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tag:theconversation.com,2011:/us/topics/oil-prices-11112/articles oil prices – The Conversation 2018-12-12T11:41:48Z tag:theconversation.com,2011:article/108450 2018-12-12T11:41:48Z 2018-12-12T11:41:48Z Cheap oil is blocking progress on climate change

Ford's F-150 trucks are more popular when gas costs less. AP Photo/Carlos Osorio

The relationship between supply and demand, a fundamental economic concept, holds that when the price of something rises, people use less of it. Similarly, when prices fall, they use more.

And it may seem logical that low oil prices benefit consumers, countries, even the world. When consumers save money on gas, they can spend it elsewhere.

Yet, I argue that climate change makes this view obsolete.

That's because cheap oil has two big downsides along with its short-term gains. It erodes the advantages of vehicles that get more miles to the gallon, making consumers less apt to do their share to reduce emissions by buying vehicles that use less fuel – or none at all.

It also makes the case for energy innovation seem less urgent to policymakers and the automotive industry.

What's not to like?

Burning fossil fuels, the main source of manmade carbon dioxide, is the biggest cause of climate change. In the U.S. and other wealthy countries, oil is the single largest source of these emissions.

But relatively low prices are boosting petroleum sales worldwide. Consumption is climbing particularly in Asia, where a sustained economic boom has lifted billions out of poverty and put millions more people behind steering wheels.

Those new middle-class and wealthy consumers and the industries spawned by meteoric economic growth are burning millions of barrels of petroleum every day. This includes transport of goods by road, rail, water and air. But it is passenger vehicles that dominate global mobility, and they are consuming the greatest volume of fuel in the U.S., China and everywhere else.

To be sure, petroleum is the raw material for a great many products besides gasoline, diesel and other fuels – from lipstick to asphalt. The economic benefits of cheap oil can be widely distributed, bolstering growth and keeping inflation down.

President Donald Trump, expressed this view when he likened low oil prices to "a big tax cut for America and the world" in a tweet.

Guzzling more gas

But cheap oil has other effects as well. After improvements in fuel economy during the 1970s and early 80s, two decades of low gasoline prices reversed this trend, causing average miles per gallon to actually decrease a little in some years. Only in 2004, when prices rose, did fuel economy again become an issue.

After years of hovering around and even topping US$100 per barrel, aside from a brief peak during the Great Recession, oil prices collapsed. They fell to less than $50 by the end of 2014 and sank even lower in early 2015.

Oil prices are still nowhere near $100 a barrel.

Americans responded as economists would expect them to: by driving more. The lower prices fell, the less it cost to fill their tanks. Summertime gas consumption hit an all-time high.

Unsurprisingly, U.S. emissions from transportation rose by 10 percent between 2014 and 2017, even as they fell for electricity generation and other sectors.

In addition, drivers bought bigger vehicles. Sales of SUVs, minivans and small pickups soared, while passenger car sales plummeted.

By 2018, Americans were buying two SUVs or pickups for every sedan. The trend, also present in Europe, is a core reason why emissions have risen from advanced nations for the first time in five years.

Automakers are responding by phasing out passenger car production and manufacturing more SUVs and trucks in a trend that reaches beyond U.S. borders. SUV sales are surging around the world.

Partly due to the extra miles driven and the size of the vehicles involved, carbon dioxide emissions from wealthy nations rose by 0.5 percent in 2018, following five years of decline.

No one calls the shots

But who controls oil prices? As an energy scholar and former petroleum geoscientist, I believe that it's clear that no one does.

Governments can establish climate policies, such as carbon pricing, stiff fuel taxes and other measures, that raise gasoline prices. But, as the recent French protests and two defeats in a row in Washington state for a carbon fee or tax have shown, there are limits to how far or fast they can go, even in rich countries.

And low-income nations view such measures as damaging and intrusive. Raising fuel prices has inspired massive resistance, even riots, in nations as diverse as India, Iran, Mexico and Haiti.

The Organization of Petroleum Exporting Countries has teamed up with Russia to create an oil-exporting alliance known as OPEC+. Those countries can cut supplies to increase prices, as they agreed to do in December 2018. They can also increase output, should they wish to lower prices.

Yet that doesn't mean that exporters have the power to call all the shots. For example, if China – the world's largest oil importer – were to have a big recession, Saudi Arabia and Russia would probably have trouble finding buyers for all of the oil they want to export. Overproduction in that scenario would make oil prices sink.

There is another reason the group can't dominate. They must compete against the world's largest oil producer and most rapidly growing crude exporter: the U.S.

Electrifying solutions

Advances in drilling technology have made it easier than ever to produce petroleum at a time when humanity should use less of it for the planet's sake.

Until and unless electric vehicles become dominant, it will prove extremely hard to wean the world off of oil.

I believe that governments and automakers should for this reason be working together for the long term. By providing strong incentives for consumers and industries to make the jump, they can stop letting cheap oil stymie climate action.

Otherwise, as hundreds of millions more people become drivers in coming decades, the laws governing supply and demand could steer all of us down a road to devastating degrees of global warming.

Scott L. Montgomery does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 Drivers buy less gas when filling the tank burns holes in their wallets. Scott L. Montgomery, Lecturer, Jackson School of International Studies, University of Washington Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/100651 2018-08-01T22:59:13Z 2018-08-01T22:59:13Z The Trump-Putin friendship could be all about oil and China

In this July 2018 photo, U.S. President Donald Trump and Russian President Vladimir Putin are seen at a news conference after their meeting at the Presidential Palace in Helsinki.  (AP Photo/Alexander Zemlianichenko)

The Donald Trump-Vladimir Putin meeting in Helsinki earlier this summer has sparked an intense debate about the details of the discussions between the leaders of the two superpowers.

There is little known about these discussions, and the agreements reached remain shrouded in secrecy. This has fed speculative frenzy about the possibility of Putin controlling the president of the United States.

   Read more: Is Trump Putin's 'stooge?'

Some members of the U.S. intelligence community have contributed to the frenzy by suggesting that the Russians may have something on Trump that compromises American national security.

The situation is chaotic and fuzzy, though even chaotic situations, as we learned from the mathematical theory of chaos, have some defining patterns and organizing dynamics.

   Read more: Explainer: what is Chaos Theory?

What alternative hypotheses can rationally explain the nature and content of these discussions, beyond simplistic explanations based on conspiracy theories, even if those conspiracy theories also turn out to be accurate?

Preferences, prejudices and politics

Trump's revealed preferences and prejudices, along with the beliefs that he would like others to hold, can serve as useful guides as to what could explain the Trump-Putin relationship, and what they discussed in Helsinki.

The president has made it clear that he has a preference for white people, Christians and the rich and powerful. He perceives the economy, trade and money as zero-sum games. His world is full of competitors but no partners, deal-makers and deal-breakers.

   Read more: Casino Diplomacy: The Trump game that everyone loses

His end game with Russia could be to drive a wedge between the Russians and the Chinese, and another between the Russians, Iran and Syria.

After all, Russia is white, Christian and not a real economic competitor. The Chinese are non-white, non-Christian and a growing formidable economic power that is contesting American dominance in almost all economic domains. Iran and Syria are primarily Muslim countries and enemies of Israel, and belong to a group of nations for whom Trump has shown nothing but disdain and contempt.

But why would Trump attack traditional partners (the European Union, Great Britain, Canada and other NATO countries) when presumably he could have courted the Russians without having to insult his old partners?

Well, it could be that Trump is demonstrating and setting an example for Putin to follow.

Pressuring Russia to dump China?

The argument goes along these lines: If Trump is willing to dump old allies, why shouldn't Putin dump his old ally China for a new alliance with the United States? Trump has also shown a preference for populism of the type that is gaining steam in Europe, particularly eastern Europe, and among the current liberal democracies in power whose ideologies he does not share.

Trump believes that the commonalities between Russia and the U.S. are myriad and deep, including a new common and shared interest in a higher price for oil.

 <img alt="" src="https://images.theconversation.com/files/230053/original/file-20180731-136652-aarpp2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/230053/original/file-20180731-136652-aarpp2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/230053/original/file-20180731-136652-aarpp2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/230053/original/file-20180731-136652-aarpp2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/230053/original/file-20180731-136652-aarpp2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/230053/original/file-20180731-136652-aarpp2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/230053/original/file-20180731-136652-aarpp2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 Putin as puppet-master? Or is it all about Trump's efforts to get him to dump China? (AP Photo/Alexander Zemlianichenko)

In many respects, Russia is still an oil- and gas-dependent economy where oil and gas export revenues represent two-thirds of its export earnings and half of its federal budget. What happens to the price of oil is a matter of national security and survival for Russia. The last thing it needs is the U.S. competing with it in the European oil and gas market.

   Read more: Understanding the rollercoaster ride of oil prices

Fixing the price of oil at a level that helps Russia meet its budgetary needs cannot be achieved without American support and collusion. Saudi Arabia, the Russians know, will toe the U.S. line as it has always done; besides, the Americans are now increasingly assuming the role of the swing producer that the Saudis have played for decades.

Will Russia ditch China?

Whether Trump and his advisers have succeeded in this possible pursuit is yet to be seen.

But one thing is clear: U.S.-Russia relations are at a very low point today, and Trump apparently believes the potential for improving ties is real. The U.S. needs Russia to contain North Korea's nuclear ambitions, unlike the Chinese, who apparently seem willing to manipulate the crisis to serve their own strategic purposes.

Russia needs the U.S. to stabilize Syria, restrain Israel and constrain Iran's influence without allowing the Middle East to reel into an unmanageable crisis.

The real question for Russia is whether they are ready to ditch their long-established alliance with China for what could be a temporary respite in U.S.-Russian relations. Trump is increasingly meeting resistance to his plans from both Republicans and Democrats. Apparently, there are many Americans who still believe that the Cold War has not ended, particularly amid evidence that Russia interfered in the 2016 presidential election.

The world, nonetheless, is today safer with the two superpowers working together. But as consumers, we will pay heavily at the pumps if the U.S. and Russia are colluding on oil prices.

Atif Kubursi does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 Vladimir Putin may well have something on Donald Trump. But their close ties could also be about oil prices and Trump's efforts to get Russia to ends it alliance with China. Atif Kubursi, Professor Emeritus of Economics, McMaster University Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/100149 2018-07-19T11:02:26Z 2018-07-19T11:02:26Z What makes Putin's vision of a Russian-US oil alliance a pipedream

One historic handshake in Helsinki AP Photo/Pablo Martinez Monsivais

When Russian leader Vladimir Putin addressed the media in Helsinki alongside President Donald Trump, he proposed that their countries "work together" to make oil and gas markets calmer.

Trump didn't say whether he supported the idea but he repeated his frequent assertion that Russia and the U.S. are competitors, adding, "I think the word competitor is a compliment."

As a scholar of global energy geopolitics, I can see why Putin might want to forge an OPEC-like alliance between the U.S. and Russia – and how this idea might interest both countries if such alliance were possible. But that is not the case.

No price-fixing

There are two main reasons why Putin's proposal is a non-starter.

First, there's no national oil company or monopoly over the industry in the U.S. and the federal government exerts no direct control over crude production as is the case in Russia. Second, forming a cartel with Russia to collude on production levels or pricing would break American anti-trust laws that bar price-fixing.

Putin's idea is therefore impossible to execute regarding the oil industry, absent a government mandate, which would require an act of Congress and a host of new regulations.

