OPEC pact to cut oil output ‘unlikely to last’

A deal to curb oil output, struck by some of the world’s biggest producers, has been renewed several times. (Reuters)
Updated 31 January 2018
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OPEC pact to cut oil output ‘unlikely to last’

LONDON: An OPEC and non-OPEC agreement to limit crude production in 2018 at current levels will be difficult to maintain, Fahad Al-Turki, chief economist at Riyadh-based bank Jadwa Investment, has told a London conference.
The pact, which involves output cuts of 1.8 million barrels per day by the world’s biggest producers, is designed to buoy prices, and rebalance supply and demand. The deal was agreed at the end of 2016 and has been renewed several times, most recently in November, 2017, but is up for review in June, 2018.
Al-Turki told a Middle East and North Africa energy conference at Chatham House, London: “I doubt that the oil production cuts agreement will hold throughout 2018, partly because targets have already been met and because there will be some countries that will want to recoup their investment and increase production.”
He said for this reason and because of an expected increase in US shale production, Jadwa was forecasting the oil price in 2018 would average $60 per barrel.
Al-Turki said that after negative growth last year, the outlook for the Saudi economy was positive for 2018. “But how positive depends on the government implementing its reform policies sooner rather than later, especially the stimulus for the private sector,” he said.
The chief economist expected the oil sector to grow by about 1.5 percent and the non-oil sector by 1.4 percent this year.
Al-Turki said: “If, in 2015, you would tell me the government could generate non-oil revenue of more than SR250 billion ($66.6 billion), I would have said that was impossible. Now we see that it’s happening.”
The stimulus package for the private sector totalled SR72 billion this year, part of a SR400 billion package over four years, he said.
Al-Turki said: “We think 2017 was the toughest year, but it was mitigated by the strength of the sovereign balance sheet. Now the government has the opportunity to take a more practical approach through a gradual fiscal balance program.”
The London conference, held under Chatham House rules that prevent disclosure of speakers’ identities unless they give permission to be quoted, also heard experts commenting on economic prospects for Gulf Cooperation Council (GCC) countries.
One expert said: “There is a problem in that the non-oil sector is driven by government money, so construction companies, for instance, even if they are private, depend on government contracts, and those contracts are funded from oil revenue.”
GCC countries are attempting to reduce their dependency on oil income by diversifying their economies.
But as government expenditure has come down, there has been a significant slowdown in non-oil economic growth, said one delegate.
“If government doesn’t have the resources to drive the wheels of the non-oil economy, then the resources should come from elsewhere,” the delegate said. “One solution would be to attract more private capital from abroad. But in order to attract foreign direct investment, the GCC needs to further clarify ownership and residency rights, as well as bring legal and accounting practices more in line with best international practice.”
Another expert said that diversification was “very challenging,” but the reforms undertaken in Saudi Arabia were “staggering.”
The Kingdom’s Vision 2030 program, designed to modernize and liberalize the country’s economy, sets out to unlock “promising economic sectors,” diversify the economy and create job opportunities.
Another speaker told the conference that in Saudi Arabia and Oman the most pressing challenge was employment. “My calculation is that 1 million Saudis will move into the labor market in the next five years,” the speaker said. “The question is where are they going to find jobs, even if oil prices stay at around current levels. The public sector will no longer be able to absorb jobseekers.”
Developing a domestic private sector that could provide jobs was essential, so it was critical that GCC countries continued to wean themselves off expat labor, the expert said.
Saudi Arabia is already taking action on this front. In December, the Ministry of Finance said it would introduce a monthly expat levy from this year.
Tourism and entertainment would provide significant employment to young Saudis, as would oil and oil-backed industries, where the Kingdom had a great advantage, another delegate said.


