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Arab Oil Exporters’ Diversification Strategies in the Context of the Energy Transition
EleventhArabEnergyConference,Morocco,October2018
Bassam FattouhOxford Institute for Energy Studies
February 2018
Energy Insight: 28 Bassam Fattouh, Director OIES & Andreas Economou, Research Associate, OIES
Oil Price Paths in 2018:
The Interplay bertween OPEC, US Shale and Supply Interruptions
Abstract 2018 started on a positive note for oil markets with Brent prices breaking through $70 a barrel for a few days and all the key international crude oil benchmarks flipping into backwardation. Yet, there is still a wide uncertainty engulfing the oil market, with very divergent views among market observers about how the oil price path could evolve in 2018, with some revising upwards their forecasts to higher than $80/b while others are less convinced that the market fundamentals can sustainably support a price above $70/b, expecting a lower path in the mid $60/b. The key uncertainties behind these divergent views mainly pertain to different views about:
x The OPEC/NOPEC exit strategy from the output cut agreement reached in November 2016;
x US shale supply response to the recent oil price rise;
x The potential impact of higher oil prices on global oil demand;
x The extent of supply disruptions amid a fragile geopolitical environment.
In this Energy Insight, we analyse how the oil price path could evolve in 2018 by evaluating the aforementioned risks underlying the world oil market using a structural model of the oil market and considering various forecast scenarios. Forecast scenarios are not predictions of what will happen, but rather modelled projections of various oil price risks conditional on certain events that are known at the time of the forecast or some other hypothetical events. Our reference forecast scenario projects for Brent to trade within a narrow price range, with a price floor at above $60/b and a ceiling of below $75/b, with a 2018 average price of $67/b. The baseline forecast suggests that the momentum of stronger than expected oil demand and the OPEC/NOPEC output cuts have tightened the oil market in 2017 and even with no change in current market dynamics, the oil price will continue to be supported at around $65/b. Our results show that for 2018, US shale output growth will be the key factor putting a ceiling on the oil price, while supply disruptions could provide some support to the oil price, with a sharp fall in Venezuelan output constituting the biggest geopolitical risk that could push prices well above our baseline or reference forecasts. The results also show the paramount importance for the strong oil demand momentum experienced in 2017 to carry on into 2018 for rebalancing the market and supporting the oil price. Finally, our results show that for OPEC/NOPEC to maintain the recent price gains, they have to extend their output cut until the end of 2018; releasing the withheld barrels under the current agreement would result in a sharp fall in oil prices, suggesting that OPEC/NOPEC should be very wary about unwinding the output cut agreement when they next meet in June 2018.
February 2018
Energy Insight: 28 Bassam Fattouh, Director OIES & Andreas Economou, Research Associate, OIES
Oil Price Paths in 2018:
The Interplay bertween OPEC, US Shale and Supply Interruptions
Abstract 2018 started on a positive note for oil markets with Brent prices breaking through $70 a barrel for a few days and all the key international crude oil benchmarks flipping into backwardation. Yet, there is still a wide uncertainty engulfing the oil market, with very divergent views among market observers about how the oil price path could evolve in 2018, with some revising upwards their forecasts to higher than $80/b while others are less convinced that the market fundamentals can sustainably support a price above $70/b, expecting a lower path in the mid $60/b. The key uncertainties behind these divergent views mainly pertain to different views about:
x The OPEC/NOPEC exit strategy from the output cut agreement reached in November 2016;
x US shale supply response to the recent oil price rise;
x The potential impact of higher oil prices on global oil demand;
x The extent of supply disruptions amid a fragile geopolitical environment.
In this Energy Insight, we analyse how the oil price path could evolve in 2018 by evaluating the aforementioned risks underlying the world oil market using a structural model of the oil market and considering various forecast scenarios. Forecast scenarios are not predictions of what will happen, but rather modelled projections of various oil price risks conditional on certain events that are known at the time of the forecast or some other hypothetical events. Our reference forecast scenario projects for Brent to trade within a narrow price range, with a price floor at above $60/b and a ceiling of below $75/b, with a 2018 average price of $67/b. The baseline forecast suggests that the momentum of stronger than expected oil demand and the OPEC/NOPEC output cuts have tightened the oil market in 2017 and even with no change in current market dynamics, the oil price will continue to be supported at around $65/b. Our results show that for 2018, US shale output growth will be the key factor putting a ceiling on the oil price, while supply disruptions could provide some support to the oil price, with a sharp fall in Venezuelan output constituting the biggest geopolitical risk that could push prices well above our baseline or reference forecasts. The results also show the paramount importance for the strong oil demand momentum experienced in 2017 to carry on into 2018 for rebalancing the market and supporting the oil price. Finally, our results show that for OPEC/NOPEC to maintain the recent price gains, they have to extend their output cut until the end of 2018; releasing the withheld barrels under the current agreement would result in a sharp fall in oil prices, suggesting that OPEC/NOPEC should be very wary about unwinding the output cut agreement when they next meet in June 2018.
