For what prospects ?
Oil price is at a level not seen for more than four years, slumping by more than 60% if compared to its 2014’s, with however a slight increase a month ago. It was on May 27th, 2016 at $49.20 for the WIT and $49.07 for Brent with the Euro at $1.113. Then what’s the OPEC’s meeting of 2 June 2016 about ?
The OPEC’s meeting of June 2nd, 2016 where the member countries will be reviewing their respective quotas, market share and eventually prices. They more or less maintained their production quota to a total of 30 million barrels per day (mb/d) since the agreement of Oran, Algeria of 2008. This was recently upped at Doha whilst trying to freeze production to 31.5 mb/d, but the failure of the meeting OPEC/non-OPEC by virtue of Saudi Arabia tensions with absent Iran did not bring any happy conclusion. But the lifting of the sanctions on Iran and the Indonesian re-entry into the cartel are in reality pushing towards exceeding that.
I propose a list of twelve basic fundamentals, avoiding both to reason on a linear consumption model and then make risky predictions; some so called experts are predicting a price at $80 by year end, perhaps misleading public opinion (1).
1 – OPEC, composed of Algeria, Angola, recently reintegrated Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Ecuador and Venezuela, with the largest world oil reserves represents only a third of the world’s marketed production. Algeria and Venezuela, campaigning for a reduction of the quota by 2 million barrels per day, are marginalized compared to the weight of Saudi Arabia, and the Gulf countries. Algeria produced since January 2009 approximately 1.2 mb/d, in accordance with the quota that was allocated to it by the Conference of December 17th, 2008 in Oran.
2 – The strategy of countries outside OPEC representing 65 to 67% of global market include Gazprom, both for oil and gas, Russia being in need of finance, tensions in Ukraine which in no way affected its exports to Europe where its market share for gas was 30% in 2014. Experience in the past has shown that Russia has taken market share whereas OPEC was in the process of reducing its quotas. Any decrease in the production of non-OPEC countries for reasons of productivity would result into a decrease of the supply and conversely in case of demand increase would act positively on prices and vice versa. Countries of the Gulf including Saudi Arabia did, indeed, for several times recently announced that they would reduce their production if and only if the producers outside the cartel, including Russia whose production has recently reached a record level, did commit also towards the same goal. Most analysts consider this to be somehow very probable.
3 – Weakness of the world economy’s growth, including the slowdown in emerging countries like Argentina, Brazil, India with 0.5%, and especially China though with 7% of growth rate, is mainly due to the increase in interest rates where building and infrastructure development contributing to more than 25% of its GDP’s, in order to perhaps avoid the real estate bubble, would explain weakness of demand.
4 – The introduction of the American shale oil / gas has upset the entire energy world map, from 5 mb/d of oil to over the current 10 mb/d, and still has a definite bearing on supply. For the medium term, many experts believe that the marginal cost of Saudi production (i.e. the cost of the most expensive well to operate) is between $5 and $10 (Iraq’s is below 5 dollars) against 40-$60 for shale oil for the marginal deposits and 25-$40 for the large deposits. By and large, new technologies have substantially reduced all around costs in recent years by more than 30 to 40% contrary to some forecasts. The reality is somehow more complex, and between geo-strategic decisions involving difficult negotiations with Russia, Iran and Venezuela, and by implication, Algeria, which being the weak links in OPEC cartel and therefore possible financial difficulties. According to the IMF, Russia needs a barrel at $110 to wrap up a year’s budget, Venezuela 120, 140 for Iran and Algeria $110 to $120, the price floor of $37 being an accounting artifice.
5 – Rivalries within OPEC with some not respecting their quotas include Iran, Saudi Arabia that by the way does not want to lose its market share by increase supply. Saudi Arabia (more than 35% of the OPEC production) and 12% of world production is the only producer country in the world today that is able to weigh on world supply, and therefore on prices. Rivalries are not acknowledged as such for geo-strategic reasons between Saudi Arabia and the USA. Eventually, the equilibrium price will basically be determined by an agreement between Saudi Arabia and the USA.
6 – Entry and / or re-entry of numerous producers into the market must be taken into account on the supply-side. Libya has up to 2 mb/d, Iraq with 3.7mb/d (and second world reserves at a production cost of less than 20% compared to its competitors and that can go more than 8 to 9 mb/d), and Iran with 2.7 mb/d that can go more than 5 to 7 mb/d in the medium-term, with possibility in a very short period to exceed 3.5 mb/d. Moreover, with new discoveries in the world, especially offshore, particularly in Eastern Mediterranean (20 000 billion m³ of gas that could explain in part all the tensions in this area) and Africa including Mozambique that could have the third biggest reserves of oil in Africa.