As for natural gas, I believe that this concept is even more far-fetched. Natural gas does not trade in the same way oil does in the global markets, making OPEC-like arrangements extremely unlikely between any countries. Besides, as I have explained before, the U.S. and Russia are beginning to compete in that industry.

A Goldilocks industry

Even so, this proposal shines a light on the complex interplay among oil prices, global economics and national energy policies.

Because they depend heavily on the money they make from oil exports, the governments of OPEC members like Nigeria and Qatar and Russia have tried to keep prices stable and at the kinds of levels that can keep demand robust while generating enough revenue to cover their budgets. OPEC stands for the Organization of the Petroleum Exporting Countries, after all.

The calculus is not easy but simply put: when oil prices rise, they make other things cost more. In general, when prices rise too much, demand decreases. That slows the economy, eventually lowering crude demand and prices.

When prices do fall, importing countries may welcome cheaper oil. But drastic reductions hurt oil-exporting nations, sometimes triggering global economic troubles that hurt everyone.

In short, all governments benefit when oil prices are relatively stable, regardless of whether their policies toward that goal are determined by market forces or steered by the state.

Not only price levels but also their stability matters

To be sure, the roller coaster that crude prices have been on for the past decade has been hard on oil exporters and oil importers alike.

Oil prices plummeted to only US$33 per barrel in December 2008, after hitting record highs of $147 the prior summer. Then, they soared again, generally remaining above $100 a barrel between 2011 and mid-2014, only to tumble down all the way to about $30 in January of 2016.

Oil prices have gradually rebounded by now thanks to more vigorous global economic growth and supply constraints stemming from production outages due to political and social upheaval in countries like Venezuela, Libya and Iran.

In addition, deliberate production cuts orchestrated by a set of collaborative agreements between OPEC and Russia have been increasing prices and reducing volatility.

Russia and OPEC members' heavy reliance on oil export earnings, together with their ability to control their oil production, makes them natural partners for a cartel-like arrangement.

Decisions that disrupt oil markets sometimes serve geopolitical considerations. For example, the 1973 OPEC embargo occurred when oil-rich OPEC nations suspended their crude sales to the U.S. to punish it for backing Israel.

As my colleague Gabriel Collins has found, Russia has often disrupted its supplies of natural gas and oil, most recently in Ukraine, Poland and Slovakia, to influence other countries' policies.

When prices drive production, not government fiats

The situation is dramatically different in the U.S. Here, since the early 2000s, hydraulic fracturing technology together with advances in horizontal drilling have brought about a U.S. oil and gas production boom.

As a result, the U.S. has ratcheted down its crude imports, ended its ban on crude exports and began to export some of the oil it drills.

According to International Energy Agency chief Fatih Birol, the U.S. will account for 80 percent of world's oil supply growth through 2025. That being said, the U.S. still imports crude, which in 2017 accounted for 19 percent of total petroleum consumption.

I believe these oil imports will continue as long as U.S. refineries remain equipped to process the heavy and sour crude that comes from other countries, rather than domestic varieties. Moreover, its huge national market makes it virtually impossible for the U.S. to become a net exporter like OPEC members and Russia.

Also, all American oil companies – from oil majors like Chevron and ExxonMobil to mom-and-pop fracking operations – are privately owned. They decide how much fuel to produce, free from direct government influence. Their main concern is profits, not boosting the government's budget or furthering geopolitical goals.

U.S. businesses are also explicitly forbidden by an antitrust law known as the Sherman Act from colluding on production targets as this is equivalent to price fixing.

The federal structure of the U.S. government additionally complicates the picture. Individual American states play a big role in oil and gas regulation.

Furthermore, if any cartel-like actions by the U.S. were to hike oil prices, American consumers would suffer since the country remains a net oil importer.

What the U.S. can do

That said, the federal government does have some tools at its disposal that can indirectly have an impact on oil and gas production and prices.

For example, the U.S. could tap into emergency oil stockpiles stored in salt caverns along its Gulf Coast, also known as the Strategic Petroleum Reserves. The government created this stashing system following the 1970s oil shortages to provide temporary relief when the need arises.

The Trump administration has been considering this move to counter a recent uptick in gasoline prices. But any oil sold this way would probably have short-lived effects as the supply is limited.

Second, Trump can, as he recently did, ask Saudi Arabia to increase its crude production. This reflects the special relationship between the two countries that dates back to the Carter administration.

Lastly, Congress can play a role too. For example, it can impose restrictions on production or even restore the ban on oil exports that the U.S. lifted in 2015. However, I believe that the prospect of imposing higher prices via a government program is a non-starter since the number of states that consume more oil than they produce far exceeds the number of states that produce more than they use.

Perhaps the clearest sign that any openness on Trump's part to joining forces with Russia in some kind of new OPEC-like alliance would go nowhere is some pending legislation in Congress.

The House Judiciary Committee has approved a bipartisan proposal to expand U.S. antitrust law. The No Oil Producing and Exporting Cartels Act, or NOPEC, would subject foreign oil cartels to U.S. antitrust laws. And a bipartisan group of senators recently introduced their own NOPEC bill within days of the Trump-Putin summit.

Anna Mikulska is affiliated with Rice University's Baker Institute for Public Policy, Center for Energy Studies, University of Pennsylvania's Kleinman Center for Energy Policy, and Foreign Policy Research Institute. She receives funding from Rice University's Baker Institute for Public Policy, Center for Energy Studies and University of Pennsylvania's Kleinman Center for Energy Policy.
 Not only does U.S. law bar price-fixing, there are bipartisan efforts underway to make it possible to sue OPEC members in American courts for antitrust violations. Anna Mikulska, Nonresident Fellow in Energy Studies, Baker Institute for Public Policy, Rice University Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/97848 2018-06-28T20:59:13Z 2018-06-28T20:59:13Z Understanding the rollercoaster ride of oil prices

Gas prices usually rise heading into long weekends. The reasons behind wild oil price fluctuations, reflected at the pumps, is about a lot more than economics.  THE CANADIAN PRESS/Jonathan Hayward

Gas price fluctuations of the last few months raise questions about oil production, distribution, pricing and exploration. All involve complex issues of economics. But they're largely politically motivated or politically determined.

Regulation and taxation of the oil industry is a matter of political policy. Regulation of oil flows, as all other economic flows among nations, is viewed by all governments as a political function.

The subject as a whole is not about the economics of oil. Rather, and more accurately, it is the political economy of oil.

Price has little to do with supply & demand

In a more general sense, oil prices, unlike the price of potatoes or other commodities, are not determined by the supply and demand of physical oil; every barrel of physical oil is now traded nine to 12 times on future markets.

Speculators play a crucial role in overshooting price responses, downwards or upwards. Selling short oil is profitable when its price is falling, and this can create an avalanche of sales that push prices far below their fundamental value. This is also true in the event that oil prices start to rise. Forward buying can push prices higher than where they'll eventually settle.

   Read more: OPEC meetings: why it's so hard to predict how the oil market will react

The demand for oil is known as what's called price inelastic — it has limited substitutes, if any. Oil quantities aren't responsive to price changes; a lower price does not create large increases in quantity demanded.

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 Pumpjacks at work pumping crude oil near Halkirk, Alta., in June 2007. Canada's oil industry is expected to be back in the black in 2018 thanks to higher oil prices. But how long they'll stay high depends on politics more than economics. THE CANADIAN PRESS/Larry MacDougal

But small changes in supply are almost exclusively reflected in price changes, so much so that a decrease in supply of only 200,000 barrels daily increases prices by about $10 per barrel.

Oil fuels global economy

Oil is also the major transportation fuel and probably one of the most critical and indispensable raw materials of the contemporary industrial civilization.

It is now the largest single component of international trade, the world's primary source of commercial energy, the mainstay of industry, the lifeblood of transport and often the cause of war.

It's consequently become the major determinant of today's global military-political-economic balance.

While oil is versatile and its uses are pervasive, its consumption and production are concentrated in few areas and few hands.

On the demand side, we have primarily the large industrial economies of the West, particularly its most dynamic segments of Western Europe, and more recently China and India, as primarily oil-consuming nations. Their domestic energy capacities are falling behind their consumption needs, thereby requiring them to import the balance.

Alternatively, on the supply side we have a small group of developing countries, predominately Middle Eastern, that produce and export almost all of their production primarily to Western Europe, Japan, China and the United States.

Seven companies under two flags

Production, exploration and particularly refining and distribution are dominated, even in the oil-exporting countries, by seven large, fully integrated multinational corporations flying the flags of primarily two countries (five of them American and two European) that only too recently colonized or monopolized the production of oil.

As abundant as oil is in the Middle East, it is also cheap and supplied irregularly with a wide margin of fluctuation brought about principally by political instability and, often, crisis situations; crises that involve either the threat or actual disruption of supply.

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 In this 2010 photo, an oilfield worker ties pipes to be raised on an oil rig in the Persian Gulf desert oil field of Sakhir, Bahrain. (AP Photo/Hasan Jamali)

The list of these crises is long but familiar: The nationalization of Iranian oil in 1951, the Suez crisis in 1956, the Arab-Israeli War of 1967, the October War of 1973, the Iranian revolution in 1979, the Iran-Iraq war of 1980-88, the Iraqi invasion of Kuwait in 1990 and, more recently, the U.S. invasion of Iraq.

Oil is an inventory stored at zero cost. It's exhaustible and non-renewable. It takes thousands of years to replenish any decrease in supply. Its production costs vary across countries.

The marginal cost (the cost of producing an additional barrel of oil) is lowest in Saudi Arabia at US$8.98 per barrel; the highest in the U.K. at US$44.33. In Canada, it's $26.24.

Saudi Arabia has the lowest oil production costs in the world thanks to three advantages: Abundant pools of oil close to the surface and the sea, public ownership and no taxes on production.

Because of that, it can make money in almost any oil price environment. This state of affairs is the prize that the United States has long coveted, and vied with other countries to claim.

The cost is also low in Iran and Iraq ($10), but higher than $19 in Russia and $23.33 in the U.S. There isn't one generally acceptable estimate of these costs. More recent estimates put the cost of production per barrel to exceed $60 dollars in the United States.

Oil prices plummet

In 2013, oil prices (Western Texas Intermediate (WTI), the benchmark price of oil) exceeded US$133 per barrel, but dropped to below $20 in 2016.. If that price had been maintained for any long period, few oil-producing countries could afford to produce oil.

Some believed that Saudi Arabia was ramping up production with the view to eliminate high-cost producers, especially the American fracking industry.

Others felt that the Saudis would not have dared to allow the price to drop to that level without the approval of the U.S., which was aiming to constrain the economic fortunes of geopolitical foes Russia, Venezuela and Iran, countries in which oil revenues represent sizeable portions of their GDPs and total exports.

The recent increase in oil prices to over $70 a barrel from less than $20 a barrel a year ago reflects the dire need of oil-producing countries to fetch a price that balances their current budgets.

Even a country like Saudi Arabia still needs a price of over $100 per barrel to balance its budget, and so does Russia. It seems there's an implicit contract and a tacit agreement among Russia, Saudi Arabia and the U.S., each for different reasons, to shore oil prices to the current levels.

The price that would most likely stick will hover between the U.S. high cost of production of shale oil of over $60, and the break-even price of $100 that balances the fiscal needs of Russia and Saudi Arabia.

Given the new excess capacity to produce oil in the United States, the price will likely be closer to the American target price of more than $60 a barrel.

The U.S., indeed, is now the swing producer due to American production growing dramatically over the last decade. That's the role Saudi Arabia played in the past.

Oh, and as an aside: If Iraq produced and exported those aforementioned potatoes instead of oil, there wouldn't have been either a first or second Gulf War.