US says conserving oil is no longer an economic imperative

Updated 19 August 2018
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US says conserving oil is no longer an economic imperative

  • Fears of oil scarcity no longer driver of US energy policy
  • Surging shale production brings energy abundance

WASHINGTON: Conserving oil is no longer an economic imperative for the US, the Trump administration declares in a major new policy statement that threatens to undermine decades of government campaigns for gas-thrifty cars and other conservation programs.
The position was outlined in a memo released last month in support of the administration’s proposal to relax fuel mileage standards. The government released the memo online this month without fanfare.
Growth of natural gas and other alternatives to petroleum has reduced the need for imported oil, which “in turn affects the need of the nation to conserve energy,” the Energy Department said. It also cites the now decade-old fracking revolution that has unlocked US shale oil reserves, giving “the United States more flexibility than in the past to use our oil resources with less concern.”
With the memo, the administration is formally challenging old justifications for conservation — even congressionally prescribed ones, as with the mileage standards. The memo made no mention of climate change. Transportation is the single largest source of climate-changing emissions.
President Donald Trump has questioned the existence of climate change, embraced the notion of “energy dominance” as a national goal, and called for easing what he calls burdensome regulation of oil, gas and coal, including repealing the Obama Clean Power Plan.
Despite the increased oil supplies, the administration continues to believe in the need to “use energy wisely,” the Energy Department said, without elaboration. Department spokesmen did not respond Friday to questions about that statement.
Reaction was quick.
“It’s like saying, ‘I’m a big old fat guy, and food prices have dropped — it’s time to start eating again,’” said Tom Kloza, longtime oil analyst with the Maryland-based Oil Price Information Service.
“If you look at it from the other end, if you do believe that fossil fuels do some sort of damage to the atmosphere ... you come up with a different viewpoint,” Kloza said. “There’s a downside to living large.”
Climate change is a “clear and present and increasing danger,” said Sean Donahue, a lawyer for the Environmental Defense Fund.
In a big way, the Energy Department statement just acknowledges the world’s vastly changed reality when it comes to oil.
Just 10 years ago, in summer 2008, oil prices were peaking at $147 a barrel and pummeling the global economy. OPEC was enjoying a massive transfer of wealth, from countries dependent on imported oil. Prices now are about $65.
Today, the US is vying with Russia for the title of top world oil producer. US oil production hit an all-time high this summer, aided by the technological leaps of horizontal drilling and hydraulic fracturing.
How much the US economy is hooked up to the gas pump, and vice versa, plays into any number of policy considerations, not just economic or environmental ones, but military and geopolitical ones, said John Graham, a former official in the George W. Bush administration, now dean of the School of Public and Environmental Affairs at Indiana University.
“Our ability to play that role as a leader in the world is stronger when we are the strongest producer of oil and gas,” Graham said. “But there are still reasons to want to reduce the amount we consume.”
Current administration proposals include one that would freeze mileage standards for cars and light trucks after 2020, instead of continuing to make them tougher.
The proposal eventually would increase US oil consumption by 500,000 barrels a day, the administration says. While Trump officials say the freeze would improve highway safety, documents released this month showed senior Environmental Protection Agency staffers calculate the administration’s move would actually increase highway deaths.
“American businesses, consumers and our environment are all the losers under his plan,” said Sen. Tom Carper, a Delaware Democrat. “The only clear winner is the oil industry. It’s not hard to see whose side President Trump is on.”
Administration support has been tepid to null on some other long-running government programs for alternatives to gas-powered cars.
Bill Wehrum, assistant administration of the EPA’s Office of Air and Radiation, spoke dismissively of electric cars — a young industry supported financially by the federal government and many states — this month in a call with reporters announcing the mileage freeze proposal.
“People just don’t want to buy them,” the EPA official said.
Oil and gas interests are campaigning for changes in government conservation efforts on mileage standards, biofuels and electric cars.
In June, for instance, the American Petroleum Institute and other industries wrote eight governors, promoting the dominance of the internal-combustion engine and questioning their states’ incentives to consumers for electric cars.
Surging US and gas production has brought on “energy security and abundance,” Frank Macchiarola, a group director of the American Petroleum Institute trade association, told reporters this week, in a telephone call dedicated to urging scrapping or overhauling of one US program for biofuels.
Fears of oil scarcity used to be a driver of US energy policy, Macchiarola said.
Thanks partly to increased production, “that pillar has really been rendered essentially moot,” he said.