Transcript Geopolitical Ramifications PowerPoint

NATIONAL SECURITY FORUM
29 JANUARY 2016
WINNERS AND LOSERS:
THE GEOPOLITICAL
RAMIFICATIONS
OF THE RAPID DECLINE IN
GLOBAL OIL PRICES
Dr. John A. Scire, PhD
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
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.
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
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
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
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)
PREDICTIONS
FOR THE PRICE
OF A BARREL OF
OIL FOR
DECEMBER 2016
US ENERGY INFORMATION AGENCY
$45-$55*
INTERNATIONAL MONETARY FUND**
– 52% PROBABILITY OF $30+
–16.6% PROBABILITY < $20
* January 12, 2016
** January 19, 2016
WORLD BANK: $37 (Brent/WTI)*
CREDIT SUISSE: $36 (Brent)*
DECEMBER FUTURES: $41**(WTI)
* January 25, 2016
** January 30, 2016 December contracts (NYMEX)
FISCAL BREAKEVEN BARREL PRICES
FOR GOVERNMENT BUDGETS*
• SAUDI ARABIA $98
• BAHRAIN $90
• RUSSIA $50
• OMAN $97
*IMF-DECEMBER 2016
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 20122014 to 4.1% growth
*Dr. Tyrus W. Cobb, PhD
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.
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.
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”
THE BIG QUESTION?
WILL ECONOMIC STRESS
CHANGE RUSSIAN
INTERNATIONAL BEHAVIOR
FOR THE BETTER....OR THE
WORSE?
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
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