on Tuesday, extending a selloff that has sliced almost 20 percent off prices this year amid deepening concerns about fragile Chinese demand and the absence of output restraint. Prices settled down 3 percent, a seventh straight daily decline for oil. Traders have all but given up attempting to predict where the new-year rout will end, with momentum-driven dealing and overwhelmingly bearish sentiment engulfing the market. Some analysts warned of $20 a barrel; Standard Chartered said fund selling may not relent until it reaches $10. By Tuesday, the crash had become almost self-fulfilling, with speculators too afraid to buy for fear of being burned by another false bottom”.

Saudi fears of Iran, overproduction and Obama

15/01/2016

A report in Foreign Policy discusses the fear felt by many in the House of Saud, “The true surprise about the Saudi-Iranian contretemps over the execution of Sheikh Nimr al-Nimr is that it caught so many people off guard in the first place. Anyone paying attention to Saudi Arabia knew that something like this was a long time coming. Unfortunately, not enough people were paying attention until it was too late. It’s impossible to understand the current situation without delving into Saudi politics and foreign policy. But it’s equally important to be honest about the limits of our knowledge. Very much like the Islamic Republic of Iran, it’s very difficult for anyone outside the highest reaches of government of the Kingdom of Saudi Arabia to really understand its fears and strategies”.

The writer argues that “it’s clear that Saudi policy has to be understood as an interweaving of Saudi internal and external interests, and right now those interests are overwhelmingly about fear. The external threats it seems to see are easier for Americans to recognise than the internal ones. But what we often miss is how the Saudis see external issues affecting their internal circumstances and creating domestic threats they find far more frightening than the external threat on its own. At the broadest level, when the Saudis in Riyadh look at the Middle East around them, they see a region spiraling out of control. Since 2011, they have witnessed a massive increase in general instability across the region”.

The writer notes that civil wars, terrorism and refugees have turned a placid region into one wrecked by chaos, “Indeed, both the civil wars and the spillover they generate have also produced a general mobilization of the Middle East’s Shiites, instigated and led by Iran. And that includes the Shiites in the Saudi kingdom. Officials in private and press reports occasionally note that hundreds of Saudi security service personnel have been killed and wounded in operations in the Eastern Province, the home to the vast majority of the kingdom’s Shiites. Americans tend not to pay attention to these operations because we see them as proof that the Saudis have things well in hand; but another way to look at it is that the Saudis are fighting pitched battles with someone in the cities of the Eastern Province. In other words, there seems to be a much higher degree of mobilization and violent confrontation among the Saudi Shiites than most realize”.

Implausibly he argues “Then there are Saudi fears about the oil market. Everyone seems to believe that the Saudis are purposely not cutting back production to kill off North American shale producers. But that is absolutely not what the Saudis are saying, either in private or public. Instead, they are saying that they can no longer control the oil market because there are too many other sources and all of the OPEC countries cheat like crazy whenever Riyadh tries to orchestrate a production cut. This has happened to them repeatedly over the past 20 to 30 years. They try to cut production to prevent oil prices from dropping, and the rest of OPEC takes advantage of it to pump as much as they can, contrary to what they promised and agreed to. The result is that there is no overall supply curtailment and the Saudis lose market share. This time around, they have stated that they cannot realistically control the OPEC oil supply, so they are not going to try to do so. Instead, they are going to fight for market share. But doing so means having to win a race to the bottom, with the result that their oil revenues are plummeting”.

Correctly he writes “the region’s civil wars have the Saudis so frightened that they have intervened in unprecedented ways. They have poured tens, if not hundreds, of billions of dollars into Syria and Yemen and to a lesser extent Iraq and Libya. They are pouring tens of billions more into Egypt, Jordan, Morocco, Algeria, and Bahrain to shore up their governments, prevent state collapse under the strain of the spillover from neighbouring civil wars, and thus prevent more civil wars on their own borders. But these increased foreign-policy costs coupled with reduced oil revenues have forced the Saudis to draw from their sovereign wealth fund at a rate of $12 to 14 billion per month — a pace that will wipe out those reserves in less than three years, but is likely to cause severe domestic political problems (including dissension within the royal family) long before”.

