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International Developments in Oil and Natural Gas Markets and their Impact on
Arab Countries
Christopher AllsoppOxford Institute for Energy Studies
New College, Oxford
Ninth Arab Energy Conference, Doha, Qatar 9 – 12 May, 2010
RECOGNISED INDEPENDENT CENTRE OF THE UNIVERSITY OF OXFORD
Overview
• The recent cycle– Boom, bust and stabilisation– V-shaped recovery and the level
effect on GDP and energy
• Oil supply and demand• Price swings
– Fundamentals or speculation?
• Is gas different?• The Middle East region
TIME
ECONOMIC ACTIVITY
Previous trend
Slower growth
Step down
Recovery
What accounts for the V – shape?
• The world stock building cycle• Aggressive monetary and fiscal policy• The cumulative effects of budget deficits
– Offsets private sector ‘deleveraging’
– The financial ‘stock adjustment cycle’
– Tends to reverse as private sector adjusts.
• BUT risks of public sector crisis (Greece)• Dangers during recovery phase
– Protectionism– Competitive devaluations– Forced or competitive deflations
• Low interest rates, public sector restraint and attempt to square the circle by regulation
• Downside risks if policy gets it wrong.
The recent oil price cycle
• Major swings in price of oil: recent stabilisation?• Lack of feedbacks from supply, demand, world economy• Future expectations: parallel shifts• Why was it different this time?
– No second round effects in OECD
– Policy offsetting, rather than reinforcing
• Collapse due to credit crunch, not oil– OPEC response and the lower bound
– Unprecedented contango
– Unsustainable situation in Q1 2009
• Market coordination on $60-$80?• Will it stick?
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Parallel shifts in the futures curve give way to relatively stable futures expectation
Front End and Back End Prices-Exceptional contango in early 2009- Future price never below $70
Recent oil price swings
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Front Month WTI Price, US$/Barrel
Fundamentals: Supply
• Non-OPEC supply– Russia …
• Decline rates• Lack of investment, and the fear of future spikes • OPEC behaviour
– Assumed to meet ‘call on OPEC’
• All these are ‘endogenous’• Supply relatively insensitive to prices –except over
longer term
Fundamentals: Demand
• The level effect of the world recession– 6 to 10% fall in global GDP amounts to about 5 – 8 mbpd fall in oil
demand
• Price level, price volatility, price swings all affect demand– Threshold effects and non- linear effects– Looking forward: higher share of expenditure on oil/energy suggests
bigger responses to oil price rises
• Competition between fuels likely to increase: e.g. via CNG and electric vehicles
• Policy: the climate change agenda, and the security agenda have potentially large and irreversible effects on demand
• Has demand peaked?
How Spare Capacity Will Erode?
Oil price issues: current consensus
• The perception– Current excess capacity– Fast growth in Asia (but policy?)– Supply side worries ( investment, high costs in non-OPEC, OPEC behaviour)– Adds up to perception of future scarcity and high oil prices – driving spot markets– But – lack of feedbacks: supply, demand, world growth, mean near indeterminacy
• Fundamentals or speculation? – Not a helpful distinction
• A coordination game?– ‘herding’ behaviour?– The beauty contest– The importance of public signals: including OPEC– Focal points?
• Coordination of expectations• Feedbacks from the fundamentals?
Some implications …• Oil prices likely to swing about, geared to perceptions
about global economy, policy and fundamentals• Framework: not about prediction but about the kinds of
things that affect future anticipations – including policy• Regulation?
– Not the issue– Collateral damage?
• Proposals– Consumer producer dialogue– The band $60-$80. The eni blueprint. The expert group, IEF– Transparency and institutions– Coordinating expectations: focal points– Economic diplomacy: important– Perceived feedbacks: supply, demand, and policy responses
Is Gas Different
• Affected by world recession and step down• But – supply picture different
– LNG (Especially Qatar)
– Shale gas in US
– Unconventional gas in Europe? China, India?
• The gas glut - for how long• Will gas prices disconnect from oil?• Gas in MENA
– Domestic consumption
– Policy towards gas
• Gas as transition fuel?
Issues for Middle East Countries
• Dependent on global prospects• Domestic consumption rising very fast
– the subsidy issue
• Employment• Diversification• Macroeconomic management
– Oil funds
– Exchange rate policy
– Integration?
Concluding remarks• World economy: consensus, until recently, return to
growth; level effect; firm oil prices; problems for gas. Low interest rates due to fiscal consolidation. But risks.
• Main risk from shocks the system cannot cope with (Greece?) and or policy errors
• After Lehman shock, assumption that policy makers would get it right eventually proved correct.
• Difficulties greater looking forward. Imbalances, fiscal problems, combined with financial fragility, risk uncoordinated policy responses. Double dip?
• Bad scenario. Low growth, deflation and continuing fiscal problems. Like Japan.
• Not very likely – yet.