Current Status of the Oil Market: the Traditional Scenario
Oil prices have remarkably decreased since June 2014, as the price of a barrel of crude oil dropped below $ 50 at the beginning of January 2015, and continued to fall until it reached about $ 30/ barrel in last January. So, beside supply and demand, what are the other factors affecting the global oil market, and hence oil prices?
One of these factors is the behavioral psychology of producers, consumers and brokers which affects their decisions regarding production, sale and purchasing contracts in the oil global market.
Some producers may sometimes continue production despite the low price, in their desire to maintain their shares in the market. Others may intentionally reduce their oil price to face rivalry and the high availability of supply in the global market, in order to maintain their market places. This situation creates what’s called a price war.
For consumers, who purchase crude oil for different purposes, their purchase decisions are affected by the current and predicted prices of the oil. In the case of continuous fall in the prices for a certain period, they tend to reduce their spot buying amounts, and abstain completely from future contracts in anticipation of another drop in prices. Thus, the global oil market will face a buyer power that forces lowering prices due to the decline of demand, regardless the availability of supply. On the other hand, if the oil prices are predicted to increase, consumers will purchase in large amounts through instantaneous and future contracts to avoid increments in their costs.
As for the brokers and investors in the financial markets, their purchasing decisions of instantaneous and future contracts are based on maximizing their profit by utilizing the difference of buy and sell prices.
The geopolitical factors also influence the oil prices through their impact on the global production and supply, which in turns affected by natural disasters, wars and conflicts in production places, in addition to logistics in consumption places. Price is also affected by political stability in oil-producing countries and some major consuming countries. Accordingly, any kind of political disruption or natural disasters would raise the global oil prices levels.
The Most Important New Factors Affecting Oil Prices
The US Energy Information Administration (EIA) announced in a report issued in 2013 that some preliminary estimates have pointed the possibility of increasing global reserves of oil and gas by 11% and 47% respectively from shale oil.
The same report pointed out that the initial studies estimated the shale oil resources by 345 billion barrels. Adding this amount to the current global oil resources results in an overall 3,357 billion barrels.
The US Energy Information Administration report also mentioned that preliminary estimates indicated that the expected exploitable amount of natural gas from the rocks is 7,299 trillion cubic meters. This amount is equivalent to 32% of the current global volume of the natural gas.
This study, which was carried out recently in the US, is considered as the first attempt to analyze the impact of the startling discovery of fine-grained sedimentary rock containing kerogen (oil shale) as a resource of oil and natural gas. This discovery has changed the industry of oil and gas in the US and will most likely have a considerable effect on the globe.
As per the report, 60% of the global resource of shale gas is owned by six countries, namely China, Argentina, Algeria and the United States, Canada and Mexico.
The same report also pointed that five countries, namely Russia and the United States, China, Argentina and Libya own approximately 63% of the global resources of shale oil.
However, there is no information in the report regarding the economic viability of extracting shale oil or shale gas in the above mentioned countries. United States and Canada are the only two countries that started commercial production.
As a result of these discoveries, authorities announced that US will be the largest oil producer by 2020 and the largest producer of gas through 2015. According to this announcement, US will no longer depend on the Middle East oil after this date.
The International Energy Administration confirmed this by an official announcement that the United States will surpass Saudi Arabia and Russia to become the largest oil producer by 2017. In addition, the oil exports of North America will surpass its imports by 2030. By 2035, America will achieve energy independence.
Based on EIA, it is highly expected that production of US will rise to about 11.4 million barrels per day, while the current production capacity of Saudi Arabia and Russia are approximately 11.5 and 10.3 respectively. Moreover, City Bank experts expect the US production to reach 13-15 million barrels per day by 2020.
A modern technology, innovated by US oil companies, has significantly leveraged the shale oil production rates which enabled US to reduce the previously set time frame for its energy independence. This promoted the cancellation of the law issued by the Congress in 1975 which ban oil exporting. Thus, the United States has currently become one of the petroleum exporting countries.
Current Status of the Oil Markets: a Different Scenario
A fact, which might be intentionally ignored in analysis, is that oil is almost the only commodity that its price is determined by the consumer rather than producer. Unlike other goods and durables such as clothing, cars, etc.
Therefore, the oil pricing is not conducted in accordance with supply and demand factors. However, these factors are exploited to determine oil prices in accordance with the best interests of the countries that control the joints of the global economy.
As a result, oil is sometimes used as a tool to achieve political goals and objectives, which are mostly undeclared and covered with economic or social frames. For instance, US as an influencing power in the global oil market, may change the trend of oil prices up and down to impose economic pressure on other countries, to force them to change, or at least modify, their political stands.