He ends noting “the Saudis feel frustrated and abandoned by the United States. Many Saudis and other Gulf Arabs consider President Barack Obama deeply ignorant, if not outright foolish, about the world and the Middle East. They evince out-and-out contempt for him and his policies. From their perspective, the United States has turned its back on its traditional allies in the Middle East. Washington is doing the least it can in Iraq, and effectively nothing in Libya and Syria, with the result that none of those conflicts is getting better. If anything, they are actually getting worse. Moreover, Saudi Arabia seems to differ over whether Obama is using the new nuclear deal with Tehran to deliberately try to shift the United States from the Saudi side to the Iranian side in the grand, regional struggle or if he is allowing it to happen unintentionally. The more charitable Saudi position is the former, because that suggests that Obama at least understands what he is doing, even if they think it a mistake and a betrayal. The latter view, for Saudis, sees him as a virtual imbecile who is destroying the Middle East without any understanding or recognition”.

For those who have argued that the Saudi’s have no where else to go during Obama’s term he argues “The depth of Saudi anger and contempt for the current American leadership is important to understand because it is another critical element of their worldview and policies, as best we can understand them. With the Middle East coming apart at the seams (in Saudi Arabia’s view), the United States — the traditional regional hegemon — is doing nothing to stop it and even encouraging Iran to widen the fissures. Since the United States can’t or won’t do anything, someone else has to, and that someone can only be Saudi Arabia. The dramatic increase in Riyadh’s willingness to intervene abroad, with both financial and military power, has been driven by its sense that dramatic action is required to prevent the region from melting down altogether and taking the kingdom down with it”.

He ends “the Saudis are scared of the rising tide of popular mobilization and Shiite mobilization; they are scared by their loss of control over the oil market and what that is forcing them to do domestically; they are scared by the spillover from the region’s civil wars and the costs that they are being forced to bear to try to prevent that spillover from affecting them; and they are scared that we are abandoning them for Iran”.

Brazil’s myriad problems

13/01/2016

A report in the Economist discusses the mounting economic problems of Brazil, “THE longest recession in a century; the biggest bribery scandal in history; the most unpopular leader in living memory. These are not the sort of records Brazil was hoping to set in 2016, the year in which Rio de Janeiro hosts South America’s first-ever Olympic games. When the games were awarded to Brazil in 2009 Luiz Inácio Lula da Silva, then president and in his pomp, pointed proudly to the ease with which a booming Brazil had weathered the global financial crisis. Now Lula’s handpicked successor, Dilma Rousseff, who began her second term in January 2015, presides over an unprecedented roster of calamities”.

The author mentions that “By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off. Two ratings agencies have demoted Brazilian debt to junk status. Joaquim Levy, who was appointed as finance minister last January with a mandate to cut the deficit, quit in December. Any country where it is hard to tell the difference between the inflation rate—which has edged into double digits—and the president’s approval rating—currently 12%, having dipped into single figures—has serious problems”.

The report adds “Ms Rousseff’s political woes are as crippling as her economic ones. Thirty-two sitting members of Congress, mostly from the coalition led by her left-wing Workers’ Party (PT), are under investigation for accepting billions of dollars in bribes in exchange for padded contracts with the state-controlled oil-and-gas company, Petrobras. On December 15th the police raided several offices of the Party of the Brazilian Democratic Movement (PMDB), a partner in Ms Rousseff’s coalition led by the vice-president, Michel Temer”.

Worryingly for the future stability of the country it mentions “Brazil’s electoral tribunal is investigating whether to annul Ms Rousseff’s re-election in 2014 over dodgy campaign donations. In December members of Congress began debating her impeachment. The proceedings were launched by the speaker of the lower house, Eduardo Cunha (who though part of the PMDB considers himself in opposition) on the grounds that Ms Rousseff tampered with public accounts to hide the true size of the budgetary hole. Some see the impeachment as a way to divert attention from Mr Cunha’s own problems; Brazil’s chief prosecutor wants him stripped of his privileged position so that his role in the Petrobras affair can be investigated more freely. Mr Cunha denies any wrongdoing”.

