Presentation: The Future of Oil and Fiscal Sustainability ...Two long-term trends will likely define...
Transcript of Presentation: The Future of Oil and Fiscal Sustainability ...Two long-term trends will likely define...
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FEBRUARY 6, 2020Peterson Institute for International Economics
The Future of Oil
and
Fiscal Sustainability in the
GCC Region
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Part I
The Future of Oil
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Two long-term trends will likely define the future of oil:#1: Increased oil abundance
US Crude Production(In millions of barrels per day)
Output and Proven Oil Reserves in the GCC Countries (In millions of barrels per day)
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Mb/
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Crude excl. Shale Shale Oil EIA Ref.Case Projection
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Cumulative oiloutput in 1998-
2017
Proven reserves,1998
Proven reserves,2017
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#2: The world moving away from oil
Estimation of global oil demand reveals:
• One-for-one effect of population
• Nonlinear impact of GDP per capita: oil demand income elasticity declines with income
• Declining time trend (energy efficiency and substitution)
• Price elasticity appears to be small: 0 if using annual data, -0.1 if using past 5-year average
Energy Efficiency and Substitution Trends (Index; 1992=0)
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
Oil
Natural gas
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At current trends, oil demand could peak in ~20 years
• Population growth is expected to slow
• As countries grow richer, their growth will be less oil-intensive
• Energy efficiency improvements will begin to dominate
• Demand for natural gas will continue to grow, but at a slowing pace
Cumulative Change in Oil Demand Since 1971(In millions of barrels per day)
Demand peak
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The oil market model• Supply: oil output and investment with forward-looking
producers
• Demand: exogenous forces (GDP, population, …) and non-constant price elasticity of oil demand.
• Prices clear the market
Scenarios:
• Carbon tax scenario: tax introduced in 2024 and gradually increased to bring the cost of CO2 emissions to $50/ton by 2030 and $150/ton by 2050 (to limit increase in global temperature at 20𝐶𝐶).
• Energy efficiency scenario: the declining time trend accelerates by an additional 0.6 percentage points (2 st.deviations).
Global Oil Demand (In millions of barrels per day)
Scenarios highlight large downside risks
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The oil market model• Supply: oil output and investment with forward-looking
producers
• Demand: exogenous forces (GDP, population, …) and non-constant price elasticity of oil demand.
• Prices clear the market
Scenarios:
• Carbon tax scenario: tax introduced in 2024 and gradually increased to bring the cost of CO2 emissions to $50/ton by 2030 and $150/ton by 2050 (to limit increase in global temperature at 20𝐶𝐶).
• Energy efficiency scenario: the declining time trend accelerates by an additional 0.6 percentage points (2 st.deviations).
Global Oil Demand (In millions of barrels per day)
Scenarios highlight large downside risks
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The oil market model• Supply: oil output and investment with forward-looking
producers
• Demand: exogenous forces (GDP, population, …) and non-constant price elasticity of oil demand.
• Prices clear the market
Scenarios:
• Carbon tax scenario: tax introduced in 2024 and gradually increased to bring the cost of CO2 emissions to $50/ton by 2030 and $150/ton by 2050 (to limit increase in global temperature at 20𝐶𝐶).
• Energy efficiency scenario: the declining time trend accelerates by an additional 0.6 percentage points (2 st.deviations).
Global Oil Demand (In millions of barrels per day)
Scenarios highlight large downside risks
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What does it mean for GCC?
GCC Market Share Projection(In percent)
Market share would increase…
GCC Hydrocarbon GDP Projection(In billions of US dollars)
…but will only delay the peak in GDP.
15
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2019 2029 2039 2049 2059 2069 2079 2089 2099
Benchmark projection
Energy efficiency scenario
Carbon tax scenario250
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2020 2030 2040 2050 2060 2070 2080
Benchmark projectionEfficiency gains scenarioCarbon tax scenario
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Part II
Fiscal Sustainability in
the GCC Region
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After a near-decade of accelerated spending, fiscal positions have weakened by 2014. Since then, they began to adjust…
GCC Fiscal Revenue, Spending, and Saving (Real, in billions of 2018 US dollars)
Non-oil Primary Balance(In percent of non-oil GDP)
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Real Net Financial Wealth(In trillions of 2018 US dollars)
…but financial wealth declined.
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Annual Growth of Global Oil Demand(In percent)
Looking ahead, the fiscal impact will be felt well before the peak…
GCC Aggregate Hydrocarbon Revenue(In percent of GDP)
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Benchmark projectionEfficiency gains scenarioCarbon tax scenario
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Bechmark projection
Energy efficiency scenario
Carbon tax scenario
Projections
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Net Financial Wealth: Benchmark Projection(GCC total, in trillions of 2018 US dollars)
Current fiscal stance could deplete financial buffers by 2035
Financial Wealth under Alternative Price Assumptions(GCC total, in trillion of 2018 US dollars)
-40
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Simulation
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Achieving fiscal sustainability and intergenerational equity
Fiscal sustainability = stabilization of wealth, but how fast and at what level is an intergenerational choice.
