Cheap Oil
I like gassing up for $25 bucks, and judging by the prices I saw driving home last night, my next fillup will be even cheaper. It reminds me of long ago, more peaceful times. It may be a Mideast nightmare, but what are the risks, and does it pay other dividends? Roundup starts with MEMRI’s roundup of fear, loathing and hopes in those places where money bubbles up out of the ground:
After a hefty spike in oil prices in the preceding year, reaching as high as $147 a barrel in July 2008, prices plummeted in the subsequent four months to below $55 a barrel on the close of trading day of November 14 - a a sharp price decline of close to two-thirds. The decline is quite far-reaching, given that oil revenues provide 70 to 80 percent of government revenues in OPEC countries. According to the International Monetary Fund (IMF) a decline of $1 in the price of crude would translate into a loss in revenues of $3.5 billion in Saudi Arabia, $300 million in Qatar, $1 billion in the United Arab Emirates (UAE) and $960 million in Kuwait, calculated in an annualized basis. Some of the countries concerned, such as Saudi Arabia, Kuwait, and the United Arab Emirates, have deep pockets and would survive the dip in revenues, certainly in the short term. According to data from the Institute of International Finance, GCC governments had foreign assets of $1.8 trillion at the end of 2007, and the tally was expected to top $2 trillion by end of the 2008. In other countries, particularly Iran and Iraq, oil shocks could trigger serious economic dislocation.
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The Risk of Faltering Reforms
For most oil producing countries, oil revenues are the backbone of their national revenues and a major source of financing of their oil and infrastructure projects. In the case of Iran, oil revenues serve to bolster the regime’s populist programs, including the subsidies for key food items as well as for gasoline - more than half of which is imported due to limited refining capacity. For the others, the decline of revenues will cancel or put on hold a variety of both upstream and downstream oil projects, including exploration and the development of the oil-based integrated refinery-petrochemical links as well as the gas-based petrochemical and fertilizer links.
The financial turmoil may also have more fundamental consequences for the Middle East economies beyond the reduced financial sector profitability and the losses suffered by investors. One particular analysis warns against “faltering reform” which is far more significant than the real threat of faltering asset prices. In most MENA countries, there has been a move in recent years towards economic and financial reform. Foreign investors have been encouraged to take significant stakes in state-owned banks. The fact that Western governments are taking control of private sector banks “hardly strengthens the hand of the Middle East reformers keen to privatize their own lumbering state-owned institutions.” There is also a greater concern that, as a result of the perception of market failure in the West, the drive for a free-market economy will be stalled, if not abandoned.
How to Live on $20 a Barrel
Abd Al-Rahman Al-Rashed, director-general of Saudi satellite TV Al-Arabiya and columnist for (and former editor of) the London daily Al-Sharq Al-Awsat offers an uncommon perspective on the challenges facing the Gulf countries in the event that crude prices dip all the way down to $20 a barrel. He considers the shock a blessing in disguise, a warning for self-reliance, and an opportunity for reform. The reform, according to Al-Rashid, must focus on the education system: “We do not need $100 a barrel to reform our education. Teaching students more chemistry, physics and mathematics will not require a single additional dollar, but will produce more than our existing educational system…Weak instruction produces [an] emaciated society.”
Crisis Spillover
In a study by the Gulf Finance House in Dubai, senior economist Hany Genena wrote that the global financial crisis was spilling over to the GCC (Gulf Cooperation Council) countries via three main channels:
First, lower crude prices. The key risk to the GCC growth story is the longer-term outlook of crude oil prices rather than short-term volatilities. However, the Brent (benchmark) price would have to fall to about $60 per barrel before GCC fiscal surpluses start to erode. At this price, GCC oil revenues will be marked down by no less than 40% in 2009, compared with 2008, resulting in lower fiscal and current account surpluses.
Second, the exit of foreign capital has resulted in a significant fall in bank reserves and rise in interbank rates across the GCC. This was particularly pronounced in the case of the UAE, where the ratio of banks’ foreign liabilities to total liabilities jumped fourfold, from 6.5% to 25%, between early 2007 and March 2008.
Third is the faltering demand for energy-intensive industrial and building materials, which are the largest sectors in the GCC after oil. Downward pricing pressures are occurring amid a build-up of excess capacity in the GCC.
A mitigating factor for the GCC countries is the fact that their currencies are pegged to the U.S. dollar, which has recently registered a sharp appreciation against the euro and the British pound. As a result, inflation, which was a major concern for these countries while oil prices were rising, has begun to diminish.
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Conclusion
The global financial turmoil has impacted the oil-producing countries, particularly the members of the GCC, in at least three ways: crude price has declined by almost two-thirds in a three-month span, foreign investments have dried up, and the demand for the region’s energy-intensive industrial and building materials will likely slow down the pace of economic growth. Major development projects may have to await better times.
The various economies of the oil-producing countries are in different stages of readiness for the sharp decline of revenues. Most obviously, how these countries would fare depends on the duration of the financial crisis and how much deeper, if at all, oil prices will plunge.
Iran, the second largest oil producer among OPEC members, is likely to feel the pain of declining oil prices more severely than any other oil-producing country in the Middle East. Unlike the GCC member countries, Iran’s price stabilization fund, which was to receive windfall profits to be used when oil revenues decline, has been nearly depleted as a result of poorly managed economic policies by the regime of President Mahmoud Ahmadinejad. The criticism in the Iranian press of Ahmadinejad’s stewardship of the national economy is a daily occurrence.
