The oil price changes the world
- Written by Victor Lupu
The fall of oil prices on the international markets began in 2014 as a bad dream for the energy industry and almost turned into a nightmare in 2015. Especially if we consider that many oil companies, small, medium or large, have had to drastically restructure, closing down some operations, cutting investments and operating layoffs. Others have left exploitation areas in countries where they had ambitious projects.
The oil prices have fluctuated throughout 2015, but the trend was clearly of gradual decline. By year end the international quotations were around USD 38 per barrel, very close to the minimum of the last 11 years, following even lower values, e.g. Brent oil reached USD 35.98 per barrel on the eve of Christmas. Let’s not forget that about 18 months ago, the level was above USD 100 per barrel.
Opinions are divided about the 2016 developments. The international market is still saturated with petroleum products and the depots are full both in the US and Russia, Asia and the Middle East. News agencies reported in December 2015 that the oil storage hub Amsterdam-Rotterdam-Antwerp had reached a new record of loading. If we take into account the probable lifting of sanctions against Iran in January, it seems there would be no grounds for a recovery of the international oil quotations. In addition, none of the major world producers is willing to lose its market share in a world with uncertain prospects. The mild winter, which led to reduced consumption of heating fuel, has also contributed to the market saturation. On the other hand, fuel futures transactions were made with major discounts, as traders prefer to store in anticipation of favourable moments.
There are voices claiming that in 2016 the market will defrost, despite the developments so far, as demand for oil will grow and offset the negative trends. But most analysts see the empty half of the glass and expect international prices to fall below the threshold of USD 30 per barrel.
The US, historic decision after 40 years
The United States took a historic decision on December 18, namely to lift the ban on oil export, after no less than 40 years. The self-imposed embargo dates back to the oil shock during 1973-1975 when the US, facing a declining production, intended to get protected against external shocks, namely supply problems, a decision taken simultaneously with the establishing of a strategic oil reserve.
Following the decision in December, only the US President may limit exports for reasons of national security.
The boom of the shale oil production seems to have led to this decision and, consequently, to the internal market oversupply, plus the intense lobbying done by the major oil companies. The US oil production has almost doubled in the last seven years, enhanced by the exploitation of hydrocarbons from shale deposits. More than ten companies, including Continental Resources and ConocoPhillips, have lobbied over two years for lifting the ban, arguing that in this way market distortions will be eliminated, the American economy would be stimulated and the US national security will be strengthened.
The arguments put forward by the supporters of the measure say the decision could lead to cutting down the very high stocks, would ensure outlets for the American production and would lead also to a drop in fuel prices at the pump. The Senator of North Dakota, Heidi Heitkamp, argued: “By liberalizing American oil, we offer our allies a more stable commercial partner, reducing the power of countries like Russia, Venezuela and volatile regions of the Middle East who use their dominance on the energy market to influence our country and our allies.”
According to the American Energy Department, in September 2015 the US oil production reached 281.68 barrels a month, close to the peak registered in October 1970 (310.40 million barrels), almost double against October 2008 (146.93 million barrels).
How would the recent decision influence the world oil market?
James Williams, working with WTRG Economics, believes the cancelling of the oil export ban will not have a deep impact on the oil market, as overall there won’t be an extra quantity for sale, but the producers could take advantage of the new framework and export at a better price to Europe.
A report issued by the International Energy Agency (IEA) reveals that the US would become the world’s largest oil producer by 2020, overcoming Saudi Arabia, based on the shale oil exploitations. By 2035 the US might cover domestic demand from own sources, it says, adding that currently the US imports some 20% of the quantities needed. IEA says the US would produce 11.1 million barrels per day by 2020, as compared to Saudi Arabia’s expected 10.6 million barrels per day.