As for prices at the pump? They all depend on politics.

Atif Kubursi does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 Oil prices have little to do with supply or demand or even economic forces. Instead, it's all about politics. Atif Kubursi, Professor Emeritus of Economics, McMaster University Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/97522 2018-06-20T14:53:53Z 2018-06-20T14:53:53Z OPEC meetings: why it's so hard to predict how the oil market will react

 vladm / shutterstock

The Organisation of the Petroleum Exporting Countries, better known as OPEC, meets in Vienna on June 22. OPEC is a group (many call it a cartel) of 14 of the biggest oil nations, representing most of the world's reserves and just under half of current oil production. For the first time in many years, the cartel will assemble against a background of tightening supply and significantly rising oil prices.

Though the emergence of Russia and the US as major oil producers means OPEC no longer wields quite as much power as it did in the 1970s, its announcements are still big news. So will OPEC choose to raise production? Will its members even be able to agree at all?

These are questions we have looked at in our recent research on OPEC's decision making. We found that whether or not all cartel members agreed on what to do significantly affected how the market reacted to an OPEC announcement.

This latest meeting comes as the price of oil is fast increasing, several years after it crashed from around $100 a barrel (bbl) to $50/bbl. OPEC members, who generally produce their oil relatively cheaply, will also be aware that long-run prices above $50/bbl will motivate shale production in rivals, including Canada and the US.

Focus on 'forward prices'

Commentary on OPEC decisions usually focuses on "spot prices" – that is, how much a barrel of oil would cost if you actually wanted it right away. But trading is also possible where we assume delivery at some specified future date, that is "forward prices". The other way to assess OPEC decisions is to look at these forward prices – and especially at the relationship between forward and spot prices. This relationship is known as the oil market's "term structure".

The graph below provides a simple demonstration of the importance of term structure in the oil markets. The blue line shows the familiar story of spot prices, including the 2014 crash and the recent rally. However, the red line, showing the price of three-year forward oil, tells a very different story. There was no distinct fall in forward prices around the OPEC policy change of 2014 and no recent recovery. Rather, there was a continuous and gradual decline followed by an ongoing period of stability.

 <img alt="" src="https://images.theconversation.com/files/224025/original/file-20180620-137711-rnmllr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/224025/original/file-20180620-137711-rnmllr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=327&fit=crop&dpr=1 600w, https://images.theconversation.com/files/224025/original/file-20180620-137711-rnmllr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=327&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/224025/original/file-20180620-137711-rnmllr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=327&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/224025/original/file-20180620-137711-rnmllr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=412&fit=crop&dpr=1 754w, https://images.theconversation.com/files/224025/original/file-20180620-137711-rnmllr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=412&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/224025/original/file-20180620-137711-rnmllr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=412&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 The authors have looked at the difference between the two lines. Bloomberg, Author provided

Given OPEC decisions have long-term ramifications, an analysis that looked only at spot prices would certainly not tell the whole story. This is why our recent study also examined the impact of OPEC decisions on how forward prices relate to spot prices – the term structure.

We found that decisions to raise production tend to be followed by forward price increases, while decisions to cut tend to be followed by forward price decreases. These findings are seemingly counter-intuitive – after all, basic economics tells us that more supply leads to lower prices and vice versa. So why would additional OPEC production actually make oil more expensive in the future?

Things are best explained by viewing OPEC decisions as something of a too-little-too-late response to market fundamentals. If you look back at the graph above, you'll see that the OPEC decision to allow (spot) prices to fall in 2014 appears to have been anticipated by the forward market over several years.

Optimism vs caution

Most OPEC meetings aren't as dramatic as 2014, of course. The most frequent outcome is "no change" in production quotas and previous research has found that prices rise following such decisions.

We however have divided the "no change" decisions into those which follow a unanimous decision by members to maintain production unchanged, and those which follow a failure by OPEC members to make a unanimous decision (leading to no change by default). For example during the two OPEC meetings in 2015, both decisions were no change in production. However, the June meeting was based on "agreement to maintain", while the December meeting was based on "failure to agree".

 <img alt="" src="https://images.theconversation.com/files/224038/original/file-20180620-137738-1trfpv3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/224038/original/file-20180620-137738-1trfpv3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/224038/original/file-20180620-137738-1trfpv3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/224038/original/file-20180620-137738-1trfpv3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/224038/original/file-20180620-137738-1trfpv3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/224038/original/file-20180620-137738-1trfpv3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/224038/original/file-20180620-137738-1trfpv3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 Petroleum Ministry, Tehran. OPEC's meeting in December 2015 collapsed after Iran couldn't agree with other members on production quotas. Shutterstock

We found that the market reacts significantly differently to the two types of no-change decision. Failure to agree decisions lead to higher spot prices and expectations of higher prices, over a prolonged period. This is not the case for agreement to maintain decisions. The implication is that there is more market optimism following an agreement to maintain production and more caution following a failure to agree.

So OPEC members should not be fooled by the current short-run price increases. Though reports suggest an increase in production is likely, they may yet (and, from a purely self-interested point of view, should) decide not to increase their production quotas, at least so long as forward prices remain low.

But there will no doubt be some voices at the table looking to boost production because prices in the short term suggest that more oil could be absorbed by the market.

If there is no quota change, it will be interesting to watch whether members agree to maintain production unchanged, or whether they maintain production unchanged as a result of a failure to agree. Our study shows that when it comes to OPEC decisions, agreement matters.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
 Our research on the oil cartel shows, that it really matters whether OPEC members 'failed to agree' or 'agreed to disagree'. Don Bredin, Professor of Finance, University College Dublin Simon James Jeune Spencer, PhD Researcher, Commodity Finance, University College Dublin Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/95089 2018-05-04T09:00:32Z 2018-05-04T09:00:32Z How the arms trade is used to secure access to oil

  shutterstock.com

UK arms exports to Saudi Arabia increased by 175% in the first nine months of 2017 according to an investigation by the Campaign Against Arms Trade. Similarly, France and the US are major exporters of arms to the oil-rich Gulf state – in 2017 alone, they were worth around US$2.6 billion.

Selling weapons is a lucrative business. As well as the money to be made, the arms trade is also a barometer of the quality of relationships between states and it creates an interdependence that gives current and future recipient governments incentives to cooperate with arms suppliers.

Oil dependency is another reason. Sometimes this idea is disregarded as a conspiracy theory, but colleagues Claudio Deiana, Roberto Nisticò and I recently researched the extent to which oil-dependent countries transfer arms to oil-rich countries. It turns out it's a lot.

The international transfer of weapons is one of the most dynamic and lucrative sectors of international trade. By one estimate, from the Stockholm International Peace Research Institute, global transfers of major weapons have grown continuously since 2004 and between 2012 and 2016 reached its highest volume for any five-year period since the end of the Cold War. The value of the global arms trade in 2015 was at least US$91.3 billion, roughly equal to the GDP of Ukraine, or half of Greece's GDP.

Since no country is self-sufficient in arms production – even the US – most of the countries in the world import weapons. This is shown in the image below, which displays the volume of arms imports of major conventional weapons between 2012 and 2016.

 <img alt="" src="https://images.theconversation.com/files/217254/original/file-20180502-153908-spzk1j.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/217254/original/file-20180502-153908-spzk1j.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=232&fit=crop&dpr=1 600w, https://images.theconversation.com/files/217254/original/file-20180502-153908-spzk1j.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=232&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/217254/original/file-20180502-153908-spzk1j.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=232&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/217254/original/file-20180502-153908-spzk1j.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=292&fit=crop&dpr=1 754w, https://images.theconversation.com/files/217254/original/file-20180502-153908-spzk1j.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=292&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/217254/original/file-20180502-153908-spzk1j.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=292&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
  Data: SIPRI

At the same time, the export of arms is a key part of national policy – and weapons are often given only to close allies. It is not unusual to observe arms transferred for free to allies, under the umbrella of military aid, such as US military support to Colombia to fight drug cartels and insurgent groups. Equally, the absence of trade in arms between two countries can reflect a desire to safeguard national security. For example, if there are fears that the importing nation can become a future threat.

The oil connection

To test the idea that energy dependence leads to a higher volume of arms transfers between countries, we assembled a large dataset with information on oil wealth (such as production, reserves and recent discoveries) and oil trade data, to measure energy interdependence and the potential damage of regional instabilities to oil supplies.

We found the existence of a "local oil dependence", which indicates that the amount of arms imported has a direct relationship with the amount of oil exported to the arms supplier. Speculatively, arms export to a specific country is affected by the degree of dependence on its supply of oil. The larger the amount of oil that country A imports from country B, the larger will be the volume of arms that country A will transfer to country B.

But we did not only find the existence of a direct oil-for-weapons relationship. Our results also reveal the presence of a "global oil dependence". The more a country depends on oil imports, the higher the incentives are to export weapons to oil-rich economies, even in the absence of a direct bilateral oil-for-weapons exchange. The idea is that by providing weapons, the oil-dependent country seeks to contain the risk of instabilities in an oil-rich country.

 <img alt="" src="https://images.theconversation.com/files/217565/original/file-20180503-153888-qttda9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/217565/original/file-20180503-153888-qttda9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/217565/original/file-20180503-153888-qttda9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/217565/original/file-20180503-153888-qttda9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/217565/original/file-20180503-153888-qttda9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/217565/original/file-20180503-153888-qttda9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/217565/original/file-20180503-153888-qttda9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 Got to keep that oil flowing. shutterstock.com

The oil-rich country does not necessarily need to be the oil-dependent's direct supplier, however, because disruptions in the production of oil are likely to affect oil prices worldwide. Violent events such as civil wars or terrorist incidents are often accompanied by surging oil prices, or more general insecurity in the supply of oil. This was the case in many recent wars, such as the Gulf War and the Iraq War, the political unrest in Venezuela in 2003, and the recent Iraq-Kurdistan conflict.

So it does not matter how much oil the UK directly imports from Saudi Arabia for it to want the country to remain stable, which in turn keeps oil prices stable. In line with this, we found that a country with a recent discovery of new oil fields will increase its import of weapons from oil-dependent economies by 56%.

Our results point consistently toward the conclusion that the arms trade is an effective foreign policy tool to secure and maintain access to oil. As such, the arms trade reveals national interests beyond simple economic considerations and the volume of bilateral arms transfers can be used as a barometer of political relations between the supplier and the recipient states. At the same time, we find that oil might play an even larger role in influencing economic and political decisions than is generally acknowledged.

Vincenzo Bove does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 The connection between oil and arms trade is not a conspiracy theory. Vincenzo Bove, Reader in Politics and Quantitative Methods, University of Warwick Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/94529 2018-04-06T10:44:28Z 2018-04-06T10:44:28Z Government fuel economy standards for cars and trucks have worked

Customers line up to buy gasoline in San Jose, California, on March 15, 1974, during an Arab oil embargo. The crisis spurred enactment of the first U.S. vehicle fuel economy standards. AP

U.S. cars are twice as fuel-efficient today as they were 40 years ago. Corporate Average Fuel Economy (CAFE) standards are a major reason why.

These standards are in the news because the Trump administration plans to scale back increases scheduled under President Barack Obama that require automakers to double fuel economy by 2025. U.S. Environmental Protection Agency Administrator Scott Pruitt now says that this standard is too high.

This announcement has rightfully sparked debate – not just about narrow costs and benefits of fuel economy standards, but also over the U.S. role in shaping a global industry that faces a trio of radical transformations via electrification, self-driving cars and ride-sharing.