The elusive goal of diversification
1 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Diversification outcomes in Arab countries lags other regions
Economic diversification has been a key developmental goal
Achieving this objective is seen as essential for economic security and sustainability.
Although some Arab oil exporters have made progress over the last few decades in diversifying their economic base and sources of income, economic diversification remains generally low in Arab economies than in many emerging market economies, including commodity exporters.
Source: IMF
Economic complexity index (avg.) = 0.34 (low complexity) Arab economies lack high-quality products or services not made elsewhere.
2 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Measures of economic diversity
ECONOMIC DIVERSIFICATION IN OIL-EXPORTING ARAB COUNTRIES
10 INTERNATIONAL MONETARY FUND
DZA
KWT
LBY
OMN QAT
SAU
UAE
YEM
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
5.25 6 6.75 7.5 8.25 9 9.75 10.5 11.25 12
Eco
no
mic
Co
mp
lexi
ty, 2014
(hig
her
sco
re =
gre
ate
r eco
no
mic
co
mp
lexi
ty)
Log of GDP per Capita (in USD), 2010-14
Hydrocarbon exports <25% of total
Hydrocarbon exports >25% of total
Trend for hydrocarbon exporters
Trend for non-hydrocarbon exporters
Economic Complexity Index and GDP per Capita
DZA
KWTLBY
OMN QAT
SAU
UAE
YEM
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.05.25 6 6.75 7.5 8.25 9 9.75 10.5 11.25 12
Exp
ort
Div
ers
ity In
dex,
2014
(hig
her
sco
re =
gre
ate
r exp
ort
div
ers
ity)
Log of GDP per Capita (in USD), 2010-14
Export Diversity Index and GDP per Capita
Hydrocarbon exports <25% of total
Hydrocarbon exports >25% of total
Trend for hydrocarbon exporters
Trend for non-hydrocarbon exporters
Figure 2. Measures of Economic Diversity
Sources: The Observatory of Economic Complexity; The Diversification Toolkit (IMF); UNIDO INDSTAT4 Industrial Statistics Database; and IMF staff estimates.
Note: Scales for Economic Complexity, Export Diversity, and Export Quality indices are normalized between 0 (minimum observed valued) and 1 (maximum observed value) to facilitate comparison.
Ye
me
n Alg
eri
a Qat
ar
Om
an
Ku
wai
t
Sau
di A
rab
ia
Un
ite
d A
rab
Em
irat
es
Mo
rocc
o Jord
an Tu
rke
y
Ind
on
esi
a Can
ada
Mal
aysi
a
Me
xico
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Economic Complexity Index(1 = greater complexity)
Economic Complexity Index
Arab Oil Exporters MENA Region Other Oil Exporters
Ku
wai
tY
em
en
Sau
di A
rab
iaA
lge
ria Q
atar
Om
an
Un
ite
d A
rab
Em
irat
es
Ba
hra
in
Tu
rke
y Jord
an Mo
rocc
o
Mal
aysi
aM
exi
coIn
do
ne
sia
Can
ada
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Export Diversity (IMF)(1 = greater diversity)
Export Diversity Index
Arab Oil Exporters MENA Region Other Oil Exporters
Ye
me
nIr
aq
Sau
di A
rab
iaK
uw
ait
Om
anA
lge
ria Un
ite
d A
rab
Em
irat
es
Qat
arB
ah
rain
Mo
rocc
oJo
rdan T
urk
ey
Ind
on
esi
aM
exi
coM
alay
sia
Can
ada
0
0.2
0.4
0.6
0.8
1
Export Quality (IMF)(1 = higher quality)
Export Quality Index
Arab Oil Exporters MENA Region Other Oil Exporters
Qat
ar
Alg
eri
a
Om
an
Ye
me
n
Ku
wai
t
Ba
hra
in
Sau
di A
rab
ia
Mo
rocc
o
Jord
an
Tu
rke
y
Me
xico
Ind
on
esi
a
Mal
aysi
a
Can
ada
0
0.2
0.4
0.6
0.8
1
Manufacturing Value Added GINI(1 = greater inequality between sectors)
Manufacturing Value-Added GINI
Arab Oil Exporters MENA Region Other Oil Exporters
Economic complexity
Export diversity
Export quality
Manufacturing value-added
Index 1 = greater complexity
Index 1 = greater diversity
Index 1 = higher quality Index 1 = greater inequality between sectors
Export diversity index (avg.) = 0.25 (low diversity) Export revenues are driven by only a few sectors and trading partners.
