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Oil market outlook: Oil exporters adjustment to the new dynamics

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Majid Al Moneef - Former Governor of the Organization of Petroleum Exporting Countries, Saudi Arabia

ERF Conference on “Arab Oil Exporters: Coping with a New Global Oil Order”
How Could Arab Oil Exporters Respond to the New Global Oil Order: Graduate to Rule-based Macroeconomic Institutions
Kuwait, November 26-27, 2017
www.erf.org.eg

Published in: Government & Nonprofit
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Oil market outlook: Oil exporters adjustment to the new dynamics

  1. 1. session 2 Oil market outlook: Oil exporters adjustment to the new dynamics Arab Oil Exporters: Coping with a New Global Oil Order Kuwait city - Nov. 26-27, 2017 Majid AL MONEEF
  2. 2. Five determining factors impacting the Long Term Oil Market Outlook 1. Technological advancements and cost advantages of renewables, electric vehicles and smart mobility. 2. The commitment to Paris-21 outcome with or without the U.S 3. Leading role of China in the emerging energy landscape: in renewables, EVs and UNFCC 4. The changing trade patterns in oil and gas and with it the emerging geopolitics 5. The reviving role of the U.S in global oil and gas production and its changing energy proprieties. Five potential factors determining the impact on Arab oil and gas exporters? 1. The degree of dependence on oil and gas to fuel economic growth 2. The adaptability to oil price swings or demand decline 3. Forming business, economic and political alliances and relations in response to the emerging oil and gas patterns 4. Crafting new fiscal, energy, labor and industrial policies in response to the outlook 5. Redefining the future role of the state and the private sector in the economy Outline
  3. 3. Signaling the End of the Oil Era: Exaggeration or warning call?
  4. 4. Oil Price Cycles: Downturns Last Longer and volatility persisted 0 20 40 60 80 100 120 140 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Current Real (2015$) 1st Boom 8 Yrs Price $ 3-36 REAL $72/BL 2nd Boom 11 Yrs Price $ 38-112 Real $85/bl Downturn 22 Yrs Price $ 14-33 REAL $39/bl AVERAGE $55/BL ✓ Many indicators that the current cycle is more structural than cyclical ✓ Current oil prices could last much longer
  5. 5. 0 1 2 3 4 5 6 7 8 1960 1980 2000 2020 2040 World OECD DCs China 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1960 1970 1980 1990 2000 2010 2020 2030 2040 World OECD DCs China Energy Intensity Boe/$1000 GDP Oil Intensity Barrel/$1000 GDP 1. Efficiency gains in energy and oil in all sectors and regions ✓ Oil intensity declining from 0.55bl/$1000 to 0.3 now and 0.15bl in 2040 ✓ The only region in which intensity increased (lower efficiency) was GCC
  6. 6. 2. Renewables gaining ground: declining costs, favorable policies and receptive public ✓ Increasing investments in renewables: from $70 in 2005 to $312 bn in 2105 ✓ China is leading in investment and generation
  7. 7. Coal 28% Gas 23%Oil 1% Renewables 20% Hydro 16% Nuclea r 12% 2040 39047 TW/H Coal 7% Gas 23% Oil -3% Renewables 41% Hydro 14% Nuclear 12% 2015/2040 15539 TW/H Coal 41% Gas 22% Oil 4% Renewables 6% Hydro 16% Nuclear 11% 2015 23809 TW/H 2. Renewables gaining ground: declining costs, favorable policies and receptive public (Cont’d) Sources of Electricity Generation: 40% of new generation from Renewables
  8. 8. 3. Technology and battery cost Breakthroughs in electric vehicles Sales and in penetration along with changes in smart mobility
  9. 9. 3. Technology and battery cost Breakthroughs in electric vehicles Sales and in penetration along with changes in mobility (Cont’d) ✓ Price of oil to make EVs competitive with ICE cars is projected to reach $64 by 2020 ✓ Although many unresolved issues remain, the most optimistic scenario forecast oil demand loss 6-8 mbd
  10. 10. Levels of Penetration of EVs differ but the increasing trend is clear
  11. 11. Passengers 26% Marine 5% Freight 18% Aviation 6% Industry 19% Buildings 8% Electricity 6% Other 12% Transport 55% 94.1 MBD Passengers 24% Marine 6% Freight 19% Aviation 9% Industry 22% Buildings 6% Electricity 3% Other 11% Transport 58% 105.6 MBD 2015 2040 Sectoral Composition of world Oil Demand OECD 45% China 12% India 4% Middle East 9% Other Developing 17% Other 13% Developing 42% 92..5 MBD OECD 29% China 15% India 9% Middle East 10% Other Developing 21% Other 16% Developing 56% 105..6 MBD 2015 2040 Country Grouping Shares in consumption Modest demand growth < 1% annually, led by transport & petrochemical sectors especially in developing countries Peak global oil demand is not near in the base case, but is so in a carbon constrained scenario of IEA