Public Wealth(In percent of non-oil GDP)
Non-oil Primary Balance (In percent of non-oil GDP)
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Achieving fiscal sustainability and intergenerational equity
Fiscal sustainability = stabilization of wealth, but how fast and at what level is an intergenerational choice.
Public Wealth(In percent of non-oil GDP)
Non-oil Primary Balance (In percent of non-oil GDP)
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2019 2029 2039 2049 2059 2069 2079 2089 2099
PIH
Moderate Gradualism
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Achieving fiscal sustainability and intergenerational equity
Fiscal sustainability = stabilization of wealth, but how fast and at what level is an intergenerational choice.
Public Wealth(In percent of non-oil GDP)
Non-oil Primary Balance (In percent of non-oil GDP)
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Current plans imply accelerated effort down the road
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Bahrain
WEO BaselinePIHModerate Gradualism
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2018 2019 2020 2021 2022 2023 2024
Kuwait
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2018 2019 2020 2021 2022 2023 2024
Oman
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2018 2019 2020 2021 2022 2023 2024
Qatar
-45
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Saudi Arabia
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United Arab Emirates
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What will it take?
• Economic diversification• But it alone will not be enough: effective tax on oil output is 80 percent, and only 10 percent on
non-oil output
• Nonoil revenue will need to grow• To fully replace oil revenue, effective tax rate must rise to 50 percent of GDP
• Governments will need to downsize• Financial saving will be more important
• Biggest challenge: managing the broader socioeconomic consequences
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Thank you
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Additional Slides
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Benchmark Price Assumption: $55/barrel in real terms
• Plausible: supply follows demand as oil investment responds to price signals.
• But… Deviations could be large and persistent; market structure could have an impact.
• Can we have a better price projection? Unlikely
• Is it critical to the story? Unlikely, since higher (lower) prices would lead to lower (higher) consumption
Historical Real Oil Price(In 2017 US dollars)
1880-1966average: $21
std. dev.: 28%
1967-2018average: $55
std. dev.: 59%
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1880 1895 1910 1925 1940 1955 1970 1985 2000 2015
Source: BP, Statisical Review of World Energy, 2019.
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Comparison to Central Projections by Other Agencies
Global Oil Demand (In millions of barrels per day)
Annual Growth Rate of Global Oil Demand (In percent)
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Competitiveness of Shale Oil and Natural Gas Market Prospects
Breakeven Oil Prices(In US dollars per barrels)
Projected Global Demand for Natural Gas(In millions of metric tons of oil equivalent)
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Projections
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Table A1. Determinants of Global Oil and Gas Demand: Regression ResultsOil Natural Gas
(1)(time fixed effects)
(2)(linear time trend)
(3)
Population 0.983*** 0.975*** 0.460***(0.007) (0.007) (0.026)
Land size 0.047*** 0.051*** 0.324***(0.006) (0.006) (0.020)
GDP per capita -9.639*** -9.647*** 0.795***(1.129) (1.211) (0.033)
(GDP per capita)2 1.183*** 1.172***(0.127) (0.136)
(GDP per capita)3 -0.049*** -0.042***(0.005) (0.005)
Oil exporter (dummy) 0.172*** 0.191***(0.027) (0.027)
Oil Price -0.108***(0.026)
Year -0.018***(0.001)
Observations 5,225 4,815 2,057R-squared 0.962 0.963 0.714
Notes: The model was estimated in logs. The dependent variable is oil consumption in models (1) and (2) and natural gas consumption in model (3). Time fixed effects are included in the regressions in (1) and (3); global oil price and a linear time trend are used in (2). The oil price included in model (2) is the 5-year average real oil price (using contemporaneous price did not produce a statistically significant coefficient). Heteroskedasticity robust standard errors are in parentheses (. *** p<0.01, ** p<0.05, * p<0.1). The sample periods are 1971-2016 for oil and 1992-2016 for natural gas.Sources: EIA; Rystad Energy; IEA; BP; and IMF staff estimates.
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The impact of carbon tax: prices
1970 1980 1990 2000 2010 2020 2030 2040 20500
20
40
60
80
100
120Real Oil Prices
Base
Producer Price
Consumer Price
Tax burden falls onto consumer initially, becoming more even after consumers cut demand
Producers initially enjoy higher prices as they cut investment anticipating the higher carbon tax,
Tighter oil market conditions in the initial phase.
26Carbon tax: from 0 to $150 (in tons of CO2) ~= 0 - $60 per barrel of oil.