The piece argues that both external and internal factors have come together, “Now prices of Brazilian commodities such as oil, iron ore and soya have slumped: a Brazilian commodities index compiled by Credit Suisse, a bank, has fallen by 41% since its peak in 2011. The commodities bust has hit economies around the world, but Brazil has fared particularly badly, with its structural weaknesses—poor productivity and unaffordable, misdirected public spending—exacerbating the damage. Regardless of what she may or may not have done with respect to the impeachment charge, Ms Rousseff’s cardinal sin is her failure to have confronted these problems in her previous term, when she had some political room for manoeuvre. Instead, that term was marked by loose fiscal and monetary policies, incessant microeconomic meddling and fickle policymaking that bloated the budget, stoked inflation and sapped confidence. Poor though her record has been, some of these problems have deeper roots in what is in some ways a great achievement: the federal constitution of 1988, which enshrined the transition from military to democratic rule. This 70,000-word doorstop of a document crams in as many social, political and economic rights as its drafters could dream up, some of them highly specific: a 44-hour working week; a retirement age of 65 for men and 60 for women. The “purchasing power” of benefits “shall be preserved”, it proclaims, creating a powerful ratchet on public spending”.

Pointedly it writes “Since the constitution’s enactment, federal outlays have nearly doubled to 18% of GDP; total public spending is over 40%. Some 90% of the federal budget is ring-fenced either by the constitution or by legislation. Constitutionally protected pensions alone now swallow 11.6% of GDP, a higher proportion than in Japan, whose citizens are a great deal older”.

The scale of the problem is seen when the author notes “Analysts at Barclays, a bank, expect debt to reach 93% of GDP by 2019; among big emerging markets only Ukraine and Hungary are more indebted. The figure may still seem on the safe side compared with 197% in Greece or 246% in Japan. But those are rich countries; Brazil is not. As a proportion of its wealth Brazil’s public debt is higher than that of Japan and nearly twice that of Greece. Unable to increase taxes, Ms Rousseff’s government may prefer something even more troubling to investors and consumers alike: inflation. Faced with the inflationary pressure that has come with the devalued real, the Central Bank has held its nerve, increasing its benchmark rate by three percentage points since October 2014 and keeping it at 14.25% since July in the face of the recession. But despite this juicy rate the real continues to depreciate”.

The article calls for harsh cuts, a policy that seems to not have worked, or at least worked at the expense of all other measures, “These efforts are meeting with some success: in December pro-government rallies drew more people than anti-government ones for the first time all year. It looks unlikely that the impeachment will indeed move to the Senate (which would trigger a further six months of turmoil). But this hardly provides a political climate conducive to belt-tightening, let alone to the amendment of the constitution which Mr Barbosa has said is needed to deal with the ratchet effect on benefits. Fiscal adjustment is anathema to the government workers and union members who are Ms Rousseff’s core supporters. Like the country’s economic problems, its political ones, while specific to today’s particular scandals and manoeuvring, can be traced to the transition of the 1980s. History reveals a consistent tendency towards negotiated consensus at Brazil’s political watersheds; it can be seen in the war- and regicide-free independence declared in 1822, the military coup of 1964, which was mild compared with the blood-soaked affairs in Chile and Argentina, and the transition that created the new constitution. One aspect of this often admirable trait is a resistance to purging. The mid-1980s saw a lot of institutions—the federal police, the public prosecutor’s office, the judiciary, assorted regulators—overhauled or created afresh. But many of the old regime kept their jobs in the civil service and elsewhere. The transition was thus bound to be a generational affair”.

It adds “In 2013 the average judge was 45 years old, meaning he entered university in a democratic Brazil. Civil servants are getting younger and better qualified, says Gleisson Rubin, who heads the National School of Public Administration. More than a quarter now boast a postgraduate degree, up from a tenth in 2002. Sérgio Moro, the crusading 43-year-old federal judge who oversees the Petrobras investigations, and Deltan Dallagnol, the case’s 35-year-old lead prosecutor, are the most famous faces of this new generation. Unfortunately, this rejuvenation does not extend to the institution most in need of it: Congress. Its younger faces typically have family ties to the old guard”.

