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Miracle solutions are not expected . . .

The oil price fell to a level never reached in more than four years losing more than 60% as of 2014, though rallying slightly a month earlier; the Brent managing $47,19 and the WTI $44.72 whilst at the same time, the Dollar lost some ground to the Euro.  An Informal Meeting of OPEC in Algiers this September was envisaged in this context.

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The Organization of Petroleum Exporting Countries (OPEC) 14 member countries have agreed to meet however informally on the side-lines of an energy forum scheduled for September 26th through 28th in Algiers.  Miracles are not expected but potential solutions would rather depend on an agreement between Saudi Arabia and Iran, on the one hand, and on the other between Saudi Arabia and non-OPEC Russia and the US.

Avoiding to both reason on a linear model of consumption or to making risky predictions and whilst some experts predicted the price of $70/80 by late June 2016, misleading public opinion (1), I would like to think that we are in presence of 12 basics as follows :

1 – OPEC, composed of Algeria, Angola, Ecuador, recently reintegrated Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela, whilst having the largest world conventional oil reserves would represent only a third of the world’s marketed production.  Algeria and Venezuela, campaigning for a reduction of the quotas by 2 million barrels per day (2 Mb/d), are marginalized leaving Saudi Arabia and the Gulf countries a freehand in the cartel strategy.

2 – The non-OPEC countries’ strategy of expansion represent 65 to 67% of global market.  Russia home to Gazprom oil & gas main producer is in need of finance, and tensions in Ukraine do not seem to have affected its exports to Europe where its market share for gas was 30% between 2014/2015.  It is well known that Russia has taken market share when OPEC was reducing its quotas.  Any decrease in the production of the non-OPEC countries for productivity’s sake, would impact the supply side and in case of expansion of demand would act positively to raise prices and vice versa.  The countries of the Gulf, notably Saudi Arabia, confirmed on several recent occasions that they would reduce their production only if producers outside the cartel, notably Russia whose production lately reached record levels, also embarked on this path.

3 – Slow growth in the world economy, including that of the emerging countries, Argentina, Brazil and India between ½% and China’s 7%, mainly due to the increase in interest rates with the construction industry contributing to more than 25% of its GDP, in order to pre-empt a real estate bubble, would explain present demand.

4 – The emergence of American shale gas/oil did upset the world energy map; with a production from 5 million barrels a day to over the current 10, impacting supply and turning the US in July 2016 into an exporter to Europe.  Cost of Saudi production however is between $5 and $10 per barrel (that of Iraq’s below $5) against that of the US marginal shale gas deposits that is $40 to $60 and that of the larger deposits at $25 to $40, thanks to new technologies helping to substantially cut the costs by more than 30 to 40% in recent years.

5 – Rivalries within OPEC with respect to quotas, include Iran-Saudi Arabia, and for purposes of market share objectives, would increase their supply.  Saudi Arabia with more than 35% of OPEC’s as well as 12% of the world’s production could be the only producer country in the world today that is able to weigh on world supply, and therefore on prices, not existing for geostrategic reasons of rivalries with the USA.  Eventually, the equilibrium price will be basically determined by an agreement between Saudi Arabia and the USA.

6 – The arrival of several new producers must be taken into account on the supply-side, including Libya ranging up to 2 million barrels a day, of Iraq with 3.7 million barrels a day (at a cost of less than 20% compared to its competitors) that can go to more than 8/9 million, and Iran with more than 5/7 million in the medium term, and in a very short period exceeding 3.5 million barrels per day.  Moreover, with new discoveries in the world, especially in offshore sites particularly in Eastern Mediterranean (20,000 billion m of gas) and Africa’s Mozambique that could have the third largest world reserves.  All this is amplified by new technologies that allow the reduction of the cost of the marginal deposits.

7 – We are presently seeing new technologies for energy efficiency in the majority of Western countries, with a forecast of 30% reduction thus questioning Algeria’s continuing regardless of that with its two million housing units development using old methods of construction.