Export quality index (avg.) = 0.43 (fair quality) Average quality within any product category based on trade price, exporter income per capita and distance between importer and exporters is fair.
Manufacturing value-added Gini (avg.) = 0.80 (great inequality) The energy sector still dominates in the Arab oil-exporting economies.
The challenges of heavy reliance on oil revenues
From the developmental perspective, multiple challenges arise
The oil industry does not generate a stable source of income as oil prices fluctuate widely; in some countries oil rents are not big enough to provide sufficient income for growing populations and an extensive welfare system.
The oil industry is capital intensive in nature and does not generate enough jobs for the hundreds of thousands entering the labour market each year.
There has been a paradigm shift about the future prospects of global oil demand; the concept of peak oil demand is now more widely accepted, albeit no one really knows when or whether demand will peak.
Source: World Bank, OIES 3 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Oil rents in the Arab World, 1975-2016
1.
2.
3.
But regardless of when oil demand may peak, the debate places the topic of diversification into a new context.
Peak oil demand and the shift in perceptions
Shifts in perception impact the behavior of market players
A shift of perceptions from oil scarcity to oil abundance; in a carbon-constrained world, there are growing concerns that countries with vast amount of oil reserves are now faced with the possibility of stranded assets.
The concepts of scarcity premiums, the effectiveness of rationing oil supplies in an inter-temporal framework, and the idea that oil kept underground today will command a higher price in the future need to be critically assessed.
Global oil markets will become increasingly competitive and margins in the oil industry will decline.
Source: Google Trends, OIES
These shifts in perception are already changing the behaviour of the market participants; in oil exporting countries the urgency of reform and diversification has intensified.
4 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Worldwide news headlines trend, Jan 08 – Aug 18
1.
2.
3.
Key questions to be addressed
Source: MIT Observatory of Economic Complexity, OIES 5 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Oil exporters diversification by region, 1965 – 2016
These issues throw up three important questions
How soon can we expect ‘peak oil demand’ to occur, or to be more precise, how fast is the current energy transition
What kind of economic future should the Arab oil exporters be planning for
How does the emergence of renewable energy, as a competitive source, impacts economic diversification strategies in these countries
1.
2.
3.
?
?
?
NECI = Economic Complexity Index
Peak demand and the speed of the energy transition
6 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Peak oil demand (?)
Some general observations
Range of uncertainty is very high:
Projections are highly sensitive to underlying assumptions such as GDP, population, efficiency gains, carbon pricing, the interactions of various technologies.
Possibility of multiple peaks due to rebound effects:
A peak in oil demand could cause oil prices to fall, triggering higher demand from consumers.
No sharp fall in oil demand:
Oil will continue to be an important part of the energy mix for the foreseeable future.
Source: Dale and Fattouh (2018), OIES
Fast transitions rarely happen, but the possibility of a fast transition cannot be entirely discounted.
7 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Global oil demand projections, 1965 – 2040E
The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
4
(i) the point at which oil demand is likely to peak is very uncertain and depends on many assumptions;
(ii) even once oil demand has peaked, consumption is unlikely to fall very sharply – the world is likely to consume significant amounts of oil for many years to come.
Chart 1 shows a range of forecast for oil demand over the next 25-30 years from a variety of public and private sector organisations.
Chart 1: World oil demand (Mb/d)
There is wide range of estimates of the point at which oil demand is likely to peak. Some projections suggest global oil demand could peak soon after 2025, others expect demand to continue to grow out to 2040 and beyond. Indeed, different projections from the same organisation can point to quite different estimates depending on the assumptions used. For example, the IEA’s Sustainable Development scenario, which is predicated on a sharp tightening in climate policies, suggests oil demand may peak in the mid-2020s, whereas its “New Policies” scenario, which envisages a less sharp break in environmental policies, points to demand continuing to grow in 2040. A comparison of BP’s “Even Faster Transition” case with its base case points to a similar difference.3 BP’s Energy Outlook also highlights how relatively small differences in assumptions about GDP growth or improvements in vehicle efficiency can radically shift the likely timing of the peak in demand.