On the scandals at Petrobras the writer notes “One of the causes of the mensalão scandal was corruption that provided Lula’s government with a way to get the votes it needed from the disparate small parties. The petrolão (“big oily”, as the Petrobras affair is widely known) apparently shared a similar aim. Such ruses may have helped PT governments pass some good laws, such as an extension of the successful Bolsa Família (family fund) cash-transfer programme. But the party was not able to do all that it had said it would; potentially helpful reforms in which it was less invested fell by the wayside. Raphael Di Cunto of Pinheiro Neto, a big law firm in São Paulo, points to many antiquated statutes in need of an update, such as the Mussolini-inspired labour code (from 1943) and laws governing foreign investments (1962) and capital markets (1974). A Congress in which dysfunction feeds corruption which feeds further dysfunction is not one likely to take the hard decisions that the economy needs”.

It ends “The strength of Brazil’s institutions suggests something shy of the failed populist experiments of some South American neighbours. And the fact that voters in Argentina and Venezuela rebuffed that populism in the past few months has not escaped the notice of Brazil’s politicians. But every month of dithering and every new petrolão revelation chips away at Brazil’s prospects. The 2010s are already certain to be another lost decade; GDP per person won’t rebound for years to come. It will be a long time before a president can match the pride with which Lula showed off his Olympic trophy. But if Brazil’s politicians get their act together, the 2020s could be cheerier. Alas, if they do not, things will get a great deal worse”.

“Belligerent rhetoric only plays into the hands of the Saudi monarchy”

13/01/2016

A report discusses the next “front” in the Iran-Saudi war.

It opens, “Looks like 2016 was born in violence. Saudi Arabia’s execution of popular Saudi Shiite cleric Nimr al-Nimr has led to an escalation with its regional nemesis, Iran. After Saudi Arabia’s embassy in Tehran was sacked by an angry Iranian mob, Riyadh severed diplomatic ties with the country and organized a regional coalition of countries to isolate it further — Bahrain, the United Arab Emirates, Qatar, Kuwait, Djibouti, and Sudan have all cut or downgraded diplomatic ties with the Islamic Republic in the incident’s aftermath. Iran accused Saudi Arabia of going even further Thursday, claiming that Saudi warplanes had launched airstrikes against its embassy in war-torn Yemen”.

It goes on to mention “Far from being an angry string of irrational actions, the Saudi escalation in recent days seems like a cold and premeditated act of international gamesmanship. Meanwhile, there is reason to believe that Iran’s moves following Nimr’s execution were a strategic blunder. Sheikh Nimr was, after all, a Saudi citizen; by going beyond condemnation to issuing threats, Iran’s reaction served to confirm, rather than challenge, the Saudi narrative about the cleric as a terrorist mastermind in the employ of an Iranian agenda. But the fallout from the recent war of words won’t only be felt on the battlefields of Syria and Yemen. While the military struggles in the region get the most attention, the most important area in which the conflict will play out could be the economic arena”.

He posits that “it looks like Riyadh and Tehran will increase support for their allies, as a negotiated peace looks further away than ever. Unfortunately, Syrian and Yemeni civilians will bear the brunt of the violence. The markets have also weighed in, and they do not appear to expect any direct military confrontation between the two countries. The oil market is particularly sensitive to disruptions in oil supply routes or facilities, as would occur during a conflict between the two Gulf powers. But while there was a spike in oil prices immediately following the recent escalation, it was short-lived, and prices continue to slide, hitting an 11-year low Wednesday”.

He writes that the Saudis aim to weaken Iranian economic growth, “Even as oil prices sit near an 11-year low, Saudi Arabia has continued to pump massive amounts of crude oil. It has repeatedly refused to cut production, rendering OPEC’s price-setting mechanisms useless — and the kingdom has enough excess capacity to drive the price even further down. Analysts have speculated that Riyadh might be trying to drive U.S. shale oil producers out of the market, but the more important aim is to wreak havoc on the budgets of Iran and Russia, both of which are dependent on oil revenues for income”.

