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In an article I wrote for the Research Centre of Energy Management (RCEM) at ESCP Europe Business School on the 2nd of March 2017 under the title “Oil Prices Will Be Mostly Bullish in 2017”, I said that the oil price will break through the $60 level in 2017. This the oil price did when it has risen to more than $66.78 a barrel in December 2017.
And despite efforts by vested interests including the International Energy Agency (IEA) and the United States Energy Information Administration (EIA) to dampen oil prices, I am now projecting that the oil price could be heading towards $70/barrel or even higher during 2018 and $100 in 2020.
The OPEC meeting is over and the organization has extended production cuts throughout 2018. The decision is obviously crucial to supporting oil prices, but also of the utmost importance to the vision and future of one man, Prince Mohammed bin Salman, Saudi Arabia’s de facto head of government and Crown prince (the king’s son).
The oil price is key to the success of Prince Mohammed bin Salman’s Vision 2030 which aims to build a dynamic twenty-first Saudi economy.
Oil is like a coin: one side is Economics and the other is geopolitics and the two are inseparable.
The petrodollar came into existence in 1973 in the wake of the collapse of the international gold standard which was created in the aftermath of World War II under the Bretton Woods agreements. These agreements also established the US dollar as the reserve currency of the world.
Independence has been a lifelong dream for many Iraqi Kurds and so the 25th of September 2017 referendum was met with understandable jubilation across Iraqi Kurdistan with over 90% voting for secession from Iraq.
Although the referendum was non-binding, it pointed to a deteriorating geopolitical situation between the Kurdistan Regional Government (KRG) and neighbouring countries. Baghdad urged neighbouring countries to shut down flights into the region and threatened a blockade. Iran stopped oil trade with Iraqi Kurdistan and also banned flights to the region. And Turkey, which fears stirring separatism among its own Kurdish population, has threatened similar action. Turkish President Recep Tayyip Erdogan called the vote “treachery” and suggested the region would "not find food or clothing" if sanctions were implemented.
Geopolitics & US Self-Interest
In imposing new sanctions on Russia, the US Congress aimed to punish Russia for its alleged meddling in the US elections in 2016. Still, these sanctions were mostly motivated by US self-interest, geopolitics and blatant US efforts to delay if not prevent Russia’s emergence as the world’s energy superpower.
The target of these sanctions as in the previous ones is Russian banks and companies as well as Russian oil and gas projects. However, the most contentious issue could well be the sanctions on pipelines. Key projects such as Nord Stream II and the TurkStream pipelines are at the very heart of the sanctions.
The US has always been opposed to Nord Stream II, which it views as Russia’s attempt to solidify its hold on Europe’s energy supplies (see Map 1).
Venezuela’s Deepening Crisis
With 300.9 billion barrels (bb) of proven oil reserves, Venezuela holds the biggest reserves in the world and also accounts for 92% of Latin America’s reserves. This is 13% bigger than Saudi Arabia’s. Still, the United States Geological Survey (USGS) estimates that there may be more than 513 bb of extra-heavy crude oil and bitumen deposits in Venezuela’s Orinoco belt region.
Venezuela, a country that should be one of the wealthiest in the world, remains mired in deepening crisis. Its currency (the bolívar) has virtually collapsed while its economy shrank by 10% in 2016 and annual inflation is poised to exceed 720% in 2017.
With oil prices alternating so frequently between bullish and bearish conditions, a global oil deficit could be making its way stealthily through the global oil market.
Last November, the International Energy Agency (IEA) warned that a shortage could set in as soon as 2020, as the investment shrinkage brought on by the 2014 oil price crash bears fruit. Prices, the IEA had said at the time, could jump significantly at the end of the decade. The IEA reiterated its concerns more recently in its World Energy Investment 2017 Report adding that the rate of new oil discoveries is at its lowest level in more than 70 years. Overall, global spending on oil and gas will rise by a moderate 3% this year, compared to the 44% between 2014 and 2016.
Since the discovery of oil in Saudi Arabia seventy nine years ago, the country has been synonymous with oil. But now the sands under which 16% of the global proven oil reserves lie are beginning to shift under the feet of its leaders.
Saudi Arabia whose beneficence, peace-making efforts, soft power and great oil wealth brought it to the forefront of influential countries in the world over a period of more than half a century, is now embroiled in a crescent of conflicts involving Iran, Iraq, Syria, Yemen and now Qatar not to mention its uneasy relations with the United States.
With oil prices ebbing and flowing against a background of OPEC and non-OPEC production cuts’ extension and US shale oil production inching up, nobody is paying enough attention to the fast-approaching oil supply gap.
Despite the recent dip in oil prices, industry experts are predicting a supply gap and rising oil prices by 2020. This is due in large part to an oil investment drought marked by almost three years of consecutive decline in oil prices, a statistic that has no precedent in the oil industry. This year a report by the International Energy Agency (IEA) projected that if oil investment remains stagnant over the next few years, by 2020 we will see a significant increase in the price of oil as global demand continues to climb.
In the run-up to 2014 sanctions, US oil giant ExxonMobil led by its then CEO Mr Rex Tillerson, and Russia’s oil giant Rosneft invested $3.2 billion in a project for drilling for oil in the Kara Sea in the Russian sector of the Arctic — a region that Rosneft estimated it could have more oil than the entire Gulf of Mexico. But the sanctions forced Exxon Mobil to halt drilling.