The point here is that any estimate of when oil demand will peak is highly dependent on the assumptions underpinning it: slight differences in those assumptions can lead to very different estimates. Beware soothsayers who profess to know when oil demand will peak.
Chart 1 also illustrates that even those projections that predict oil demand will peak during their forecast period, do not envisage a sharp drop off in demand. The vast majority of the projections in Chart 1 expect the level of oil demand in 2035 or 2040 to be greater than it is today. Even those projections which suggest that oil demand may peak relatively early, such as the IEA Sustainable Development scenario, do not see a very sharp drop off in oil demand. The Sustainable Development scenario considers a scenario in which climate policies tighten sufficiently aggressively for carbon emissions to decline at a rate thought to be broadly consistent with achieving the goals set out at the Paris COP21
3 https://www.bp.com/en/global/corporate/energy-economics/energy-outlook.html
Slow versus fast transition
Slow transition
Historical data (coal over centuries, oil for decades).
Opportunity-driven; interfuel substitution.
Massive infrastructure built around the fuel.
Lock-in and path dependency.
Huge sunk costs create inertia and economic incentives to utilise infrastructure until it is written-off.
Incumbents “fight back” and delay the transition.
8 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Fast transition
Some previous “fast” historical transitions (country- and industry-specific, seen in end-use technologies).
Problem-driven, managed or incentivised: policy play a key role.
Speed likely to differ across sectors and regions.
Not just influenced by changes in the energy sector; draws on synergistic advances
(e.g. blockchain, computing, materials science etc.).
Difficult to draw firm conclusions about the speed of the current energy transition.
How should Arab oil exporters adapt to the current energy transition the speed of which is highly uncertain?
9 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Investment in the oil sector needed
Consolidation of three key trends
Global oil liquids demand is unlikely to increase strongly over the next few decades.
Large investments will still be needed in the oil sectors of the Arab
world to fill the gap in supply.
Renewables are at an inflection point and there is virtual consensus among forecasts that the share of renewables in the energy mix will rise.
Source: Dale and Fattouh (2018), OIES
The Arab oil exporters must feed these trends into their strategic thinking and economic diversification agendas; but how?
10 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Global supply-demand prospects under no upstream investments scenario, 1965 – 2040E 1.
2.
3.
The contents of this paper are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
4
(i) the point at which oil demand is likely to peak is very uncertain and depends on many assumptions;
(ii) even once oil demand has peaked, consumption is unlikely to fall very sharply – the world is likely to consume significant amounts of oil for many years to come.
Chart 1 shows a range of forecast for oil demand over the next 25-30 years from a variety of public and private sector organisations.
Chart 1: World oil demand (Mb/d)
There is wide range of estimates of the point at which oil demand is likely to peak. Some projections suggest global oil demand could peak soon after 2025, others expect demand to continue to grow out to 2040 and beyond. Indeed, different projections from the same organisation can point to quite different estimates depending on the assumptions used. For example, the IEA’s Sustainable Development scenario, which is predicated on a sharp tightening in climate policies, suggests oil demand may peak in the mid-2020s, whereas its “New Policies” scenario, which envisages a less sharp break in environmental policies, points to demand continuing to grow in 2040. A comparison of BP’s “Even Faster Transition” case with its base case points to a similar difference.3 BP’s Energy Outlook also highlights how relatively small differences in assumptions about GDP growth or improvements in vehicle efficiency can radically shift the likely timing of the peak in demand.
The point here is that any estimate of when oil demand will peak is highly dependent on the assumptions underpinning it: slight differences in those assumptions can lead to very different estimates. Beware soothsayers who profess to know when oil demand will peak.
Chart 1 also illustrates that even those projections that predict oil demand will peak during their forecast period, do not envisage a sharp drop off in demand. The vast majority of the projections in Chart 1 expect the level of oil demand in 2035 or 2040 to be greater than it is today. Even those projections which suggest that oil demand may peak relatively early, such as the IEA Sustainable Development scenario, do not see a very sharp drop off in oil demand. The Sustainable Development scenario considers a scenario in which climate policies tighten sufficiently aggressively for carbon emissions to decline at a rate thought to be broadly consistent with achieving the goals set out at the Paris COP21
3 https://www.bp.com/en/global/corporate/energy-economics/energy-outlook.html
S-D Gap
The strategic role of the energy sector in the transition
11 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Energy sector to play a more active role in the diversification process
Integration, optimization, adaptation
The oil sector will continue to dominate the Arab oil-exporting economies but it needs to play a much more active role in the diversification process.