How have CAFE standards shaped the U.S. auto market? While they are an imperfect tool, these regulations have pushed automakers to greatly increase vehicle fuel economy – and have saved consumers millions of dollars.

 <img alt="" src="https://images.theconversation.com/files/213430/original/file-20180405-189830-127qudu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/213430/original/file-20180405-189830-127qudu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=386&fit=crop&dpr=1 600w, https://images.theconversation.com/files/213430/original/file-20180405-189830-127qudu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=386&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/213430/original/file-20180405-189830-127qudu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=386&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/213430/original/file-20180405-189830-127qudu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/213430/original/file-20180405-189830-127qudu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/213430/original/file-20180405-189830-127qudu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 Mandatory fuel economy label design adopted in 2011 for gasoline-powered vehicles. NHTSA/EPA

Saving money and cutting pollution

Before Congress mandated the first CAFE standards in 1975, the average American car got about 13.5 miles per gallon. By 2016, fuel economy had roughly doubled to 25 miles per gallon.

To get a sense of what that means, if Americans kept driving exactly as much as they do today but operated pre-CAFE gas guzzlers, the average U.S. household would spend nearly US$2,000 more on gasoline each year. And annual U.S. carbon dioxide emissions would jump by 1 billion tons. Economists debate how much damage these emissions cause, but conventional estimates peg the cost at $37 billion per year.

Does CAFE deserve credit? Yes, at least partly. Historically, the average fuel economy of vehicles in the U.S. has closely tracked the minimum required by law. Fuel economy was stagnant before CAFE, then increased rapidly in lockstep with the law as CAFE standards phased in over 15 years.

When the standard sat unchanged in the 1990s, average fuel economy flatlined. Technological progress continued, but instead of designing cars that exceeded CAFE standards, auto makers made cars that were bigger and faster and just met the minimum efficiency required by law. This pattern only shifted in the early 2000s, when high gasoline prices drove fuel economy gains even while CAFE was flat.

There are better ways to improve fuel economy. Many economists like me would like to replace CAFE standards with a gasoline tax, or at least pair them with policies that target congestion and accidents. For now, however, as lawmakers debate scaling back CAFE standards, they should remember the important role these regulations have played.

James M. Sallee has received funding from the Sloan Foundation for research related to fuel economy standards.
 Since the federal government started setting fuel economy standards, US-built cars have doubled their fuel efficiency, saving money for consumers and reducing pollution. James M. Sallee, Assistant Professor of Agricultural and Resource Economics, University of California, Berkeley Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/82178 2017-08-08T13:32:42Z 2017-08-08T13:32:42Z Venezuela crisis is the hidden consequence of Saudi Arabia's oil price war

  esfera / shutterstock

Venezuela is sinking ever deeper into a political and economic calamity. Inflation is above 700% and GDP is more than a third below 2013 levels. The country with the world's largest proven oil reserves is now the world's most indebted country – no other nation has a larger public external debt as a share of GDP or of exports. Living standards have truly collapsed.

Many factors have contributed to Venezuela's current crisis including mismanagement of oil wealth by former president Hugo Chavez and the current leader, Nicolás Maduro, and criminality, lawlessness and the black market.

While all of these have undoubtedly had a part to play, the falling price of oil is the most significant factor. However the connection between this and an economic crisis in South America is not as obvious. What's going on in Venezuela is the unintended consequence of Saudi Arabia's policy of keeping oil prices deliberately low for political reasons.

The price of oil, as with any other commodity, is regulated through supply and demand. When there is an oil surplus, or a reduction in demand, the price will fall.

At the start of 2014 the global supply and demand for oil was fairly balanced, at around 92m barrels a day. But production started to escalate thereafter, and by late 2015 the average daily supply reached 97m barrels, more than a million barrels per day ahead of demand. This surplus caused a sharp drop in the price of oil.

Part of this increase in supply was from American shale oil, extracted through fracking, but mostly it was the result of the Saudis deliberately pumping large amounts of oil for political reasons. As the only oil-producing country with sufficient reserves to regulate the market in this way, Saudi Arabia is considered the "swing producer". Even though US shale production has reduced some of the Saudis's swing power, the oil kingdom has still the capacity to produce more than it does currently and is therefore still very much capable of crashing the market.

Taking on America and Iran

It seems the Saudis are trying to achieve two aims. The first is to drive US shale producers out of business and consolidate the Gulf state's leading role in global oil. Producing oil from shale via fracking is expensive, around US$60 a barrel, while the cost of natural oil is no higher than US$7 a barrel. Saudi Arabia hopes the drastic decrease in oil prices, to well below US$60 a barrel, will make it unprofitable for American shale producers to drill at their current rates.

 <img alt="" src="https://images.theconversation.com/files/181239/original/file-20170807-25539-1uys3gf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/181239/original/file-20170807-25539-1uys3gf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/181239/original/file-20170807-25539-1uys3gf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/181239/original/file-20170807-25539-1uys3gf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/181239/original/file-20170807-25539-1uys3gf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/181239/original/file-20170807-25539-1uys3gf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/181239/original/file-20170807-25539-1uys3gf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 Fracking in Colorado. Oil released by this rig can't compete with cheap Saudi oil. Jon Mullen/Shutterstock

The second aim is to destroy the economy of Iran, the Saudi kingdom's main competitor in the Middle East. This would thus limit Tehran's ability to continue funnelling hundreds of millions each year to the Syrian regime, and Shia militias in Iraq, Yemen and elsewhere.

Oil markets have always been at the heart of the Saudi-Iranian struggle for regional hegemony. Back in 1977, when Iran was planning extensive nuclear power plants and envisaging the spread of its influence throughout the Middle East, the Saudi regime swamped the markets, expanding oil production from 8m to almost 12m barrels a day, sharply cutting the oil prices.

Iran watched billions of dollars in anticipated oil revenues vanish, and the Shah was forced to abandon his plans for nuclear investment. Manufacturing collapsed, inflation skyrocketed, unemployment rose steeply – and before long economic troubles had destroyed all support for the Iranian monarchy. The rest is history: the regime collapsed in two years and was replaced by Ayatollah Khomeini's Islamic republic.

An oil alliance

It seems, after some hesitation and discussions in the early part of 2014, Saudi Arabia launched this oil price war in tandem with the US. America supported the policy as it wanted to undermine the influence of oil-dependent Russia, something it apparently considered more important than supporting its own fracking sector, while access to cheap imported oil is good news for US consumers and industry in general. Whether or not there was a clearly planned and agreed strategy, there seems to be an unmistakable convergence of interests between the Saudi and US positions.

This strategy of keeping the price of oil down has not necessarily destroyed either the Russian or Iranian economies however. Instead, the hardest hit oil-producing nations are in South America and Africa, where petro-states such as Libya, Angola, and Nigeria are suffering.

But the worst affected country of all is Venezuela, the most disastrously oil-dependent state in the world. Oil accounts for 96% of exports and more than 40% of government revenues.

It is still unclear whether the Saudi-US oil price strategy will ever achieve its main goal of crushing Russian and Iranian power and influence. But one thing is clear: the world oil market will continue to be extremely volatile, and smaller, less powerful nations will continue to be caught up in the wider battle.

This article was amended on August 10 to more accurately reflect the status of global oil supplies before 2014. Supply was not "constant at around 80m barrels a day" but instead grew steadily throughout the previous five years.

Bulent Gökay does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 When the price collapsed, the world's most disastrously oil-dependent state was the biggest casualty. Bulent Gökay, Professor of International Relations, Keele University Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/77351 2017-05-30T06:47:16Z 2017-05-30T06:47:16Z In Suriname, an endless refrain: boom, bust, and Bouterse
Recent street protests in Suriname haven't made many international headlines. Only newspapers in neighbouring Guyana and in the Netherlands, the colonial metropole, have covered the marches in which thousands of people have taken to the streets in recent weeks to protest spiraling economic chaos.

Suriname, a small nation on South America's northern coast with a population of half a million, doesn't often garner global attention. But maybe right now it should.

The next Venezuela?

Suriname's current upheaval pales in comparison to the massive protests in nearby Venezuela, with (fortunately) no major casualties reported so far.

Yet events in Venezuelan are on many minds in Suriname, for both political and economic reasons.

Surinamese President Desiré (Desi) Delano Bouterse is a great admirer of the late Hugo Chávez. Bouterse not only "adored" the man, as I have argued before, he also copied the Chavista hybrid political system, in which elections are held and opposition is allowed but weak institutions, clientelism, discretionary spending, and lack of transparency all advance the power of the executive – in this case, Bouterse's.

Like Chávez, the opportunistic, charismatic, and controversial Bouterse also has a loyal following. He is especially popular among younger, lower-class Afro-Surinamese. Even a 1999 sentence in absentia to 11 years imprisonment for drug trafficking in a Dutch court did not hurt his popularity. In fact, it increased his street cred.

Sergeant Bouterse emerged on the national stage in February 1980, when he and 15 other non-commisioned military officers staged a coup against the democratically elected government. Their revolution – or "revo", as it was locally called – soon became a nightmare as the dictatorship staged gross human rights violations, including the December 1982 massacre of 15 opposition leaders, economic collapse and social dislocation.

Bouterse did not disappear into the shadows with the return of democracy in 1987. He immediately founded a political party, the National Democratic Party (NDP), and in 2010 was elected president. In the last elections in 2015, his NDP gained an absolute majority in parliament, a first in Suriname's history, and Bouterse was again re-elected.

So has this dictator really turned into a democrat? People who lived through the 1980s remember what Bouterse is capable of, and they fear a repeat of that period's threats, violence and murders.

As days of protests turned into weeks, signs of the bad old days are beginning to show. Radio shows aired by NDP-run stations are threatening a Dutch-born young leader of the current protests, Maisha Neus, with deportation. Freedom of the press has been curtailed for several years, with critical media barred from official press conferences.

Boom and bust

The second Venezuelan link is that Suriname also suffers from the continuing decline in oil prices paired with populist spending policies. Natural resource exploitation has long been the basis of Suriname's economy, forcing the country to undergo regular boom-and-bust cycles.

In the 20th century, bauxite mining generated foreign exchange revenues and financed a rapid increase in state expenditure. In the post-second world war period, respective governments have expanded the large state bureaucracy, employing tens of thousands of party supporters.

But Bouterse's dictatorship (1980-1987) saw a sharp economic decline, with shortages and long shopping lines that many elderly Surinamese still remember vividly.

By the late 1990s, a downturn in international aluminium prices combined with the expansionary economic policies of the NDP administration of Jules Wijdenbosch had completely wiped out the recovery that had taken place earlier that decade. Inflation accelerated, undermining the value of Suriname's currency.

In 1999, in the largest demonstration in the country's history, 50,000 to 75,000 people (10% of the country's population) protested the rising cost of living in the capital, Paramaribo.

Today's protests are triggered by the same issues. Excessive spending and tumbling oil and gold prices have led to inflation at some 60% and halved the value of the Surinamese dollar. A spike in fuel prices has caused the initially small demonstrations to grow, and they are now attracting thousands of people, many of them in their 20s and 30s, including former Bouterse supporters.

The government is currently borrowing heavily to pay for hospitals, construction of infrastructure, food for the poor, and to repay outstanding debts. According to the Surinamese news magazine Parbode, since December 2015 Bouterse has taken out at least 17 loans from the International Monetary Fund, Eximbank China and other lenders.

Borrowing will only add to Suriname's debt burden. According to the IMF, the country's debt-to-GDP ratio is projected to reach 68%. In February 2017, ratings agency Fitch lowered Suriname's rating to B-minus.