The recent sudden fall in oil prices was not merely due to the decrease of demand, despite the slower growth in the economies of the industrialized countries, especially in the Chinese economy. It was actually caused by prior planning of the United States based on geopolitical reasons which are totally unrelated global supply and demand factors, which in turns will have negative global consequences, especially on the producing countries.
An evidence that oil prices were not determined according to the global supply and demand is that when the oversupply of oil reported peak demand in the second quarter of 2014 (1.2 million barrels per day on average), the price was at its highest (US $ 103.35 per barrel), although the increase in demand compared to the first quarter was limited. Besides, when the average daily surplus volume shrank to 310 thousand barrels in the fourth quarter of 2014, due to lower global supply, the price dropped to $ 73.16 per barrel. In spite of the continued increase in demand. According to economic theory the increased demand for a commodity with stability or decline in supply, is expected to be accompanied by a rise in prices. However, this theory was totally opposed in the case of oil prices in the fourth quarter of 2014.
The changes in oil pricing during the year 2014, which was not related to supply and demand factors in the global market, validate our claim that oil prices can be exploited as a weapon to achieve political objectives that serve the interests of some countries. In the first three quarters of the year, when the supply exceeded the demand, oil has achieved very high prices. In the fourth quarter of the year, and despite the low volume of excess supply and increased demand levels, the price has dropped by 25% compared to its level in the third quarter!
The United States has already used oil pricing as weapon against the former Soviet Union in Afghanistan, which led to its collapse.
The United States and its allies also took advantage of this weapon recently for political reasons in Latin America, especially Venezuela, which resulted in the defeat of the ruling party in the parliamentary elections which took place last December. In addition to enabling the forces of the opposition to control the parliament as a prelude to their control over the country's presidency in the future.
The oil pricing weapon is also used by the United States and its allies in its political conflict with Russia. It took the form of a proxy war in Ukraine to protect its interests in Eastern Europe as well as the war that is currently going on in Syria to protect its interests in the Middle East. Hence, the undeclared objective of lowering oil prices by US, is to weaken the Russian economy and thus destabilizing its political status, even it has been economically covered, in order to change its policies in Ukraine and the Middle East.
Alternative Oil Resources: the Worst Scenario
The American strategy in the long term is to be the alternative for Chinese and Japanese oil imports instead of the Arabian Gulf states and Iran.
It has become well known that the Western countries, especially the United States, carry out in-depth studies on relevant topics prior taking decisions about their strategies and foreign policies. It is also well known that America always adopt long term strategies that might extend to fifty years in some cases.
The United States announced earlier its plan for a new regional map which was launched as the «new Middle East» based on a philosophy called creative chaos, which aims to ignite wars within and among the countries of the region. The plan is to achieve this with the mean of the political Islam groups, especially the Muslim Brotherhood.
The war declared by the US and its allies on what known as the "Islamic state", or the organization of "Daesh," is not an exception to this rule. America has declared the war recently on this organization after it got out of control, as al-Qaeda, and became a key threatening to its interests in the region.
The rush of the US President in taking the war decision outside the United Nations framework is a clear evidence that the US does not want to face any objection that may lead to failure of its strategy, especially if Russia decided to use its veto right. Therefore, President Obama called to the formation of "coalition of the willing", beyond the framework of the United Nations, which reminds us of the experience of his predecessor Bush in his war on Iraq.
It is well known that the economy of both China and Japan rely entirely on oil imported from Arabian Gulf countries and Iran. This petroleum resource is actually essential for their economy. Therefore, any threat of cutting this supply will have disastrous effects on the economy of the two countries and will cause a huge damage.
The threat to the oil resources in the region, or to the means of oil export to China and Japan, is a possible scenario for a potential regional wars, particularly the one declared against the organization of “Daesh” Iraq and Syria. Continuation of this war for a long term may lead to revenge by the organization from participants, especially the United States, through hitting their interests all over the world, and most important in the Gulf region, the strategic region of oil exports.
Any threat to oil exports from the Arabian Gulf region and Iran to China, Japan and European countries, will make the US the main source of oil for those countries. Especially if we consider the developed technologies in the field of oil and gas that will enable America in the short term to become the largest producer and exporter for them in the world.
The realization of this scenario would allow the United States to control the economy of China and Japan, as well as the economy of its allies from the European countries. Thus, restoring its control over the whole world’s economy for a long period of time. This indeed represents the real objective behind the regional wars, specifically the US war against "Daesh ".
