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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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.