Presentation on theme: "International Developments in Oil and Natural Gas Markets and their Impact on Arab Countries Christopher Allsopp Oxford Institute for Energy Studies New."— Presentation transcript:
International Developments in Oil and Natural Gas Markets and their Impact on Arab Countries Christopher Allsopp Oxford 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 Q Market coordination on $60-$80? Will it stick?
Parallel shifts in the futures curve give way to relatively stable futures expectation
Front End and Back End Prices - Exceptional contango in early Future price never below $70
Recent oil price swings Front Month WTI Price, US$/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.