Meanwhile, a coherent policy addressing the recession, depreciation, rise in inflation and government deficit is lacking.

Still, the ongoing protests are unlikely to lead to the resignation of their president. He claims to have a popular mandate, but that's not the only reason why Bouterse won't budge: human rights violations from the 1980s still haunt him.

Bouterse and his comrades are still being prosecuted for the 1982 execution of 15 opposition members. He has tried to put an end to this seemingly endless court case, several times in fact. But on May 11, despite the demands of the public prosecutor to stop the process because it allegedly endangered national security, the court decided to forge on.

The reaction of the Minister of Justice, Eugene van der San, was swift – "The government respects the judge's decision" – then cryptic – "But there will be a moment when the executive power will be in charge again."

Right now, Suriname's economic and political future are uncertain, but one thing is clear: too few international eyes are watching the unfolding events.

Rosemarijn Hofte has received funding from the Netherlands Organisation for Scientific Research (NWO) to study the history of twentieth-century Suriname.
 Oil-dependent and led by a charismatic dictator with a chaotic economic policy, is Suriname the next Venezuela? Rosemarijn Hofte, Professor, Suriname History , Royal Netherlands Institute of Southeast Asian and Caribbean Studies Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/75759 2017-05-23T13:52:48Z 2017-05-23T13:52:48Z How the Aramco IPO will make history and transform Saudi Arabia's economy

 shutterstock.com

The US and Saudi Arabia have signed hundreds of billions of dollars worth of business deals following Donald Trump's trip to the oil-rich state. The biggest deal was for nearly US$110 billion worth of weapons (extending to US$350 billion over ten years). But a number of smaller agreements were made between Saudi and US firms, as part of Riyadh's goal to diversify its economy.

Saudi Arabia's economy is almost entirely dependent on oil exports and the need to diversify has become increasingly evident in recent years. A global glut in oil has caused prices to fall dramatically since 2014 and countries are increasingly turning to renewable sources to meet their energy needs.

Ultimately, the issue of peak oil makes diversifying its economy crucial. Saudi Arabia's oil reserves are not inexhaustible so it cannot rely on oil exports to prop up its economy forever. A move towards a productivity and an investment-led economy is therefore needed to serve the country's long-term strategic goals.

Central to this are plans to partially float the country's giant state oil company, Saudi Aramco. It is gearing up to sell shares in part of the company in what will be the biggest IPO in history. The market value of Aramco is estimated to be around US$2 trillion – significantly more than Alibaba Group's US$25 billion, which shattered IPO records in 2014. Even with only 5% of the company up for grabs, it is still set to be the world's biggest IPO and marks a significant shift for Saudi Arabia's economy.

Saudi Arabia has almost a fifth of the world's proven oil and gas reserves and is the largest producer of oil and gas in the world. This is entirely governed by Saudi Aramco and the ministry of energy and mineral resources. It is estimated that Aramco's reserves are the largest an oil company has ever owned, at 266 billion barrels.

But Saudi officials have always avoided discussing issues related to peak oil. No clear data has been made known about the country's exact oil reserves, so it is hard to predict at what point the country will hit peak oil production. Nonetheless, oil discoveries, exploration and production around the world seem to have peaked and it is no longer beneficial to deny this fact. Plus, the crash in crude oil prices since 2014 left Saudi Arabia with a big budget deficit.

A new vision

The 31-year-old deputy crown prince and son of the king, Mohammed bin Salman, set out a new vision to transform the country's economy by 2030. Named Vision 2030, it is packed with targets for education, transport, fostering new private business and cutting the budget deficit. And central to the economic transformation is the proposal to raise money through selling just 5% of the US$2 trillion worth Aramco.

The IPO would allow Saudi Arabia a significant source of liquidity (a predicted US$100 billion) that can be used to plug the budget deficit and make new investments. If the expected funds are invested well into productive areas of the economy (as is intended), the country's economy would be boosted and its GDP could be doubled. For example, investments in renewable energy, while sustaining the kingdom's future energy security, would also enable it to conserve valuable oil for exports. Meanwhile, investing in the Islamic tourism sector could bring billions to the Saudi economy.

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 Saudi Arabia is hoping solar energy will help fuel its economic development. shutterstock.com

This investment would create new jobs and significantly reduce the unemployment rate. At a high of 12% last year, this would, in turn, help the government curb its large spending on subsidies for citizens.

The money raise from the IPO would also make Saudi Arabia a world class global investor. The country's sovereign wealth fund, which has 90% of its portfolio within Saudi Arabia, recently announced it will start slowly increasing its investments overseas. The aim is to obtain better technology for domestic industries and boost returns on its financial reserves. This was a big part of the Saudi king's recent month-long tour around Asia, as well as promoting the Aramco IPO.

There is still no date set for the IPO to take place. It was originally expected to take place in early 2018, but the Saudi government seems intent on making sure that the company is in as best shape possible to make it attractive to investors. After all, a lot is riding on the Aramco IPO raising the US$100 billion record-smashing estimate.

Hafez Abdo does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 Saudi Arabia's economy is almost entirely dependent on oil. Here's how it's trying to change that. Hafez Abdo, Senior Lecturer in Accounting, Nottingham Trent University Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/69727 2016-12-05T23:05:36Z 2016-12-05T23:05:36Z Why OPEC's squeeze on oil prices is getting weaker all the time
OPEC's recent decision to cut oil production for the first time in eight years marked the return of the oil cartel's favourite tactic: squeeze supply in a bid to jack up the price.

Of course, this is nothing new. In 1851, during the Pennsylvania oil rush, the Oil Creek Association helped to push the price of oil up from 10 US cents a barrel to US$4.

OPEC can only dream of having the power to move prices by 4,000%. The reality is that its power to move prices at all is waning rapidly, as factors move beyond the bloc's control.

It's worth noting what happened to the oil drillers of Pennsylvania after they installed a floor under their high oil prices. Investors shifted their focus elsewhere, looking to Russia, Texas and eventually the Middle East. Precisely the same thing is happening to OPEC, particularly through the advent of the US shale oil industry. And this time it's happening not in the golden age of oil but in an era when market conditions for polluting fuels are much tougher.

In 2008, when oil prices were high, Goldman Sachs predicted that oil would hit US$200 a barrel. But they are financial wizards, not historians. It has been 75% less for most of the period since.

Over the decades we have also grown used to hearing predictions that there are "only 30 years of oil left at current production rates". (The horizon never seems to move any closer or further away.)

But bear in mind that oil reserves are a function of technology and price. When prices rise and technologies improve, more oil becomes economically viable to extract, effectively increasing the world's oil reserves. As prices fall, these reserves effectively cease to exist until prices rebound or technology gets cheaper.

So, in one sense, the oil game hasn't changed. OPEC needs high prices to justify extracting the oil. But bigger factors are now at play, which makes it harder for OPEC to squeeze supply as effectively as it once did.

What has changed?

OPEC was at its most powerful when the United States, the world's largest oil consumer, relied on OPEC member states to meet its oil needs. Since the US shale boom increased US energy independence, OPEC can no longer threaten supply as it did during the 1970s. Now it simply risks squeezing itself out of the market.

It's not just the US domestic market that has grown. If OPEC restricts supply, Canada can increase oil production from tar sands, and Brazil can bring on more deep-water oil production.

All of this challenges the perception that there is a shortage of oil, although more sophisticated peak-oil followers have shown that cheap oil from conventional sources did indeed peak in 2007, prompting the most recent big surge in oil prices.

In a bid to maintain its influence on supply and therefore prices, OPEC has turned to Russia, the world's largest state-controlled oil producer, which has agreed to cut production in tandem with OPEC nations.

But even this will not be enough to keep pace with the changes wrought by new markets, new technologies and energy efficiency. Two years ago we wrote that OPEC had lost its power and, despite the latest move, we don't see much to indicate that it has returned.

The knock-on effects

The fundamentals of the oil industry haven't changed with this latest deal. In Australia the effect will be a roughly 5% increase in the oil price, and a larger increase in the price of petrol (perhaps up to 10%), as distributors and retailers take advantage.

Aside from the small effect on Australian consumers, this announcement will probably be helpful to Australian oil companies, giving them some good news to tell shareholders and employees.

But before boardrooms get too excited, it is worth noting that oil is also suffering a demand problem. All developed nations have now begun to decouple economic growth from fossil fuels. For oil, the chief threat is one of being replaced by electric public transport and electric or hybrid cars.

Oil's murky future

Oil's future suffers from another problem: it's not good for your health. An announcement that will have a more powerful effect on the oil price, but which received much less media attention, came in 2012 when the International Agency for Research on Cancer (IARC) updated its classification of diesel engine exhaust from "probably carcinogenic to humans" (Group 2A) to "carcinogenic to humans" (Group 1). Petrol exhaust is listed as probably carcinogenic.

Health impacts are a large driver for moving away from fossil fuels – even for those who don't accept the predicted climate impacts. With the fundamental shift towards fuel efficiency and electric vehicles, the Volkswagen emissions scandal and the awareness that petrol and diesel cause cancer, respiratory disease and lower birth weights in babies with mothers living near major roads, the trend for oil consumption is downward.

So the drivers for change are as they have always been – demand and technology are behind the wheel, not OPEC making "important" announcements. Look for a small, short-lived increase in your local fuel price, but remember that if your tank of fuel goes up by 10c a litre, most of that isn't down to OPEC. It's mainly retailers looking for a bigger Christmas bonus.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
 OPEC's recent decision to cut supply is a classic move from the oil cartel playbook. But in today's era, there are many more players and game-changing technologies on the field. Mark Andrich, Director, Sustainability and Finance Specialist, University of Western Australia Jemma Green, Research Fellow, Curtin University Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/65509 2016-09-19T12:25:18Z 2016-09-19T12:25:18Z Gulf states are torn between economic sense and military ambition
There is a certain irony in the Arab Gulf states' rising power across the Middle East and North Africa. International prestige, the ability to intervene militarily in regional conflict, and holding the same leverage as international financial institutions in aid and investment are what these states have long coveted. But now that they have the power – both economic and military – Gulf states like Qatar, Saudi Arabia and the UAE are faced with the dilemma of demonstrating their dominance without destroying the neighbourhood.

These Gulf states' foreign policies are increasingly at odds with their economic interests. Twenty or 30 years ago, times of war and conflict in the wider Middle East usually meant marginally better economic times for the Gulf states. Oil prices would rise, Dubai could host informal arms negotiations, and the relative calm of the backwater Gulf cities beckoned those in the Middle East (and further abroad) seeking a place to shelter investment, and sometimes to continue opposition politics. From the 1960s to the 1980s the Gulf states provided a welcome for many expatriate Arabs looking for jobs in education, healthcare and security services.

Economic integration

But no more. The economies of the Gulf states have changed dramatically since the beginning of the second oil boom, between 2003 and 2014. Joined together in the Gulf Cooperation Council (GCC) trade bloc, they are more integrated into the regional and wider international economy in trade and investment flows.

Their labour markets are less reliant on Arab nationals, with the influx and preference for workers from Asia since the 1990s. Meanwhile, citizens living in the Middle East and North Africa (MENA) region are more dependent on family members working in Gulf states, as a source of remittances (money sent to foreign nationals abroad). At the same time, the mega real estate projects that have propelled infrastructure development across the Gulf in the last decade have relied on wealthy expatriates as builders and buyers of these ventures.