He notes that “While the Saudi economy is more heavily reliant on oil than Iran’s, its foreign exchange reserves are far higher and its sovereign wealth fund owns far more assets. It also still has the untapped option of issuing bonds — it has the world’s lowest GDP-to-debt ratio (under 2 percent) and a high credit rating. Most importantly, Riyadh is already taking steps to inject more funds into government coffers: The development to watch out for is the planned economic reforms package, which would institute a value-added tax, cut subsidies, and privatise certain sectors. According to Saudi calculations, should this be successful, the country will see a balanced budget before 2020. Iran, on the other hand, does not have as many options. It’s already in the midst of a subsidy reform plan and, unlike Saudi Arabia, already taxes its citizens. Raising taxes is difficult when inflation is high (16.2 percent) and unemployment is in the double digits (10.4 percent). The oil price necessary to balance Iran’s budget is much higher than the price needed to balance the Saudi budget; the Iranian oil sector is in need of development after more than a decade of sanctions”.

He goes on to write “For these reasons, Iran’s aggressive reaction to Nimr’s death represents a strategic blunder. Rather than simply issuing a condemnation, Iranian leaders issued what could only be construed as a direct threat. Iran’s supreme leader, Ayatollah Ali Khamenei, talked of “divine vengeance”; a spokesman at its Foreign Ministry said that Saudi Arabia will “pay a high price.” Hezbollah leader Hassan Nasrallah gave a televised speech in which he went so far as to describe Saudi Arabia as an illegitimate state and said that Nimr’s execution “will not pass.” This belligerent rhetoric only plays into the hands of the Saudi monarchy, whose recent tough stance toward Iran seems to have become very popular at home”.

He ends “A young Shiite man from the kingdom’s Eastern Province is now less likely to feel Saudi or adopt a Saudi identity — something that does not bode well for the future. After the executions, young protestors in Nimr’s hometown marched to chants of “the people demand the downfall of the Sauds.” Saudi Arabia and Iran could have solved their long-standing issues without destabilizing the region, but they instead chose to cynically exploit existing sectarian tensions. The final chapter in this saga has not yet been written — but the region will not see peace until both sides recognize and respect each other’s boundaries”.

“Could send oil prices back to the triple digits”

11/01/2016

Keith Johnson arguesas others have done, that low oil prices will rise eventually, “Never mind roiling tensions between Saudi Arabia and Iran, the Islamic State’s continued assault on Libyan oil infrastructure, or North Korea’s purported detonation of a hydrogen bomb. Crude prices hit their lowest levels in more than a decade on Wednesday, plunging through a rotted floor and falling more than 5 percent in trading in New York and London to about $34 a barrel — culminating a dizzying crash from heights of more than $100 a barrel in the summer of 2014. Which makes for an odd time to start worrying about all the things that threaten to drive oil prices sharply higher. Yet that’s exactly what many in the industry are starting to do”.

Johnson writes that “The current oversupply of oil, which is keeping prices low, is also setting the stage for oil’s own rebound. The U.S. shale boom, which has gushed more than 4 million barrels of oil a day onto global markets, is fizzling, with U.S. production this year set to shrink for the first time since the bonanza began. Investment across the global oil industry is in free-fall like it hasn’t been for 30 years, which makes it harder to keep today’s wells pumping and puts tomorrow’s projects on ice. Global demand for oil, meanwhile, is still growing, if not quite as fast as last year’s heated pace. In other words, an oil market that currently looks ridiculously glutted is poised to tighten up dramatically later this year and could send oil prices back to the triple digits with all sorts of nasty consequences for a still-wheezing global economy”.

He adds that “In the meantime, all signs point to even lower prices for crude. Asian economies, the motor of global growth, and demand for crude are both stumbling. Prolonged malaise in countries like China could further dampen already tepid expectations for oil-demand growth this year, which would push prices even lower. Meanwhile, oil storage tanks around the world are brimming already and getting fuller because the world still pumps more oil every day than it burns. The U.S. oil storage facility in Cushing, Oklahoma, holds more crude now than ever before. At the same time, Iran, sidelined from oil markets since 2012, is gearing up for a return as Western sanctions are lifted as part of last year’s nuclear deal. If Iran is able to increase oil output and exports more quickly than experts expect, that could further flood a glutted market”.