Governments should pursue measures to optimise the resource
base, especially in a carbon-constrained world.
The Arab countries should not miss out on the renewable ‘revolution’ and renewable energy should complement the economic diversification strategies.
Source: IEA, OIES
In the long-term, diversification of the Arab oil-exporting economies, which requires deep structural reforms, remains the main adaptation strategy that these countries need to pursue.
12 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
1.
2.
3.
Total primary energy supply by total of renewable energy sources, 1990 – 2016
Oil policy matters
13 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Maximizing revenue during the transition
Oil policy and monetization strategies will remain key
Is it rational for Arab producers/exporters to monetise reserves as quickly as possible and squeeze out high-cost producers to gain market share?
If all low-cost producers adopt this strategy in the face of slowing demand growth it could lead to a massive fall in oil prices and revenues, derailing social and economic stability and the diversification agenda.
Heavy reliance on oil revenues places a constraint on how fast Arab oil exporters can shift to a more competitive world where prices converge to marginal cost of production.
Cooperation has to take a different shape to the past.
Producers should not only be concerned with low oil prices, but also be proactive when prices are too high, as high oil prices include strong supply and demand responses.
Source: OIES
As long as the Arab oil-exporting economies are not diversified, the alternative of non-cooperation is not sustainable.
14 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Direct impact of the Declaration of Cooperation on gross oil revenues, y/y change
Conclusion: The co-dependence between economic diversificationand the global energy transition
15 | The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
Bassam Fattouh, Director OIES
October 2018
Oxford Institute for Energy Studies
The contents of this presentation are the authors’ sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members.
February 2018
Energy Insight: 28 Bassam Fattouh, Director OIES & Andreas Economou, Research Associate, OIES
Oil Price Paths in 2018:
The Interplay bertween OPEC, US Shale and Supply Interruptions
Abstract 2018 started on a positive note for oil markets with Brent prices breaking through $70 a barrel for a few days and all the key international crude oil benchmarks flipping into backwardation. Yet, there is still a wide uncertainty engulfing the oil market, with very divergent views among market observers about how the oil price path could evolve in 2018, with some revising upwards their forecasts to higher than $80/b while others are less convinced that the market fundamentals can sustainably support a price above $70/b, expecting a lower path in the mid $60/b. The key uncertainties behind these divergent views mainly pertain to different views about:
x The OPEC/NOPEC exit strategy from the output cut agreement reached in November 2016;
x US shale supply response to the recent oil price rise;
x The potential impact of higher oil prices on global oil demand;
x The extent of supply disruptions amid a fragile geopolitical environment.
In this Energy Insight, we analyse how the oil price path could evolve in 2018 by evaluating the aforementioned risks underlying the world oil market using a structural model of the oil market and considering various forecast scenarios. Forecast scenarios are not predictions of what will happen, but rather modelled projections of various oil price risks conditional on certain events that are known at the time of the forecast or some other hypothetical events. Our reference forecast scenario projects for Brent to trade within a narrow price range, with a price floor at above $60/b and a ceiling of below $75/b, with a 2018 average price of $67/b. The baseline forecast suggests that the momentum of stronger than expected oil demand and the OPEC/NOPEC output cuts have tightened the oil market in 2017 and even with no change in current market dynamics, the oil price will continue to be supported at around $65/b. Our results show that for 2018, US shale output growth will be the key factor putting a ceiling on the oil price, while supply disruptions could provide some support to the oil price, with a sharp fall in Venezuelan output constituting the biggest geopolitical risk that could push prices well above our baseline or reference forecasts. The results also show the paramount importance for the strong oil demand momentum experienced in 2017 to carry on into 2018 for rebalancing the market and supporting the oil price. Finally, our results show that for OPEC/NOPEC to maintain the recent price gains, they have to extend their output cut until the end of 2018; releasing the withheld barrels under the current agreement would result in a sharp fall in oil prices, suggesting that OPEC/NOPEC should be very wary about unwinding the output cut agreement when they next meet in June 2018.