The GCC's outward investments in equity markets, especially towards Europe and the US, means it is also more integrated globally. And it has large amounts of foreign direct investment in infrastructure, agriculture and real estate across the MENA region.

The figures speak for themselves. Average annual inflows of foreign direct investment into the GCC have blossomed to more than US$30 billion in the decade since 2001. This is up from less than $1 billion during the 1990s and constitutes the bulk of total foreign investment in the Arab world. The GCC states are now more sensitive to the financial stability of their local markets, as well as to the performance of their investments regionally.

With the prolonged decline in oil revenues, the stakes for ensuring stability and continued financial flows both into the Gulf, and the profitability of ventures flowing out of the Gulf, are high. Gulf state investments are also in unlikely places, including shared investments with deemed adversaries like Iran. In non-oil trade flows, the GCC states continue to lag behind other regional organisations in promoting trade, though it has certainly been increasing in the last decade:

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 Growth of GCC intra-regional trade. World Bank

The strength of their economic influence in the region lies in huge flows of capital – often a mixture of remittances, foreign aid, and foreign direct investment under the auspices of state-related bodies. This has enabled the Gulf states to usurp international institutions in shaping economic reform across the MENA region, especially in Egypt and other oil importers.

Political disorder

Politically, however, the GCC is engaged in numerous interventions across the region that have caused significant disorder and pose a threat to their mutual economic prosperity. The Gulf states were successful in crushing the Arab Spring within their own countries and cementing their development agenda. By contrast, their interventions in Libya, Syria, Yemen and Egypt have stoked the chaos there, putting the stability of the region at risk.

In the last year, the foreign economic policies of the UAE and Saudi Arabia have specifically targeted the political and economic stability of Egypt and Lebanon. In Egypt, the attempt has been to support the Sisi administration, while also creating opportunities for state-related entities to invest in Egypt's housing and infrastructure development.

In Lebanon, they have punished the political establishment for its perceived proximity to Iran by reneging on military aid transfers and discouraging economic links and travel there for Gulf citizens. Their foreign policies, in arms transfers or direct confrontation, have targeted Libya, Syria and Yemen. Iran remains a target of diplomatic confrontation.

In each of these interventions, there is an incumbent economic cost to the GCC states. The war in Yemen is probably the best example of a mounting military expenditure that will only be dwarfed by the cost of re-building Yemen, which surely the UAE and Saudi Arabia will have to help foot. The Gulf States would therefore be wise to start dovetailing their foreign policies with their economic interests by fostering stability instead of conflict. And sooner rather than later.

Karen E. Young receives grant funding from the LSE Middle East Centre and Emirates Foundation. She works for the Arab Gulf States Institute in Washington as a Senior Resident Scholar.
 The interventionist foreign policy of the Gulf states is increasingly at odds with their economic security. Karen E. Young, Visiting Fellow, Middle East Centre, London School of Economics and Political Science Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/63597 2016-09-06T20:11:03Z 2016-09-06T20:11:03Z Company results wrap: energy companies are facing disruption
Companies have finished reporting results for the financial year so it's time to take stock of how the different business sectors of Australia are fairing. In our company results wrap series we take a step back from the short-term focus of quarterly profit and loss statements and examine what big picture factors are at play.

The energy sector is dealing with a complex mix of relationships between consumer trends, global commodity markets, and state, federal and industry regulation. Because large established companies in electricity generation and distribution and coal and natural gas export have a lot of influence in this process, Australian energy regulations reflect more traditional energy provision rather than global trends where renewable energy is becoming more prevalent.

State governments are currently coming to terms with the regulatory changes needed to accommodate public support for disruptive technology. One example is the ongoing adoption of ride-sharing company Uber. However this same pragmatism needs to be reflected in preparations for the provision and consumption of energy in Australia. The energy companies that are prepared for this disruption will survive and flourish, while those that cling to traditional structures will struggle.

Evidence of disruption

Globally energy companies are already showing signs of being affected by the looming disruption. Coal miners have been subjected to multiple forces over the last decade, but the changing landscape associated with new forms of energy, is a strong influencer of their performance. Coal companies in the US are facing dwindling share prices or bankruptcy like Peabody Energy and Arch Coal.

Tesla's share price, which increased from US$28.52 in August 2012 to US$220 in August 2016, is more than double that of more traditional vehicle company Toyota. Toyota has experienced moderate growth from US$79.62 in August 2012. With electric vehicles forcing themselves into the motor vehicle market, technological disruptors like Tesla are seen as more likely to succeed than traditional motor vehicle companies like Ford.

West Texas Intermediate, a benchmark international oil price, declined from US$133 a barrel in July 2008 to US$45 a barrel in July 2016. This followed a slowdown in global growth after the global financial crisis and increased production of oil in Saudi Arabia, which some claim is to gain market share. Coal prices for export from Australia have fallen from A$180 a tonne in July 2008 to A$63 a tonne in July 2016 as China's voracious appetite for coal has declined.

International natural gas prices have also declined because in Europe the natural gas price has been referenced to the oil price. Separate to this, the US price of natural gas declined as a result of new drilling technologies which released huge quantities of natural gas onto the US market, dragging down the price.

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 Global energy prices. World Bank Commodity Price Data

Many of these global trends are apparent in Australia too. Coal export prices have caused concerns for existing companies to the extent that new mine development has been shelved since 2008. Coal mine profits have dwindled and job losses abound.

Ambitious plans for coal seam and natural gas extraction for export to Asian markets have been curtailed with some experts predicting still further price declines in response to oversupply.

While there have been recent small upticks in prices, the trend for Australian primary energy company share prices since early 2014 has been downwards.

Challenges facing the Australian electricity generation sector

The electricity sector in Australia is facing multiple challenges. Electricity consumption has declined since 2009 and is forecast to increase only slightly by 2035/6. The closing of large energy users like the Kurri Kurri aluminium smelter and the Clyde Oil refinery, and a shift by residential consumers to the consumption of electricity from solar panels have contributed to this trend.

This is coupled with increasing supply of energy from low marginal cost wind power which, if the Australian National Energy Market is working as designed, reduces the spot price for electricity.

Many electricity generators have launched or acquired retail businesses to market directly to customers. AGL and Origin are the two largest of these "gentailers", with a combined 56% of the small customer market in the eastern states. However, there is potential for disruption to this existing industry model. 1.57 million households now have solar panels on their roofs, and residential batteries are expected to increase consumer control of residential electricity.

Startups like Sunverge, Reposit and Powerledger are looking to connect households with spare energy to households buying spare energy. Mojo Power is offering customers fixed price packages that are more reminiscent of mobile phone offers than electricity. At this stage it is unclear whether the National Electricity Market will play a part in, or hinder, these new business models.

A few retail companies, like Red, Lumo, Powershop and Infinite spruik their renewable energy credentials. Renewable energy is viewed very favourably by the public.

Recent polling suggests that 71% of respondents would favour a government that facilitated greater support for solar panels and batteries. Energy giant AGL has a larger renewable energy portfolio than Origin making it slightly more attractive to consumers with environmental concerns, but it is exposed to the risk of owning a large coal generation fleet.

Infigen is the only renewable, publicly listed company. Infigen faced torrid times during the multiple back-to-back reviews of the Renewable Energy Target, but since the target has been set at 33GWh, Infigen's share price has been recovering.

Of note, is the share prices of domestic energy companies AGL and Origin who are both in the business of generating and retailing electricity and previously were both engaged in the development of coal seam gas. Origin has continued its coal seam gas investment while AGL exited the market. AGL has instead focused more on diversifying its electricity generation portfolio. Part of this strategy has involved formulating innovative plans for virtual power stations of consolidated rooftop solar panels and residential batteries.

Origin's foray into the export of Liquid Natural Gas (LNG) has not been good for its share price. Concern over debt related to the investment in LNG and exposure to declining LNG prices has worried investors.

Electricity distribution also faces multiple challenges

Electricity distribution companies in Australia are regulated monopolies. Distribution companies in NSW and QLD have been government owned and as a result of hefty investment plans, large electricity price rises were passed through to customers after 2009. This was at the same time as environmental charges were being included in electricity tariffs.

 <img alt="" src="https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/136379/original/image-20160902-1030-1dbmc9x.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 Residential electricity price 2007-2015. Author

Customers were angered by the rise in electricity prices, but the NSW and QLD governments have enjoyed the profits that have flowed back into state coffers.

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 Electricity network profits: QLD and NSW. Author

The NSW government is now seeking to sell a large share of its distribution businesses, although the most promising buyers have been knocked back by the federal government due to security concerns. With the popularity of solar panels and the expectation about the benefits of battery storage to meet demand after sundown, investors buying into the electricity distribution sector will be facing disruption.

Origin and AGL have gambled on different strategies to face a future with carbon constraints and technological disruption. Origin has bet on natural gas being a transition fuel to a cleaner energy future, while AGL is betting on electricity from renewable sources with batteries as the preferred path.

Energy distribution companies need to wrestle with the technological disruption that is looming from decentralised, distributed generation from solar panels, batteries and peer-to-peer energy transactions. Coal miners should seriously consider diversification to face a carbon-constrained future. The energy sector is in a state of transition; profits and share prices may be volatile for a few years to come. It would be advantageous if regulation did not get in the way of the shifts already evident.

Lynette Molyneaux does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 Energy companies shouldn't rely on government regulation to protect them from the growing disruption from renewables and increased consumer control. Lynette Molyneaux, Researcher, Energy Economics and Management Group, Global Change Institute, The University of Queensland Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/59117 2016-06-03T01:02:13Z 2016-06-03T01:02:13Z Is OPEC's oil era over?
Just a couple months ago, some were declaring the old oil order dead after the Organization of the Petroleum Exporting Countries (OPEC) failed to agree on coordinated action at its April meeting in Doha.

That meeting was meant to bring about a production freeze to arrest the downward spiral of prices that began in July 2014. Instead, the Doha meeting was over before it began. Iran refused to slow production until it had regained its pre-sanctions position in the market, so Saudi Arabia canceled the freeze and continued to produce at peak levels.

This week, with oil trading at six-month highs, OPEC members once again had high hopes to show that the organization remains relevant as they gathered in Vienna. Yet, once again, the meeting ended without agreement, resulting in no change to the current policy of essentially unlimited production.

So does the verdict that OPEC is dead still stand, signaling the end of an era in which it supposedly ruthlessly controlled the price of oil? In fact, that era barely existed in the first place. The failed meetings confirm a longstanding truth: the world's most famous cartel has never really been a cartel.

Rather than the arbiter of global energy, OPEC is and has always been a dysfunctional, divided and discouraged organization.

My recent research has taken me through the history of oil, particularly the relationship between oil revenues, economic development and the geopolitical balance of power in the 1960s and 1970s. Oil's history has been dominated by a struggle for balance, a contest between competing interests, both economic and political, and between the fundamental market forces of supply and demand.

OPEC has never been shielded from or been able to fully thwart these forces.

Early days: divided and powerless

When it was created in 1960, OPEC was meant to offer members a greater say in how their oil was produced and priced, addressing the disproportionate power wielded by private Western corporations. Its larger goal, to bring order to the chaotic world of global energy, has always been elusive.

OPEC was formed from frustration. In the 1950s, the world was awash in oil as small nations in the Middle East and Latin America discovered enormous deposits, and Western oil companies sought to tap them to meet rising demand.

To gain access to those deposits, the major oil companies (known as the "Seven Sisters") signed concessionary agreements with local governments, allowing them to pump, refine, transport and market a nation's oil in return for a royalty, typically 50 percent of profits.

