A success for Algeria’s economic diplomacy ?

The OPEC’s Algiers Informal Meeting tomorrow, regardless of the various scenarios of its running, would not be a failure, but a success for Algeria’s economic diplomacy, if it manages to bring together a good number of participants.  According to our information, there will not be question of lowering any production but rather to try and reach a consensus with a view to reconcile, contradictory points of view so as to stabilize the market on an equilibrium price ranging between $50 and $60.  However Utopian the idea might seem, of the growth of the world economy taking off, this is the very factor that will ultimately determine the price of oil.  Taking into account the global geo-strategic map and the approaching fourth global industrial revolution whilst avoiding to reason on a model of linear consumption, one must as just announced by the Chinese president at the recent G20, that no expert can accurately predict scenarios of evolution of the price of oil as well as that of the new world economic structure of between 2010 and 2030.

As highlighted in a number of my contributions, refer to Maghreb and contrary to some Algerian experts’ speculations, global demand for oil can only be mitigated as per the Organisation for Economic Co-operation and Development (OECD) for years 2016 and 2017 in its 2016 report.

According to this report, the low growth in trade and distortions in the financial system do cloud the Outlook for global economic growth which has a direct impact on demand for oil.

In case the price was held at a reliable level, any freeze of the production of the OPEC countries would certainly benefit those non OPEC countries who will consequently take larger market share.  Conversely in case of a production freeze, this would allow an increase in prices up to $60 but would not avoid the same scenario, and at term could have a negative impact on prices with oversupply. Those who reason about the rigidity of supply tend to easily forget two factors: 1. the reduction of costs with new technologies, thus offering a premium to those that relied on the knowledge economy, and penalising the net importers of patents and 2. the new model of energy consumption which is gradually taking place (energy efficiency and mix).

The difficult equation to solve at the Algiers meeting would be although the US as one of the largest producers will not be present and playing on the reduction of costs of production has become a net exporter.  Observers agree that the future price will depend on an agreement between consumer and producer countries on the one hand and on the other, by an OPEC and non-OPEC countries agreement.  Negotiation should then focus on the level of the freeze or nothing has been decided yet.

The transformation of the informal meeting into a formal meeting according to the statutes of the OPEC is a sovereign decision of OPEC ministers, which may postpone the final decision to the meeting scheduled for November in Vienna.  And the big problem, then would be, if freeze was agreed, its level.  If this were at a high level, of say Russia’s and Saudi Arabia’s during July to September 2016, there would be no significant impact on the price.

Also, the determination of the price of oil, (the price of gas is indexed on it) will depend on an agreement between, Saudi Arabia and first, Russia that reached a record level of production in early September 2016 and between Saudi Arabia and Iran that desperate for funds, is keen to return to its before sanctions quotas of over four million barrel per day (BpD).  The Saudi proposal to reduce its output by 500,000 BpD back to its January 2016 level would be conditioned by Iran not exceed 3.5 million BpD.  This is a big problem but what about Russia?

Country with obvious geostrategic stakes, and leaders alleging that the Americans are up to wanting to put Russia’s economy back, including foreign reserves at an exchange rate of over 40/50 Dollars may run out by 2020.

To all this, should be added the future growth of production by end of 2016/2017 of Nigeria, of that of Libya, of Iraq (for these two countries to achieve their quotas) and of Kazakhstan with the entry into production of a large deposit in December 2016, not to mention that of the USA as well with shale oil and gas (through a reduction of 30 / 40% of the costs) that has upset the whole global energy map (1).

Basically, the future equilibrium price will be determined by an agreement between the USA and their strategic allies for a long time, Saudi Arabia.  But it remains that the major factor will be the growth of the world economy with a negative or positive impact on producing countries, because of the interdependence of economies.  In case of a low growth, the stabilization of the oil price will be difficult to achieve, prices should fluctuate between $45-50.  In the case of a slight recovery, it could go to the next band of $50/60 between 2017 and 2020.  In the event of a strong recovery between 2017 and 2020, it could even reach the next band of $60/70.

In the event of a crisis similar to that of 2008, it could sink to below $40.  Beyond 2020/2030, because of the disruption the global geostrategic map and the upcoming fourth global industrial revolution, no expert would be in a position to anticipate with a relative accuracy any scenario of evolution of not only the price of oil but also of the new global economic structure, between 2020, 2030 and 2040.  All we could say at this stage is that strategies for adaptation by successive layers are necessary.

In short, far from the vision of gloom that announces the failure of the meeting in Algiers, and regardless of any of the scenario put forward, and after years of isolation, being aware that in practice of the business of fossil oil is not ready yet to be replaced by any other form of renewables, the informal meeting in Algiers OPEC would have at least served to bring some value added to the current discourse and therefore is after all a success in its own right.  Success for notably the “economic diplomacy” of Algeria.

Dr. Abderrahmane Mebtoul, University Professor, International Expert,

Translation from French by Microsoft / FaroL

References :

(1) – Interview on this subject of Professor Abderrahmane Mebtoul by

  • State controlled Arabic daily El Chaab of September 25th, 2016
  • On Ennahar TV live on September 24thand 25th, 2016 between 14 h and 14:30
  • On Dzair News TV live on September 24th, 2016 from 19:00 and 20:00 and
  • On Chorouk TV on September 26th, 2016