While further decline in the price of crude cannot be discounted, the long-term prospects remain quite positive for the oil-producing countries. After the financial crisis exhausts itself, economic growth will resume and so will the demand for energy. This is a matter of years, not decades.
The major risk for the industrialized countries is that the sharp dip in crude price has a tendency to dampen official enthusiasm and correspondingly shelve promising programs in the search of alternative sources of energy.
Which brings us to the first benefit, in the First World. Not only will ineffectual, counterproductive feel-good efforts to stem the tide of rising oceans face strains as a result of our own financial crisis, the major popular incentive exploited by warmalists … rising gas prices … just lost steam. Downside, the good goes out with the bad, as sensible efforts to gain energy independence and renewable forms of energy get shelved, or more likely under the incoming administration and Congress, the good goes out, the feel-good stays.
Al-Qaeda, because it has been driven out of the normal banking system, reportedly has been in a position to weather the global economic crisis. Is it in a position to weather a drastic drop in income in its core financial base? We’ve always been told jihad is fueled by poverty and hardship, though it was never that simple and many jihadis, particularly at the higher levels, have been middle- and upper-class malcontents. But financial incentives for foot soldiers and suicide bombers have always been part of the picture, from Palestine to Iraq to Afghanistan. Like all major corporations, Global Jihad Inc. requires cash flow. You can’t eat or shoot jihad.
Iran, as noted above, already has been experiencing economic discontent, as well as social discontent. The Iranians have an example in living memory of toppling a government, as well as, within the existing system, shifting its direction somewhat. Does nuclear weapons development continue when they can’t fee the peasants? Downside, the government has experience repressing the will of the people.
A commentator cited above feels the time is ripe for social reforms in Arab countries, and that financial stress has the potential to aid rather than hinder. Could be. Unfortunately, the Arab country that has seen the greatest reforms in living memory, Iraq, is now unlike other oil-rich Arab states where social change rather than basic development is the fundamental problem. Lack of money, stalled development in Iraq may risk a return to the bad old days and a renewed and ongoing reliance on us. So much for that subway. Will backward regimes that have been feeling some heat such as the Saudis be forced to step up the pace of reforms, or attempt to retrench? Do the people of the region decide it’s all our fault and build on anti-western resentment, or do they build on the hard lessons of self-reliance and self-government and responsibility of the past decade?
These are the questions. I have no idea what the answers are, and they promise to be highly complex from one country to another, one situation to another. But the Obama administration had better be prepared to come up with some, and to help our friends and allies in the region do so.
Some more. Lebanon’s Daily Star:
The perfect financial storm now descending on the Middle East threatens to derail the economic ambitions of the oil-rich Gulf states and wipe out the modest economic growth and progress witnessed in the non-oil producing areas of the region. Perhaps even more troubling, the crisis has exposed the vulnerability and inadequacy of the institutional foundations of Middle Eastern economies and raised serious questions about the economic judgment of the region’s authoritarian leaders and their ability to weather the current financial tsunami.
And there’s that piracy thing, hot topic the last few days, more likely to grow and spread if things get bad enough. WSJ blogs on shipping costs:
The boldness of the attack on the 1,080-foot Sirius Star may prompt insurers to require special “war risk” insurance costing tens of thousands of dollars a day to cover travel across a much greater area of water. It also could spur shippers to hire more onboard security for their vessels, which many have resisted because of costs and the fear of escalating armed conflicts with the pirates.
“This could be a game-changer,” says Peter Hinchliffe, maritime director of the London-based International Chamber of Shipping. “It’s no secret the whole industry is looking into this.”
WSJ on Iran’s $$$ woes. Less oil money means less oil, bad for consumers as well as producers.
Gulf Daily News, Bahrain, Oasis of Stability:
“Here in Bahrain we have not had the luxury of large oil reserves, but what little we have, has been used well by a wise government committed to diversification, and to investment in its main resource - its human capital.”
Novel concept in that part of the world.
Now for something completely different. TIME: Energy crisis will outlast the economic crisis … and help fuel it. Enjoy your cheap oil while it lasts, high prices are coming back.
… the respite could be brief, according to the International Energy Agency’s analysts. The Paris-based organization’s annual World Energy Outlook, released on Wednesday, predicts that oil prices will start a steep climb soon, and by 2030 will settle around $120 a barrel — more than double this week’s price — as producers face rocketing costs of equipment such as drills and rigs, and are forced into the increasingly expensive business of extracting oil from less accessible fields, many of them far out at sea. Added to that, the world economy continues to grow — albeit at a slower rate — which will likely accelerate again at some point in the coming years — prompting billions more people to drive cars and burn electricity at home during the next two decades, says the report by the IEA, which represents the industrialized oil-consuming countries. Securing sufficient energy supplies, and switching to low-carbon systems will require “radical action by governments.”
Topics: Obama, middle east, money, oil
Posted by Jules Crittenden at 9:04 am on Thursday, November 20, 2008
One Response to “Cheap Oil”
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November 20th, 2008 at 5:56 pm
While seldom agreeing with Time, suspect they are correct. The price of fuel will grow as the global economy rights itself. BO will usher in carbon caps and higher costs to U.S. taxpayers but not gain much in actual energy independence.
Finally, thinking Americans are certainly familiar with the Saudi television executive’s statement, “…Weak instruction produces [an] emaciated society.”