8 – Trends are for a new division and international specialization with concentration of high-intensive energy manufacturing in Asia with 65% of world consumption by 2030 notably in India and China.  Customer-supplier relationships will be to their advantage to have comparative advantages pushing prices down as does currently China for Venezuela and Ecuador.

9 – The upward or downward level of US stocks would intensify speculation of traders in the stock markets.

10 – Terrorism interference in oil and gas fields in Iraq and Syria with flows through to the black market and Turkey at $30 a barrel has some transient and marginal consequences on prices.

11 – Any variation in the exchange rate between the Dollar and the Euro would impact the oil price at between 10 to 15%, although there is no direct linear correlation.

12 – The determining factor in the future will be the energy transition between 2020 and 2040.  It is a strategic mistake to reason on a linear consumption model and make risky predictions without sticking to the fundamentals.  Each year in the world, $5,300 billion ($10 million per minute) are spent by all States to support fossil oils, according to estimates of the IMF in its report for the COP21.  However, it seems that the majority of the leaders of the world have become aware of the urgent need to go for an energy transition.  In the case of a mutation of the model of energy consumption at the global level, (the future in 2030 being hydrogen), this will influence fossil energies pricing down.  .

According to experts of Citigroup, the Saudi strategy preparing for the energy transition, is investing massively in renewable energy so as to reduce its dependence on oil; $2,000 billion could also be seen as a precursor sign of OPEC weakness, as being able of acting sustainably on prices.  Rebalancing also of the market will depend on a series of factors that are outside of OPEC countries.  The financial tensions in many oil-exporting countries reduce the capacity of these countries to mitigate the shock, resulting in a significant decline in their domestic demand.

A spectacular rise in the price of oil that is expected not to occur, we anticipate to have four scenarios :

  • The first scenario is about an expansion of the world economy including China’s where the oil price approaching $60/65 between 2017/2020; no one can predict beyond that but all depend on the energy mix between 2020/2030.
  • The second scenario is moderate growth, and the price would fluctuate between $50/60.
  • The third scenario, with low growth course would fluctuate between $40/50.
  • The fourth scenario a global crisis where the price would plunge below $ 40.

 Dr. Abderrahmane Mebtoul, University Professor, Expert International,  ademmebtoul@gmail.com

Translation from French by Microsoft / FaroL  faro@farolco.onmicrosoft.com

(1) – Professor Abderrahmane Mebtoul, PhD (1974) – Director of Studies at Department Energy/SONATRACH 1974 / 2007.  Audit director, February 2015 on the risks and opportunities of the shale gas assisted by 23 international experts.  – See study by Professor Abderrahmane Mebtoul, published at l’Institut des Relations Internationales (IFRI Paris France November 2011) in French – “Maghreb cooperation / Europe geostrategic challenges”–“for a new strategic management of SONATRACH» – revue international HEC Montréal Canada (2010) – International Conference ADAPES / French Parliament, November 2013 -“new mutations energy global’ – ‘Gas strategy of Algeria facing global changes’ review International Gas today (Paris France – January 2016).

Also – See different contributions in MaghrebEmergent.com  (2014/2016) and Interviews of Professor Abderrahmane Mebtoul, on :

  • CNN Arabic on August 25, 2015
  • The weekly London based Arab Economic News
  • Al-Arabiya TV, London, August 27, 2015
  • The Spanish official agency E.F.E., main agency in Spanish, «Global energy changes, impacts of the decline in the price of oil on the Algerian economy and prospects»
  • RFI (Paris, France in December 2014) “what Algeria must do to avoid the crisis”
  • Report of the IMF/Bank world level of foreign exchange reserves 2018 and impact of the informal meeting of OPEC in Algiers
  • ENNAHAR TV on August 13, 2016
  • El Chaab on August 13, 2016
  • 14 August 2016 to El-Bilad daily and Le TempsDZ
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