He continues, “low prices, which did nothing to discourage oil producers last year, are finally starting to take a toll. Thanks to heroic efficiency gains, U.S. shale oil production miraculously continued to climb last year despite plunging prices. But there aren’t any more rabbits in that hat: The U.S. Energy Information Administration expects U.S. shale production to drop this year by about 1 million barrels a day from last April’s peak. Oil rigs in North Dakota’s shale patch, for example, have fallen to their lowest level since 2009 because producers that struggled to break even with $50 oil cannot make ends meet when crude fetches $30-something a barrel. Overall, after record-setting growth last year, non-OPEC oil production is expected to shrink this year by about 600,000 barrels a day, the first contraction since 2008″.

Pointedly he writes “That alone would make for a much tighter oil market. Experts figure the world pumps about 1.5 million barrels a day more than it consumes. But demand is expected to grow this year by at least 1.2 million barrels a day, nearly absorbing the whole surplus. Remove another 600,000 barrels a day of supply, and there’s no surplus at all. Wood MacKenzie, the oil and natural gas consultants, expect oil inventories to start shrinking increasingly rapidly in the second half of 2016. The price plunge has set the stage for other, longer-term impacts by discouraging capital investment across the industry. Oil companies need to invest in existing projects to counteract the natural decline of older oil fields by, for example, injecting tired wells with fluids to maintain pressure and keep output steady. Massive investment is also needed to fill future pipelines with big, ambitious projects like deepwater rigs or oil fields in the Arctic, which will be needed to meet global demand in the next decade”.

The crucial point, is that “That investment is drying up. Big-ticket projects, like Shell’s gamble in the Alaskan Arctic, have been iced. Countries like Iraq are scrambling to find the cash to pay for much-needed oil-infrastructure improvements. Brazil’s Petrobras, whose deepwater fields represented the industry’s most ambitious investment plan, is battening the hatches and slashing future production estimates. Canada’s oil sands have gone from boom to bust in the space of a year. Overall, capital expenditure in the oil and gas industry shrank dramatically last year and is set for another 25 percent contraction this year, figuresMoody’s, the ratings agency. Years of back-to-back belt-tightening are almost unheard of in the industry; the last time it happened was during the oil-price collapse of the mid-1980s”.

Crucially he writes “A tighter market would mean gradually higher prices down the road at any rate. But it could also set the stage for dramatic price spikes when something went awry, like the recent heated confrontation between Iran and Saudi Arabia or the Islamic State’s relentless assault on Libya’s teetering oil industry. That’s because the oil industry’s natural shock absorber — spare production capacity that can quickly be called on to fill any unexpected shortfalls — isn’t really there anymore. OPEC’s spare capacity is at historically low levels because everybody is pumping flat out to make what money they can with low prices. Estimates vary, but the amount of extra oil that OPEC, essentially Saudi Arabia, could quickly get to the market is estimated at between 1.25 million barrels a day and 2.3 million barrels a day, a hairbreadth margin in a global oil market that pumps almost 100 million barrels a day”.

He ends “With little buffer set aside for a stormy day, a taut market could be especially vulnerable to just the kinds of geopolitical shocks that have been proliferating in recent months, from the Persian Gulf to Syria to Russia to the South China Sea. “The oil glut has dwarfed any focus on spare capacity,” said Richard Mallinson, an analyst with Energy Aspects, a consultancy in London”.

“Unlikely to gobble up much of the excess crude”

09/01/2016

Keith Johnson writes explores the mystery of why oil prices are falling despite increased Iranian-Saudi tensions, “Saudi Arabia and Iran, OPEC’s two biggest powers, are at each other’s throats in an escalating war of words that is already spreading to other countries in the Middle East and Africa and spooking diplomats from Moscow to Beijing. Yet crude oil prices fell on Monday, a reminder of how dramatically awash the world still is in cheap oil. Oil traders had initially panicked after Saudi Arabia broke off diplomatic relations with Iran on Sunday amid fears that the growing tensions sparked by Riyadh’s execution of a prominent Shiite cleric could further escalate and potentially threaten oil supplies. That sent crude prices sharply higher in early trading in Asia, Europe, and the United States on Monday”.

