fpd - christopher allsopp - oies

8/8/2019 FPD - Christopher Allsopp - OIES

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International Developments in Oil andNatural Gas Markets and their Impact on

Arab Countries

Christopher AllsoppOxford Institute for Energy StudiesNew College, Oxford

Ninth Arab Energy Conference, Doha, Qatar9 12 May, 2010

RECOGNISED INDEPENDENT CENTREOF THE UNIVERSITY OF OXFORD


2/16

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


3/16

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 restraintand attempt to square the circle byregulation

Downside risks if policy gets it wrong.


4/16

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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5

25

45

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125

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US$/bbl nominal

Parallel shifts in the futures curve give way to relativelystable futures expectation


6/16

Front End and Back End Prices

-Exceptional contango in early 2009- Future price never below $70


7/16

Rec

entoilpriceswings

145.29

33.98

020

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Fron

tMonthWTIPrice,US$/Barrel


8/16

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 overlonger term


9/16

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 ondemand

Has demand peaked?


10/16

How Spare Capacity Will Erode?


11/16

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?


12/16

Some implications

Oil prices likely to swing about, geared to perceptionsabout global economy, policy and fundamentals

Framework: not about prediction but about the kinds ofthings 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


13/16

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?


14/16

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?


15/16

Concluding remarks

World economy: consensus, until recently, return togrowth; level effect; firm oil prices; problems for gas. Lowinterest 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, fiscalproblems, combined with financial fragility, riskuncoordinated policy responses. Double dip?

Bad scenario. Low growth, deflation and continuing fiscalproblems. Like Japan.

Not very likely yet.


16/16

fpd - christopher allsopp - oies

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