  12. 12. 4. On the supply side: Half the increase will be from non-conventionals & NGLs from gas ✓ Technology and cost efficiency improved recovery as well as shale oil economics ✓ Resource potentials increases in the $40-60/bl price. 75% of remaining shale resources generate 10% return at $60 price
  13. 13. 42.6 53.2 52.5 32.5 39.1 48.1 73.8 83.8 85.2 1.3 8.5 15.4 Non OPEC OPEC Conventional Non Conventional 2000 2015 2040 75.1 MBD 92.3 MBD 105.6 MBD 4. The outlook is for larger role for Non-Conventional oil (shale and sands) declining conventional in Non-OPEC & increasing share of OPEC (mostly conventional) ✓ The Gulf’s share in global production to increase from 33% to 40% in 2040 ✓ Cumulative investment requirements in oil upstream and downstream: $ 20 tr, 70% in non-OECD, 15% in the ME
  14. 14. 6,469 3,404 11,020 2,625 1,726 696 3,182 690 OECD US NON-OECD MIDDLE EAST UPSTREAM Other 8,195 3,315 14,202 4,100 Cumulative Investment Requirements 2016-2014 (Billion $) Changing oil trade patterns: Middle East/China and India
  15. 15. The outlook implications • The ability to and the speed of adjustment to the new normal is critical • The GCC development model could not deliver: ▪ Lack of meaningful diversification of fiscal revenues, exports, GDP ▪ Non oil economy dependent on cheap energy ▪ A state led growth, with the private sector defendant on state spending and subsidies ▪ Segmented labor market: public and private, male and female, local and expatriate & the public sector as the employer of last resort ▪ Distorted incentive systems and low factor productivity. • Potential impacts on Arab oil and gas exporters? ▪ Change expectations: current oil market cycle will likely be long ▪ Limitations of over-dependence on extremely low domestic oil and gas prices and on their revenues to fuel growth, increase employment and address inequality. ▪ How to adapt the economy to oil price swings or demand decline ▪ Fostering new trade relations and alliances in response to the emerging oil and gas patterns ▪ Setting up new fiscal, energy, labor, monetary and industrial policies ▪ Redefining the future roles of the state and the private sector and their relationships. ▪ Redesign the social contract ?
  16. 16. Impact of lower oil prices: GDP, fiscal and external sectors -15 -10 -5 0 5 10 15 20 25 2000-12 2013 2014 2015 2016 2017f 2018f Percent and % of GDP: GCC Real GDP Current Account Fiscal balance Inflation -10 -5 0 5 10 15 20 2000-12 2013 2014 2015 2016 2017f 2018f Percent and % of GDP: Saudi Arabia Real GDP Current Account Fiscal balance Inflation
  17. 17. GCC Energy Price Reform: better late than never Source: Chatham House Source: Chatham House
  18. 18. GCC Fiscal Reforms: room for more Fiscal Consolidation (% of Non-Oil GDP) Decrease in Spending to Balance the 2016 Budget Spending cuts and Non-Oil Revenue Increases
  19. 19. Economic complexity Vs. GDP and fiscal revenue volatility Source: IMF
  20. 20. Economic reforms: the Way Forward ✓Strong regulatory and institutional frameworks needed to unlock private sector potential. ✓Change is needed in the public employment and wage policies and fiscal framework: closing the wage gaps, rationalizing and prioritizing capital and current expenditures. ✓Policies and Strategies to foster the emergence of dynamic new tradable sectors to enhance diversification ✓Address energy price distortions, putting energy intensity on a declining path & diversifying energy mix ✓Foster horizontal and vertical diversification, diversify the oil & gas based manufacturing, further integrating into the global value chain, and attracting FDI into the non-oil sector. ✓Ensure that the use of SWFs is governed by clear and transparent rules. ✓Develop strong regulatory, supervisory and macro-prudential frameworks to enhance resilience of the financial sector to oil price volatility. ✓Transforming the state from an allocative to developmental, the private sector from agent to partner and the economy from singular to diversified. ✓Identifying and dealing with the winners and losers in the reform process: eg. When phasing out subsidies, enforcing local content, localizing the labor force, etc.
  21. 21. Thank You
  22. 22. Shale oil economics improved due to technological improvements and cost cutting. The outlook for continued growth until mid 2030s

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