He goes on to write “The political crisis has intensified further, with other Persian Gulf countries joining Saudi Arabia in downgrading or cutting diplomatic ties with Tehran. Oil traders, though, don’t seem to care: Oil prices began falling within hours of markets opening as traders digested gloomy economic news from Asia, including the 10th straight month of falling Chinese factory orders. The dismal data is being seen as a sure sign that the engines of the global economy are sputtering and unlikely to gobble up much of the excess crude sloshing about. The global oil glut, in other words, weighs more heavily on prices than even the prospect of open conflict between two rival, regional powerhouses”.

The report goes on to mention “Despite the growing unrest — which included the sacking of the Saudi Embassy in Tehran and moves by an array of Persian Gulf countries to downgrade their diplomatic ties with Iran — actual oil production is not at risk in either country. On the contrary, Saudi Arabia is still pumping flat out, and Iran is gearing up to boost oil production and exports in the coming months as Western sanctions are lifted”.

He adds that “The spat between Saudi Arabia, the most powerful Sunni state, and Iran, the standard-bearer of Shiite Islam, has been brewing for decades and has only intensified in the wake of the landmark nuclear deal Tehran inked last year with Western powers. Riyadh and its Sunni neighbors worry that the deal, by freeing Iran to export more oil and earn more money, will allow a rejuvenated Iran to expand its regional influence at their expense. Tehran, for its part, feels slighted by Saudi Arabia, which took advantage of Iran’s global isolation in recent years to increase its own role in the region and in global oil markets. Saudi Arabia has tried to push back against Iranian influence in countries like Iraq and Yemen. The two countries’ primary battleground is Syria, where Tehran has been one of President Bashar al-Assad’s staunchest supporters while Riyadh has pumped money and weapons to the rebel groups working to oust him”.

Crucially he writes that “Oil is just a part of the broader rivalry between the two countries, both of which rely heavily on income from exporting crude — and both of which have suffered as crude prices plunged over the last year and a half. Crude prices have fallen from about $110 a barrel in the summer of 2014 to the mid-$30s a barrel today. Annually, that costs Iran about $25 billion in foregone revenues and costs Saudi Arabia almost $200 billion. But Saudi Arabia, emboldened by much deeper pockets than Iran, has been able to withstand the price decline better. As the biggest oil producer and dominant voice inside OPEC, Riyadh has ignored calls from other OPEC members, including Iran, to throttle back its oil production to prop up falling prices”.

Pointedly he notes that “At the same time, Iran is angling to jump back into global oil markets with a vengeance and claw back market share as sanctions are lifted. Since 2012, Iranian exports have been limited to about 1 million barrels a day, compared with 2.5 million barrels a day before Western sanctions were imposed because of Iran’s controversial nuclear program. But under the terms of the deal reached last year, those oil sanctions will soon come off, potentially freeing Iran to dump up to 1 million barrels of additional oil into an already glutted market”.

Correctly Johnson sees the broader ramifications of the row, “The escalation prompted concern far and wide, especially since it could torpedo floundering talks for a resolution to the five-year-old Syrian civil war and the broader fight against the Islamic State. State Department spokesman John Kirby on Monday urged leaders in the Middle East to take steps to calm the escalation”.

He concludes “With a more impetuous Saudi leadership than in years past, and Iran’s leaders torn between hard-liners and relative moderates, there are real prospects for significant escalation. That could extend to proxy fights in places like Yemen, where Saudi Arabia has battled to push back against Iranian-backed rebels, or Syria, where Riyadh has backed rebel groups fighting the regime of Assad, an ally of Iran. But despite the relative calm on oil markets Monday, the conflict could also spread to the oil patch itself, Reed said. Saudi oil installations in the eastern, heavily Shiite part of the country are potentially vulnerable to sabotage. And in 2012 hackers, reportedly from Iran, planted malware on Saudi Aramco computers in a high-profile attack that wiped out thousands of computers and crippled the oil company’s corporate operations for weeks”.