In the attempt to avoid panic on the international markets, Russian officials have statements playing down concern following Washington’s decision. Russian Energy Minister Alexander Novak, speaking before Christmas, said the US decision to lift the oil exports ban will not affect the world market. “This decision shouldn’t influence the market, as the US is an importer, it has to buy oil on the market,” minister Novak said. He added that the Russian companies are going through stress tests for an international oil price of USD 30 or 25 per barrel. Russia’s overall oil output in 2015 was expected to reach 533 million tons (10.7 million bpd), while the investments carried out last year have peaked to 1.1 trillion roubles (USD 15.7 billion), up against 2014 of 980 million roubles.
Russia, budget based on uncertain calculations
The same Energy Minister Alexander Novak added that he expects Russia’s oil production in 2016 to reach a new post-Soviet record, namely 10.78 million bpd, as new oilfields become operational and companies will have lower costs.
In another discourse at the end of the year, Novak accused Saudi Arabia that it has destabilized the global oil market by increasing production.
The Russian officials’ optimism is not entirely justified. Hit hard by the falling oil prices on the international market, a decrease by more than half during the latest 18 months, by the gas prices fall and by western sanctions (following the occupation of Crimea) Russia is far from facing a positive development.
In his annual speech to the nation, Russia President Vladimir Putin presented the current economic data and the ones expected in the future and made some comments meant to raise the citizens’ morale. According to the data delivered by President Putin, the Russian government, considering the value of exports, expects an economic growth of 0.7% in 2016, followed by a higher one of 1.9% in 2017 and of 2.4% in 2018. However, the GDP has fallen by 3.5% in 2015.
“I’ve drawn the attention that the peak of the economic crisis has passed amid signs of stabilization in business activity in the second quarter. Russia made its plans in early 2014 based on oil at USD 100 per barrel, though crude prices fell by half and everything had to be recalculated, while a price of USD 50 per barrel in 2016 is very optimistic,” Putin said.
He added Moscow will not rush to cut budgetary expenditures such as those for social purposes, but the government is ready for various scenarios.
The data revealed by President Putin are rather positive. Unemployment is 5.6%, pensions have increased by 11.5% according to the inflation rate. The capital outflows have decreased, while the international reserves, although down, are at a ‘good level’. Vladimir Putin also said that, in spite of the sanctions, new capital inflows can be noticed, while Russia has fulfilled its obligations to partners, another reason for investors to be interested in Russia. “However, while other countries face the threat of deflation, Russia must fight inflation,” the Russian president said.
However... we shouldn’t forget the ‘failures’. US oil giant ConocoPhillips has left Russia after 25 years in this country. The company sold its 50% stake in the joint venture with the Russian firm Rosneft.
Conoco is one of the first foreign companies that managed to enter the Russian market - negotiations began before the Soviet Union collapsed. The US Company completed the sale of its last asset held in Russia, a 50% stake in Polar Lights project in north-western Russian territory, an investment that started in 1992. ConocoPhilips giant was also shareholder to Lukoil, owning after 2004 a package of 20% of the shares, which it sold in 2011, when it decided to begin the withdrawal from the Russian market.
The western sanctions against Moscow, the recent tensions with Turkey and the military intervention in Syria - have all negatively influenced the Russian Federation’s budget, in a context of falling budgetary revenues due to the decrease of international level of oil and gas prices. Their impact could be hard, despite the optimism shown by Russian officials.
For Russian citizens the problems are not simple. According to statistics, 15% of the population lives below the poverty line, more than two thirds say that the country is in economic crisis, and 58% have cut expenditures for food. According to the latest survey by the Foundation for Public Opinion, the proportion of Russians who speak about economic crisis in Russia has risen to 72%, while only 15% say there is no crisis, and 12% could not answer, out of the sample of the 1,500 respondents in 104 cities and 53 regions conducted during November 21-22, 2015. Among those who agree Russia is going through crisis, 41% see it manifested in the rising prices and inflation, 22% in the sharp decline in the standard of living and in the low level of pensions and salaries, and 15% in the unemployment and the falling offer of jobs on the labour market. About two-thirds of respondents, 61%, believe that their financial situation is an average one, 31% say it’s a bad financial situation (up from 24% in August) and the financial situation is good for only 7% of Russians.