The US shale revolution and the rising shale oil production have had a seismic impact on the global oil market contributing in no small measure to the steep decline in crude oil prices since July 2014. Equally US liquefied natural gas (LNG) exports could have a similar impact on the global gas market possibly weakening further current low gas prices. The irony, however, is that without relatively higher gas prices, the potential and prospects of sizeable US LNG exports could be restricted.
In 2008 the United States overtook Russia to become the leading natural gas producer in the world. Just a few years ago the US was expected to be a major importer of natural gas. The shale revolution has virtually reversed that trend and enabled the US to start exporting LNG.
Despite very positive signs in the global oil market, oil prices have never managed to break through the $60/barrel barrier since the OPEC production cuts were implemented in January 2017. On the contrary, they have declined from $57/barrel two weeks ago to just over $50/barrel today.
On the face of it, this could be due to two factors: one is rising Shale oil production and the second is that the glut in the global oil market might have been bigger than what was previously estimated. But circumstantial evidence suggests there could be a third factor, namely concerted efforts by the International Energy Agency (IEA), BP through its annual Statistical Review of world energy, the US Energy Information Administration (EIA) and the Financial Times (FT) to prevent the oil price breaking through the $60/barrel barrier. The rationale is that a price under $60/barrel is good enough for US shale oil production to breakeven and not high enough to slow global economic growth. Let us analyse these three factors to find out where the truth lies.
Despite a 91% compliance by OPEC members with the production cuts implemented in January 2017 and the removal of more than 1 million barrels a day (mbd) from the global oil market, the oil price has seen a lot of volatility ranging between $53 and $57 a barrel.
And although US oil inventories have declined for the last five months consecutively according to the International Energy Agency (IEA), their levels are still close to record high. This could be due to two factors: one is rising Shale oil production and second, the glut in the global oil market might have been bigger than what was previously estimated.
Among notable promises made by US President-elect Donald Trump during his presidential elections were four particular ones that attracted the attention of the world because of their geopolitical implications and their impact on the price of oil. These were the dismantling of the nuclear deal with Iran, lifting the sanctions on Russia, enhancing US oil production and a strong dollar.
Whilst most declarations made by US presidential candidates during their election campaigning would be quickly forgotten once they are installed inside the White House, it might be wise to analyse these promises in case Mr Trump stuns the world by fulfilling some or all of them.
After years of confrontation Brussels decided to permit Gazprom to use almost 90% of the OPAL gas pipeline, located in Eastern Germany. Almost simultaneously there were information leaks about a deal between the two players on the competition case. Apparently, both sides found a way to settle the row in a satisfactory way.
For the first time in eight years, the Organization of Petroleum Exporting Countries (OPEC) has decided to cut crude oil production to bolster the oil price having suffered huge losses since the collapse of the oil price in July 2014.
The continued weakness of oil prices has inflicted a huge damage on the global economy, the economies of the oil-producing countries and global investments. There has been a loss of 0.75%-1.00% annually in global economic growth since 2014. Investment in upstream exploration from 2014 to 2020 is projected to be $1.8 trillion less than previously assumed, according to leading US consultants IHS. The Arab Gulf oil producers have lost an estimated $443 bn in oil revenues between July 2014 and December 2016. And the US shale oil industry took a major blow by losing some 1.5 million barrels a day (mbd) of oil production and also risking major defaults on the $200 billion in loans that have been extended to the domestic shale oil industry.
In spite of all the polls assuring of a clean win for Hillary Clinton, the latent anti-establishment revolt of the “America first” electorate has propelled a non-interventionist and, in this sense, a “nationalist” (as opposed to globalists) to the top job in the last world’s superpower. It is hard to dismiss outright the comment from non-mainstream but gaining momentum political groups that the result of the 2016 US elections is “a triumph of the people over a failed political establishment” and that America will never be the same again.
However, the last assumption could be effectively challenged. It is not over yet. There are deep divisions within the political class and corporate community with Wall Street bankers still clinging to their guns and the neocons in both parties ready to continue sacrificing the United States for the sake of a globalist vision.
Despite developments in renewable energy, it will take 50 years for electric cars to impact global oil demand in transport, according to Dr Mamdouh G Salameh, professor of energy economics at the ESCP Europe Business School.
In his recent paper, ‘Is oil supremacy on the wane?’ Dr Salameh says the enabling technologies of renewable energy are not developed enough to properly impact consumption levels of oil in the transport sector.
Predictions of a post-oil era are also unlikely as in 2015, renewable energy accounted for only 2.8% of the global primary energy consumption.
On June 10, 2014, the Islamic State of Iraq and al-Sham (ISIS) – surprised the world by advancing into several territories of central and northern Iraq. Most notably, ISIS has taken over Iraq’s second biggest city, Mosul. ISIS has also tried to gain control of the oil-rich area of Kirkuk (which is now under the control of Iraqi Kurdish forces). ISIS’ offensive has left Iraq in a dire situation, ridden by sectarian and ethnic conflict.
However, an overwhelmingly Iraqi force of 30,000 with a contribution from Iraqi Kurdish (Peshmerga) forces are now closing on Mosul with Western air support.
The incomprehensible relative political stability in Algeria is largely attributed to the psychological trauma suffered by the people during the so-called Black Decade, the civil war that raged between 1991 and 2002 with Islamist fundamentalists challenging the regime.
Today, the aging and basically unhealthy 79-year-old president Abdelaziz Bouteflika who heads the National Liberation Front (FLN) is offering a semblance of 'stability and continuity' (the ultimate and most appealing of the FLN slogans) and thus capitalizes on the rejection of violence by 40 million people of the weary nation.