This arrangement gave the companies control over the oil – they set production levels and prices – while governments simply collected a check and had little influence on anything else.

In February 1959, amid an oil glut, the Seven Sisters decided that a price correction was necessary. And so they unilaterally began cutting the posted price, from $2.08 to $1.80 by August 1960. (Back then, oil prices didn't always follow market forces and were typically set by producers.)

The cuts meant a significant loss of revenue for the oil-producing states. In protest, the oil ministers of Iraq, Iran, Venezuela, Saudi Arabia and Kuwait met in Baghdad that September and formed OPEC to achieve a more equitable arrangement with the Sisters.

In reality, the oil-producing states could do little to coerce the companies into offering better terms. The Seven Sisters dominated global markets and were capable of shutting out individual producers. Oil was abundant, and nationalization seemed out of the question because the companies could successfully exclude an offending country from the market, as they did with Iran in 1951.

In addition, the United States itself was the world's top producer and immune from supply shocks thanks to import quotas.. If OPEC threatened to take production offline in order to put pressure on the companies, the U.S. could increase its own to make up the difference, as it did during a partial Arab oil boycott in 1967.

In the end, OPEC did not possess enough market share to make a meaningful impact.

A new balance of power

Besides being relatively impotent, OPEC couldn't agree on a consistent policy among its members. Saudi Arabia wanted to keep production levels low and prices consistent, preserving the global economy and the political status quo. Iran and Iraq, with huge military and development budgets, wanted prices pushed as high as possible in order to maximize revenue.

According to scholar and oil consultant Ian Skeet, an attempt to extract more favorable terms from the Sisters in 1963 was sabotaged by the shah of Iran, who sought a separate agreement.

During the 1960s, OPEC met, debated and released grandiose statements on their rights, yet failed to form a united front.

Nevertheless, significant changes were occurring at the time. Demand for oil shot up, while production in the U.S. stagnated. The ability of the Seven Sisters to control the market was undermined by international competitors drilling new fields in North Africa, where Libya's Muammar Qaddafi threatened to shut off supply if he didn't get higher prices.

The companies were under more and more pressure to deliver satisfactory terms to the OPEC members. The price of oil, which had held steady at $1.80 a barrel for years, began ticking upwards. American import quotas ended, leaving the U.S. more vulnerable to supply shocks as its production capacity steadily declined.

These conditions, while not the result of actions by OPEC, gave the organization an opportunity to influence the market and upset the balance of power.

The oil price revolution

This shift accelerated in the 1970s as war broke out between Israel and its Arab neighbors, creating an opportunity for OPEC to wrest control from the Western oil companies.

To punish the U.S. for supporting the Jewish state, Arab oil producers (not OPEC, as popularly believed) cut production and declared an embargo. Together with the war, this destabilized energy markets as demand outpaced supply.

Amid the fighting, OPEC met with the Seven Sisters in Geneva and demanded an increase in the posted oil price. After rejecting a small change, OPEC announced it would double the price to $5 and later doubled it again to $11.65.

This triggered a massive shift in economic power, what Stanford University professor Steven Schneider called "the greatest non-violent transfer of wealth in human history." With the uptick in oil revenues, OPEC states spent lavishly on economic development, social programs and investments in Western industry and steadily nationalized their domestic industries, pushing out the Seven Sisters.

How did the balance of power seem to shift so suddenly? Among other reasons, the major oil companies could not agree among themselves on a new price and were actually tempted by the high profits that would result. In other words, OPEC had seized control of the oil market largely due to circumstances beyond its control.

The oil crisis

Despite its victory, OPEC had come no closer to resolving its internal divisions. This became evident when another energy crisis hit.

In January 1979, the shah of Iran fled amid revolution, and global oil markets panicked. Prices soared, from $12.70 to over $30 by 1980. Iran's 6 million barrels per day (bpd) disappeared, and other OPEC states eagerly seized the opportunity to sell oil at costly premiums, sending the price even higher.

In the ensuing years, Saudi Arabia tried to impose a quota system, with overall production capped at 20 million bpd. Most members ignored their quotas or over-produced to gain greater revenue.

Meanwhile, the West worked to improve energy efficiency and invested heavily in non-OPEC oil sources, including Alaska, Canada and the North Sea. By 1985, OPEC's market share had fallen below 30 percent. OPEC dropped its production quota to 19 million bpd, then 17 million, to account for diminishing demand, but only the Saudis obeyed the rules, losing market share as other producers pumped above the quota level.

By 1986, the Saudis had had enough. Without warning, the Saudi oil minister announced that Saudi production would increase. Overnight, Saudi production shot up more than 2 million bpd, flooding the market and sending prices plunging below $10 a barrel. Sick of watching other OPEC members cheat them out of profits, the Saudis chose to enforce new discipline through an artificial market shock.

Just as the kingdom did in 2014, this move indicated Saudi willingness to use its massive reserves to "correct" the market and push out high-cost producers, even at the cost of its OPEC allies.

Feeling the pain

OPEC's fortunes have oscillated since the 1986 shock. Cooperation remained elusive.

A 2011 meeting, dubbed "the worst ever" by recently-removed Saudi oil minister Ali al-Naimi, produced disagreements over production levels. Acrimony reigned as OPEC states ignored calls for economic diversification in favor of oil-fueled economic growth.

High prices during the early 2000s accounted for a huge boom in oil revenues for OPEC members. For Venezuela and Nigeria, oil accounts for over 90 percent of all exports. Most OPEC states believed that high demand would last forever, that high prices could fund government programs and that the good times would never end.

Yet the good times appear to be over. OPEC has failed to control the downward spiral in prices, reportedly begun by Saudi Arabia in November 2014 to flood the market with cheap crude to put new and old competitors – U.S. shale producers and Iran – out of business. Saudi Arabia pursued its political interests and existing market share, leaving other OPEC members to fend for themselves.

The death of OPEC has been announced in some quarters, with its long-term decline seemingly assured as global energy enters a new era.

It is possible that Saudi Arabia may emerge from this current crisis unscathed, free to embark upon its recently announced Vision 2030 plan for an "oil-less" economy, however dubious that plan might appear. It's possible that OPEC may succeed in concerted action in the future. But its recent failures suggest that political interest will be more likely to divide OPEC and prevent mutual self-interest from uniting its members.

Gregory Brew is affiliated with OilPrice.com, where he writes once per-week on current energy issues.
 OPEC has been declared dead in recent months as the group of oil-exporters has been unable to agree on a plan to stabilize the market. But was it really ever alive in the first place? Gregory Brew, PhD Student in History, Energy and Foreign Relations, Georgetown University Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/58318 2016-04-26T12:27:28Z 2016-04-26T12:27:28Z How Gulf states are coping with the new normal of low oil prices

Not what they were: oil fields. zhengzaishuru/shutterstock

The falling price of oil is beginning to have a real impact on the energy-fuelled economies of the Gulf. In 2014, after almost a decade of record highs, the price of a barrel of Brent crude began to collapse from a peak of US$140 to less than US$30.

Saudi Arabia is lining up a US$2 trillion sovereign wealth fund to see it through the twilight years of the oil era. But not all the countries of the Gulf Co-operation Council, or GCC, have this kind of cash. Indeed, even for Saudi Arabia, the new era of low oil prices spells increasing budget deficits, reductions in state subsidies and a slowdown of the energy and construction sectors, which the region's economies have been built on.

Both private and state-owned firms are starting to restructure to reduce costs and increase efficiency now that the boom is over. They are merging divisions or outsourcing certain functions, introducing performance-related earnings, offering redundancies or smaller pay increases to staff. Qatar ought to be able to continue awarding annual salary increases given the continued investment in areas such as construction thanks to the 2022 football World Cup. But others, such as Saudi Arabia – most exposed to oil price fluctuations and subject to wide-ranging public sector cuts – will likely see redundancies at a time when the rate of inflation is high and subsidies are declining.

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 Construction in Qatar may help it ride out the initial storm. Philip Lange/Shutterstock

Neighbouring Bahrain, is still coming to terms with the after effects of recent political tensions. As subsidies fall and inflation rises, people living and working in the region are starting to experience a reduction in the purchasing power of their incomes and a subsequent increase in the cost of living.

Governments, meanwhile, look to their relatively stable currencies and large holdings of foreign currency reserves to see out the decline. If the price of a barrel continues to fall, however, these may prove insufficient. This is where Saudi Arabia's huge fund would come into play.

Reserves running low

Oil is the main GCC export, accounting for almost 90% of government revenues across the region. The current price of a barrel of crude means that it's difficult for Gulf economies to balance their budgets as expenditures remain in excess of revenues.

Some of the options available include borrowing more, reducing household fuel subsidies and postponing investment projects. The latter is a reason for firms to restructure, because it reduces the amount of funds they are able to secure for large infrastructure projects. Most of the Gulf region has already seen, for instance, the introduction of higher energy bills for households.

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 Cracking under pressure? Joakim Lloyd Raboff/shutterstock

Most analysts expect oil prices to remain depressed for the remainder of 2016 and for GCC economic growth to therefore remain subdued. For the moment, they can count on reserves to tide them over. If the price remains low, these will start to run out in two or three years and further cuts to government spending and the private sector must be expected.

Having said that, it is not all doom and gloom just yet. During an economic downturn, the decline in some sectors could be offset by growth in others. For instance, the population is growing quite quickly in the GCC region and firms are legally required to provide employee health insurance. The frequent shortage of qualified medical staff in the region means that physicians ought to be in high demand at the moment and the health sector should be looking to ride out the direct effects of an oil price decline.

Across the GCC economy as a whole, however, the growing, young population cannot be accommodated entirely by the public sector. Government programmes to increase the share of Gulf nationals in the labour market may well spill over into the private sector – this is where the Saudi sovereign wealth fund is designed to kick in.

Sovereign wealth funds are large pots of government-controlled money usually earned from commodities such as oil or gas. The Saudi pot will be the largest in the world and is a bold attempt to wean its economy off of oil.

The plan is to sell shares in a small part of the state oil firm Aramco's parent company. Around 3-4% of it will be sold through an initial public offering and the shares transferred into the fund. The proceeds, will then be invested into the Saudi economy as well as overseas markets, generating non-oil returns. Over the years, the fund will diversify and increase investments into different markets and sectors around the world.

It is going far above and beyond existing sovereign wealth funds in the region, thought to be in the region of around US$200 billion for Saudi Arabia, US$600 billion for the UAE's Abu Dhabi Investment Authority and US$600 billion for Kuwait. But the best opportunity for investment may have been missed when crude oil was fetching over a US$100 per barrel. Even with sovereign wealth funds to draw upon, the necessary process of restructuring their economies away from oil dependence will be a painful one.

Shabbir Dastgir does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 Gulf states such as Saudi Arabia and Qatar are beginning the painful process of restructuring their economies away from oil dependence. Shabbir Dastgir, Senior Lecturer in Economics, University of Huddersfield Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/56918 2016-03-30T04:37:41Z 2016-03-30T04:37:41Z Price shock: how the gas industry is weathering the oil crash
Falling oil prices are causing a shake-up in the gas industry. The latest sign of this is Australian energy company Woodside's indefinite deferral of its huge gas project off northwest Western Australia.

The A$40 billion project was to convert natural gas extracted from deepwater areas to liquid (LNG) on a floating barge-like structure for export – a world first on a commercial scale. Major oil companies Shell and BP are partners in the joint venture. Some have suggested the solution is for companies to work together to bring down costs.

The project is just the latest victim as companies adapt to lower oil prices. So how else is the sector dealing with the low prices?