According to various analysts, Russia faces uncertain prospects in 2016. A country with huge potential is still only tenth in the world ranking by GDP and relies overwhelmingly on export of energy products and raw materials. In addition, the modernization of the economy goes slowly, except for the investments made by foreign companies, and corruption remains a major risk factor. Moreover, the military ‘adventures’ Moscow embarked on remain a regional and global uncertainty factor.
The Gulf states ‘discover’ tax paying
OPEC, the cartel of states living on petrodollars, is in crisis. Saudi Arabia and its Persian Gulf allies have refused to cut production, trying to protect their market share and to ‘kill’ the US companies that have invested in shale oil exploitations, economically difficult to sustain when the current prices are declining.
But home count did not match the realities. Following the developments in oil prices, rich Persian Gulf countries - the UAE, Saudi Arabia, Kuwait, Oman, Qatar and Bahrain - have decided to gradually introduce, for the first time, the Value Added Tax (VAT) in the next three years. It will be for the first time citizens of these countries pay taxes. The decision was taken during the Gulf Cooperation Council, and the introduction of VAT will take place simultaneously in the six countries, in order to prevent unfair competition and contraband. VAT free will be medical services, social services and education and nearly 100 foodstuff products, nevertheless it is a huge change in countries that virtually had no tax offices for the citizens. Experts say the introduction of this tax will contribute to increasing the GDP by 4-5%.
Several examples: The decision comes in the context in which Saudi Arabia faces a high budget deficit, which led it to withdraw tens of billions of dollars from investment funds. Saudi Arabia has registered in 2015 a record budget deficit of 367 billion riyals (USD 98 billion), about 20% of GDP, following the collapse of oil prices, announced at the end of the year the Saudi Ministry of Finance. But despite the recent financial problems, Riyadh spends significant amounts to finance rebels in Syria and the military campaign against the rebels in Yemen.
In turn, the United Arab Emirates have cancelled the fuel subsidies. According to the information, only in August the prices have jumped by 24%. Next is the introduction of VAT and corporate tax, having the prospect of cashing in additional USD 7 billion in 2016. So far, only foreign banks have paid taxes. Finally, Oman and Bahrain too will give up subsidies and will introduce the VAT.
However, the International Monetary Fund (IMF) expressed, in mid-December 2015, doubt that these measures will be sufficient to offset the decline in oil prices, reflected in lower revenues for the state budget. Masood Ahmad, Director of the Department of IMF Middle East and Central Asia, said at the Arab Strategy Forum in Dubai that there needs to be ‘major adjustments’ in the fiscal policies of the Arab gulf states and Algeria, whose economies are heavily reliant on oil sales, adding that apart from VAT, countries need to review their capital expenditure and the public sector size.
Instead of conclusions
Hence, we start 2016 with uncertainties and repositioning of the big players in the oil field, but surprises are not excluded coming from smaller players. In their turn, large consumers such as China and Europe can have a say in the sense of redirecting demand on a market increasingly agitated. Who would have predicted one or two years ago that rich Persian Gulf states will have to take measures for the introduction/increase of taxation? Or that the US will abandon the export ban self-imposed 40 years ago?
Unfortunately, it’s not just the economic factor that can influence the developments in 2016. The last few months have shown that political and military instability in the Middle East is crucial for other regions of the world - in terms of economic stability, security, and migration - if not for the whole world. The solving of the problem of the Islamic State is required, but will it be possible? Things have become even more complex when Islamic State (IS) jihadist leader Abu Bakr al-Baghdadi urged on December 27 an uprising in Saudi Arabia and vowed attacks against Israel. Al-Baghdadi criticized a recently established coalition of 34 countries announced by Saudi Arabia on December 15 in order to ‘fight against terrorism’. The IS leader virulently criticized Riyadh in its previous records, and had urged the Saudis to ‘stand up’ against their leaders.
So, is 2016 going to be a quiet year?