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THE SITUATION BEFORE SAUDI DECISION TO RAMP UP PRODUCTION (NOVEMBER 2014)

This article explores the geopolitical implications of the rapid decline in global oil prices. It discusses the situation before Saudi Arabia's decision to increase production, why oil price predictions failed, and the effects on major oil producers like Russia. The article also highlights potential geopolitical impacts and concludes that low oil prices will continue to cause change and increase global instability.

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THE SITUATION BEFORE SAUDI DECISION TO RAMP UP PRODUCTION (NOVEMBER 2014)

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  1. NATIONAL SECURITY FORUM29 JANUARY 2016WINNERS AND LOSERS:THE GEOPOLITICAL RAMIFICATIONS OF THE RAPID DECLINE IN GLOBAL OIL PRICESDr. John A. Scire, PhD

  2. THE SITUATION BEFORE SAUDI DECISION TO RAMP UP PRODUCTION(NOVEMBER 2014) • US IMPORTS HAD DROPPED FROM 65% TO ONLY 44% OF CONSUMPTION FROM 2008 TO 2014 • US IMPORTS OF PERSIAN GULF OIL HAD DROPPED TO JUST OVER 9% OF TOTAL CONSUMPTION • US PRODUCTION HAD GROWN TO 9.7MBD, THE HIGHEST IN HISTORY

  3. SITUATION BEFORE NOVEMBER 2014 (CONTINUED) • US SCHEDULED TO BEGIN EXPORTING OF LNG IN ADDITION TO INCREASED EXPORTS OF CNG • RUSSIAN AND CANADIAN PRODUCTION WAS INCREASING • MARKET SHARE DECLINE ALARMS SAUDIS AND GIVES THEM THE RESOLVE TO HURT COMPETITORS AND TO DISCIPLINE OPEC QUOTA VIOLATORS.

  4. OIL PRICE PREDICTIONS SPRING OF 2015 • AVERAGE PRICE PREDICTION FOR FALL 2015 WAS $65 A BARREL FOR BRENT NORTH SEA OIL • REALITY WAS THE LOW 40S, WITH A RECENT DIP INTO THE 20S. • CURRENT PRICE IS $27.12 A BARREL* *January 20, 2016

  5. WHY PREDICTIONS FAILED • THE SAUDIS UNDERESTIMATED RESOLVE OF OTHER OPEC COUNTRIES PLUS RUSSIA, CANADA AND THE U.S. TO CONTINUE TO INCREASE PRODUCTION • DEMAND FROM CHINA STILL GREW BUT AT A MUCH SLOWER RATE (+.4mbd in 2015 vs. +.7 in 2014) • IMPORTS GROWTH SLOWED DOWN IN ASIA (EXCEPT FOR INDIA), AFRICA, AND PARTS OF LATIN AMERICA

  6. WHY PREDICTIONS FAILED • NON-SAUDIS UNDERESTIMATED SAUDI RESOLVE TO BANKRUPT HIGHER COST PRODUCERS AT ANY COST • NON-SAUDIS UNDERESTIMATED SAUDI WILLINGNESS TO DIMINISH CURRENCY RESERVES and TO REDUCE DOMESTIC SUBSIDIES AND EXPENSES

  7. THE BOTTOM LINE OIL SUPPLY GREW AT THE SAME TIME DEMAND GROWTH SLOWED (INCREASED PRODUCTION IN 2015 WAS 584MB*) NET RESULT: CURRENT INVENTORY IN OECD COUNTRIES IS NOW AT 2.9B BARRELS* AND PRICES DROPPED FROM OVER $100 DOWN TO AROUND $30 A BARREL. (IEA-11December 2015, Oil Market Report)

  8. PREDICTIONS FOR THE PRICE OF A BARREL OF OIL FOR DECEMBER 2016

  9. US ENERGY INFORMATION AGENCY $45-$55* INTERNATIONAL MONETARY FUND** • 52% PROBABILITY OF $30+ • 16.6% PROBABILITY < $20 * January 12, 2016 ** January 19, 2016

  10. WORLD BANK: $37 (Brent/WTI)* CREDIT SUISSE: $36 (Brent)* DECEMBER FUTURES: $41**(WTI) * January 25, 2016 ** January 30, 2016 December contracts (NYMEX)

  11. FISCAL BREAKEVEN BARREL PRICESFOR GOVERNMENT BUDGETS* • SAUDI ARABIA $98 • BAHRAIN $90 • RUSSIA $50 • OMAN $97 *IMF-DECEMBER 2016

  12. RUSSIA and OIL* • Rapid Economic Growth under Putin Was His Major Achievement • Since 1999 until Recession of 2008, Russian economy grew at average of 7%. • Dropped in 2008, but then rebounded 2012-2014 to 4.1% growth *Dr. Tyrus W. Cobb, PhD

  13. RUSSIA and OIL • Growth driven by rise in oil prices. Over 50% of Russia’s budget came from exports of oil/gas. • Drop in oil prices drops Russia into longest recession since Putin came to power. Economy contracted 3.9% in 2015. • Russia’s fiscal price per barrel is $50.

  14. RUSSIA and OIL • Ruble fell to 85 to the dollar, 12% Inflation, food prices up 20%. • Russia’s strategy—Continue to pump oil like mad—output was 11 mbpd in 2015 • In 2016, Russian economy likely will decline 4%+. Reserves being tapped—down now to about $480 billion.

  15. RUSSIA and OIL Some domestic unrest expected. Putin stresses Western evil intents as the cause of Russia’s problems, and emphasizes nationalism. ONE MAJOR SIDE EFFECT TO RUSSIAN RECESSION: Economic Spillover into the “Stans”

  16. THE BIG QUESTION? WILL ECONOMIC STRESS CHANGE RUSSIAN INTERNATIONAL BEHAVIOR FOR THE BETTER....OR THE WORSE?

  17. OTHER POSSIBLE GEOPOLITICAL IMPACTS • COMPLETE COLLAPSE OF LIBYA • COMPLETE COLLAPSE OF VENEZUELA • FURTHER UNREST IN NIGERIA • MORE CONFLICT BETWEEN SAUDI ARABIA AND IRAN IN ADDITION TO CURRENT CONFLICT IN YEMEN

  18. CONCLUSION PRICES ARE UNPREDICTABLE AT THIS TIME AS ARE THE POTENTIAL ACTIONS OF OIL PRODUCERS WHAT IS PREDICTABLE IS THAT CONTINUED LOW PRICES WILL CAUSE CHANGE AND INCREASE GLOBAL INSTABILITY

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