The Implications of the Country's Economy
All this will have an impact on the country's foreign investments, including sovereign funds, and will limit its activity due to the deflation in capital. It will also reduce its inside investments and hence lower the annual revenues. Accordingly, a significant shortage in budget is expected, which will harm the ventures and administrative subsidizing of vital sectors such as health and education.
Similarly, the decline in financial revenue of the state would negatively affect the size of the annual budget, and will have direct impact on government expenditures, which will cause serious damage to all economic sectors and activities, especially the infrastructure sector, the pioneering sector of the state which helped to attract foreign investment and achieved growth in the tourism sector in particular.
Any decline in the Gross Domestic Product (GDP) will directly bring the capita income down, which will have a negative impact on the effective demand in the economy, the size, and thus the volume of private consumption. This in turn will result in a relative deterioration in the standard of living of the population of the state. In addition, a damage in domestic industries that produce consumer goods will be caused.
Reducing government spending on services and vital sectors will be reflected directly on the citizens. It will reduce the high standard of living and distinctive, and perhaps lead to grumbling in their midst because of the unusual impairment.
What are the Solutions? The UAE Beyond Oil
It is a fortunate that the leadership has responded to this critical question during the ministerial retreat which was held on the thirtieth of last January. A “UAE beyond oil strategy” was prepared and will be announced later.
This strategy is considered exceptional by all standards as it pictures the economy and society of the UAE after the depletion of oil resources. It is a rational extension of the strategy of broadening sources of income and economic diversification apart from the oil sector, it has been deployed by the wise leadership of the UAE for decades. The later strategy, achieved considerable result by minimizing the oil sector's contribution to the GDP to about 30%.
The UAE model has become a source of inspiration for many countries in the region, in terms of attaining sustainable development which is independent on oil sector, while taking in consideration the high living standard of the citizens.
The success of the UAE model relies on the following cores:
1. The smart strategic partnership with the private sector. As an example of this partnership, a group of UAE businessmen declared the initiative «home Fund». Number of projects, which will basically serve the national economy and the citizens, will be implemented by the initiative under the supervision of Abu Dhabi Investment Company.
2. Investing in the infrastructure sector: roads, telecommunications, water, electricity, etc. And following the highest international standards in this field.
3. Awareness of the importance of the investment in health and education sectors to build qualified and well trained human resources up to the highest international standards. This is supported by the believe that national cadres are the real capital for sustainable development.
The country has adopted innovation as a formal strategy in all sectors as the strategy of the economic outlook and the knowledgeable society in the UAE of the twenty-first century.
The success of this strategy has been confirmed by all international ranking reports which are issued by relevant and reliable global institutions. International Economic Forum and the International Institute for Management Development at Lausanne of Switzerland are examples of this institutions.
Exceptional Strategy … Exceptional Policies
Since this strategy is considered exceptional, it requires application of exceptional policies to achieve its objectives. One of the biggest challenges that will face the government during the post-oil stage, is to secure sustainable sources of income for the annual government’s revenue to ensure the implementation of the objectives of the strategy and the achievement of its goals represented in the highest living standards and happiness for the citizens.
The Oil currently represents about 75% of the annual revenues of the government’s budget. Hence, the critical question is: What are the alternative resources which will be considered by the government to cover shortage in the budget due to the loss of oil revenues in the coming years?
The current most important alternative resources are the revenues from local and global investments of the government in different sectors. In addition to the fees collected by the governmental entities for the services provided to companies, institutions and individuals.
The exceptional policies, which need to be applied to secure income resources and hence ensure the continuity of the country’s well-being and happiness, is to impose direct taxes. It is considered exceptional as it is not applied by any other country in the Arabian Gulf region.
The absence of taxes in the past was meant to attract local and foreign investments during the country’s early developing stages, which was a challenge by that time.
However, the UAE beyond oil strategy requires a reconsideration of this policy. It is important to consider taxation on personal income and corporate profits in order to maintain sustainable development, prosperity and happiness for the citizens at the same current levels and even take to more advanced levels in the future.
The policy of imposing direct and indirect taxes requires in depth and comprehensive studies to address all aspects and various scenarios anticipated by the application prior finalizing the decision on this regard.
Tax exemption has become irrelevant in the presence of strong attracting factors for successful investments and highly qualified human resources. Foreign investors now prefer investing in the UAE rather than other countries in the region. Cadres also are coming to the UAE due to the distinguished privileges such as well-developed infrastructure and advanced communication system, which made the country a strong regional and international competitor.