7 – We are above all seeing the emergence of new technologies that not only allow a certain reduction of production costs of the marginal deposits as well as bringing in definite energy efficiencies in the majority of the western countries, with a forecast of 30% reduction. This raises questions in notably Algeria which carries on building two million housing units/year using out of date methods of construction.
8 – Trends are for a new division and international specialization with the concentration of high-intensive energy manufacturing base in Asia which will absorb 65% of world consumption by 2030, including India and China. The customer-supplier relationships will be to their advantage to have comparative advantages and will push to lower prices as is currently happening between China and Venezuela and Ecuador.
9 – The level of US stocks volatility caused speculation of traders in the world’s stock markets.
10 – Occupation by terrorists of oil and gas fields, in Iraq and Syria with some flows towards the black market at $30 a barrel via Turkey acts in a transient and marginal way on prices.
11 – In principle, any fluctuations of the Dollar vis-a-vis the Euro causes a decrease or increase in the oil price impact of between 10 to 15%, although that there is no linear correlation.
12 – The determinant 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. Every year, $5,300 million ($10 million per minute) are spent by the various states towards fossil oil, according to estimates by the IMF’s 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 to an energy transition. Principally because, if say, the Chinese, the Indians, the Africans decide one day, to have the same model of energy consumption as that of the USA, there would be need for a five times a planet Earth. In the case of a mutation of the model of energy consumption at the global level, this will certainly influence future prices for fossil energy level down. In the meantime, and according to Reuters, some countries since the fall of the oil price are in financial difficulty. Since the beginning of year 2016, Angola, Nigeria, Iraq and Venezuela must provide their creditors for a total of $30 billion to $50 billion. If oil prices were $120 a barrel, these countries should provide one million barrel per day to repay their debt of $50 billion. Now, they must export more than three million barrels per day.
13 – According to experts of Citigroup, the Saudis’ strategy to reduce dependence of their Kingdom from the oil addiction as they put it, is in a way a precursor of the fall of the OPEC. Also, re-balancing of the market depends on a series of exogenous factors that are outside of OPEC countries control. 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. Also, after the failure of the meeting of April 17th, 2016 and sticking to the fundamentals so as not to mislead the public, a spectacular rise in the price of oil is not to be expected.
But instead we would envisage four scenarios:
-The first would be an expansion of the world economy, including China where the price fluctuating between $60 and $75 in 2016 through 2020, depending also on the new energy mix.
-The second would be moderate growth, and the price would fluctuate between $50 and $60.
-The third with low growth course would fluctuate between $40 and $50.
-The fourth could be a global crisis if the price happened to plunge below $40.
In summary, we would not expect miracles at the above mentioned meeting of OPEC’s of 2 and 3 June 2016. According to the prospective fourth industrial revolution highlighted in resolutions of the 2016 World Economic Forum, we should be entering a new model of consumption born out of another energy source of power at the global level between 2020 and 2030, contrary to the euphoric forecasts of some Algerian experts that still think within a model of linear consumption. Algeria must already prepare its transition that depends on the used energy resource and avoid a return to the IMF between 2018 and 2019. This was also emphasised at the last meeting of Algeria and the EU on May 24th, 2016 where the majority of European experts advised Algeria that Europe, counting for 65% of Algerian exports, does not intend to renew its contracts along the same terms. These are expiring in their majority between 2018 and 2019. It must be noted that gas revenues account for more than 33% of SONATRACH’s. Then the only solution in order to meet its international commitments, Algeria, is to think of a new model of energy consumption in terms of energy efficiency, renewable energies, assuming that the review of the policy of targeted subsidies and actions on costs to be competitive (possibly between 15 and 20%) and above all referring to a strategic vision of the new model of socio-economic policy and a new management of its state owned SONATRACH.
Dr Abdulrrahmane Mebtoul, Professeur des Universités, Expert International, firstname.lastname@example.org
Director of Studies Department energy/SONATRACH 1974/1979, 1990 / 1995, 2000 / 2007
Audit director, February 2015 on the risks and opportunities of the shale gas on behalf of the Government of and 23 international experts.
– See study by Professor Abderrahmane Mebtoul, published at ‘l’Institut des Relations Internationales’ (IFRI Paris, France in November 2011) in French
– “Maghreb cooperation / Europe geostrategic challenges”–“For a new strategic management of SONATRACH»
– Revue internationale HEC Montréal Canada (2010)
– International Conference ADAPES / French Parliament November 2013
– “New mutations energy global”
– “Gas strategy of Algeria before global changes” review international gas today (Paris France – January 2016).