Why have prices fallen?

Gas prices are linked to oil prices in their export contracts. Oil prices started their freefall from around US$110 a barrel in July 2014 to the current US$38 a barrel.

Shell has claimed that the project is not economic at an oil price of less than US$50 a barrel.

Essentially, the global oil and gas industry is facing an oil price shock, which is affecting local projects.

The price of oil has fallen as non-Western oil-producing countries (OPEC) seek to re-establish dominance over the United States. The recent US shale oil revolution  uses new extraction techniques, so despite its higher costs requiring higher prices, shale oil was looking like it might make the United States self-sufficient in oil for the first time. But the OPEC competitors have flooded the market with oil (thus lowering the price) in a bid to drive US shale oil companies out of business.

Other oil states such as Nigeria, Iraq and Venezuela have compounded this oversupply by ramping up production for much-needed cash to shore up their weakening economies.

The ramifications of "low oil price shock" are being discussed in oil and gas professional journals, but academic journals haven't yet caught up.

To find out how companies are dealing with the price shock, I and other researchers have been interviewing senior executives from the oil and gas industry in Australia and Malaysia. We're starting to see some definite trends.

Cuts to exploration and new spending

After decades of exploration in Australia for oil and gas, industry is cutting its spending on exploration.

Several executives mentioned that spending on new projects has been curtailed in the design and development phase. One commented, "We've already had several rounds of capital budget cuts." The overall impression from the interviews is of a significant drop in the number of projects globally that are progressing to the development phase, which normally requires significant spending.

One oil executive called for Petronas (Malaysia's national oil company) to pull back on capital spending on overseas ventures, such as those in Australia, and spend on projects in Malaysia.

Retrenchments and asset sell-offs

In terms of the low oil price impact on employees, one comment was: "There is a blood bath going on."

An executive stated: "It is my view that non-critical and expatriate staff will not see their employment extended."

Another explained: "…in the short term, we have had a lot of job cuts and a lot of salary reductions." Thousands of jobs are being axed and the industry's professional journals are counselling those affected.

Roger Jenkins, chief executive of US Murphy Oil Corporation, recently reflected on his company's 2015 operations in Sarawak, Malaysia. He cited lower operating costs, such as savings on labour, and the "timely 30% selldown" of onshore plant assets in Malaysia. At the moment cash is sorely needed.

Maintain cash flow and preference onshore projects

Jenkins observed that Murphy Oil's capital expenditure will be cut to less than US$2 billion in 2016 and the company will reduce risk by getting out of deepwater operations, such as floating LNG facilities.

The plan is to survive the downturn in oil prices by maintaining current production projects (for cash flow) and keeping operations close to shore. Anything non-productive is being sold.

Another oil executive said cost savings have mainly been found through onshore technology, while deepwater offshore projects remain costly. His view was that as companies dispose of non-productive assets, there are going be "buying opportunities this year". He also predicted that this quarter in the US over 100 small oil and gas companies are going to file for bankruptcy.

The deferral of Woodside's major floating LNG project in the Browse Basin is part of the fallout from the low oil price shock. The next step is to figure out what this will cost the Australian economy.

Diane Kraal does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 Woodside's deferral of its floating gas project in Western Australia is just the latest blow low oil prices have dealt the industry. Diane Kraal, Senior Lecturer, Business Law and Taxation Dept, Monash Business School, Monash University, Monash University Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/56482 2016-03-24T10:07:17Z 2016-03-24T10:07:17Z Cheap gas could delay America's efficiency targets for cars and trucks
Cars and trucks in the United States are supposed to achieve great fuel efficiency gains over the next decade. But now that gasoline prices have plunged, those plans may be delayed.

In 2012, the National Highway and Traffic Safety Administration (NHTSA), in collaboration with the Environmental Protection Agency (EPA), issued regulations that require automakers to meet progressively more stringent fuel standards to reduce greenhouse gas (GHG) emissions. The regulations, which cover cars and light trucks from model years 2017 to 2025, will require automakers to reach a corporate average fuel efficiency (CAFE) standard of 41 miles per gallon by model year 2021. Then, the average fuel efficiency for automakers' vehicles needs to reach 54.5 MPG by model year 2025.

But the exact details of rules and the timing of their implementation are not cast in stone. Next year, the initial set of targets will come up for review, and executives at car companies have already suggested pushing out the timetable for complying.

As this midterm review approaches, the key questions to consider are: first, how have fuel price projections changed since the period in which regulations were initially developed (2009-2012), and, second, what are the implications of these changes on regulatory implementation?

In a recently published study, my colleagues and I suggest how to reevaluate vehicle fuel economy and greenhouse gas regulations in the upcoming midterm review in light of the dramatic changes in the price of gasoline.

Among our suggestions is that fuel economy standards should be reevaluated during the midterm review to take into account expected lower fuel price and how low prices affect consumer interest in fuel-efficient vehicles.

Crash in gasoline prices

As anyone who has filled up lately knows, there has been a significant decrease in fuel prices since the federal CAFE and vehicle GHG regulations were developed. As a result, official government projections of fuel prices have been revised downward and remain relatively low through 2030.

Back when the regulations were being formed, the NHTSA and EPA used gasoline price projections based on the early release of the 2012 Annual Energy Outlook of the Energy Information Administration (EIA) to estimate monetary savings under the regulatory program. The projection path included the following assumptions for the price per gallon of gasoline: US$3.53 in 2015, $3.76 in 2020, $4.04 in 2030 and $4.57 in 2050.

Since then, the world oil market has undergone significant changes. Prices have fallen, with the national average price in 2015 being $2.31. EIA has revised its forecasts and now expects the average national price of fuel at $2.74 in 2020 and $3.20 in 2030.

These changes in the fuel price environment are noteworthy because consumer interest in fuel-efficient vehicles wanes with lower fuel prices and rises when prices at the pump are higher.

Also, automakers' costs of complying with more stringent vehicle standards are often passed on to the consumer. Because very fuel-efficient vehicles are expected to be more expensive than their less efficient counterparts, the consumer payback period for a fuel-efficient vehicle is considerably longer in a low-fuel price environment.

A longer payback period can translate to lower consumer interest and, ultimately, lower vehicle sales. Sales of the hybrid Toyota Prius, for example, fell for the first time in 2015.

Consumer interest in fuel-efficient vehicles matters because an auto manufacturer's ability to meet federal CAFE and vehicle GHG standards over time is contingent upon consumers purchasing its vehicles. Clearly, it is not enough for manufacturers to design and produce highly fuel-efficient vehicles to meet regulatory standards – consumers must also prefer these vehicles to their less fuel-efficient, more powerful models.

New vehicle sales matter because the automotive industry plays a central role in the health of the U.S. economy. The rate of new vehicle sales is also important because it affects the achievement of the regulations' environmental objectives, since the rate of new vehicle sales influences the pace of retirement of old vehicles from the fleet.

Thus, in light of changes to fuel price projections, and related expectations about consumer payback periods and new vehicles sales, my colleagues and I concluded that federal CAFE and vehicle greenhouse gas regulations should be reevaluated during midterm reviews.

Linking gas prices to regulations

How should regulators alter the fuel efficiency targets in a way that considers environmental goals, consumer interest and the economic impact of vehicle sales?

Regulators could link the pace of the efficiency targets to EIA forecasts of fuel prices for model years 2022-2025. EIA will publish forecasts of 2025 fuel prices annually between now and 2025, drawing from the best available information on global oil markets and other factors that influence fuel prices in the U.S.

Using those data, regulators could adjust the requirements for complying with the regulations.

 <img alt="" src="https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 As gas prices have gone down, American consumers have started driving more and buying bigger, less fuel-efficient cars and trucks. librariesrock/flickr, CC BY

The NHTSA and EPA should not adjust regulatory requirements annually, since manufacturers need sufficient lead time – four to six years for a new model – to adjust their product plans for new regulatory requirements. But, EPA and NHTSA could design, in the midterm review process, a planned linkage between fuel forecasts for 2025 and the 2022-2025 regulatory requirements.

Here is a hypothetical illustration of how fuel-price forecasts might be linked to regulatory requirements. If EIA's fuel price forecasts for 2025 rise significantly above $4 per gallon by 2020, then the federal requirements for model years 2022 to 2025 might remain as currently scheduled.

If those fuel price forecasts for 2025 are less than $3 per gallon, then the ramp-up should be slowed considerably, possibly stretched out to 2035. If fuel price forecasts for 2025 land between $3 and $4 per gallon, then a stretch-out to 2030 might be appropriate.

The review process formally kicks off in mid-2016 when the NHTSA and EPA publish a draft technical assessment report. Given how much has changed since the rules were first written, it makes sense for regulators to reconsider these rules. A good way to do that would be to explicitly link gas prices with fuel efficiency mandates. Although this linkage could delay the rules' implementation, this method ultimately achieves both environmental and economic goals.

Saba Siddiki receives funding from the Alliance of Automobile Manufacturers.
 Faced with stringent fuel economy standards but cheap gas, automakers may seek to delay CAFE rules. What's the best way to reevaluate these emissions-cutting rules? Saba Siddiki, Assistant Professor of Public and Environmental Affairs, IUPUI Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/55004 2016-02-22T14:15:24Z 2016-02-22T14:15:24Z The Saudi-Russian oil gambit has little to do with prices

On hold? shutterstock.com

Saudi Arabia and Russia, the world's two most powerful oil producers, have reached a tentative agreement to freeze oil production at its current levels. As the first deal between an OPEC and non-OPEC member in 15 years, it marks a significant declaration of intent. But it is not geared toward buoying oil prices, as some might hope. Rather, it has much more to do with blocking Iran's re-emergence as a global oil exporter.

The agreement between the two countries to keep output at January levels led to much noise of a market rally, with little to show in the way of gains. The benchmark price of Brent crude jumped briefly from US$33.4 to US$35.55 a barrel but it will not lead to a sustained rise in prices.

For starters, the agreement is not a cut in production levels. In January, Saudi production was sky high; significantly up from December. So the announcement of the freeze in production was part of a strategy to merely stabilise prices.

Geopolitics at play

The story is about much more than just prices. The current state of play is that both Russia and Saudi Arabia, the number one and two oil suppliers, respectively, are trying to stop Iran from making any further inroads into the global oil market.

Saudi Arabia has always been at loggerheads with Iran when it comes to oil production – and everything else besides. It is aware that oil prices will fall further when sanctions on Iran are completely lifted. By acting now, it is hoping to pressure other major producers to follow suit, and that Iran will fall into line with the other members of OPEC.

Another concern for Saudi Arabia is losing its position as the main strategic partner of the US to Iran, especially after failing to dissuade the US from removing economic sanctions against Iran for its nuclear program. It is hoping to put Iran in its place by limiting the gains it can make from the uplift in economic sanctions.

It is difficult to understand the reasoning behind the Saudi-Russia friendship. They are, after all, the two biggest oil producing rivals who are now presenting a united front on oil supply. They are also backing opposite sides in the Syrian civil war, all the while trying to convince the world that they share a common cause in stopping the global oil market rout.

But the 70% drop in oil prices has hit the economies of both countries hard. Saudi Arabia is running a budget deficit close to more than 15% of national income and burning through its cash reserves to plug the gap in oil revenues. Russia too is expanding its deficit to cover its costs.

The shared pressure seems to have brought the two rivals together. The Saudi Arabian promise to curtail production is part of a strategy with the US to pressure Russia to drop its support for Bashar al-Assad, the Syrian president, at a time when the Russian government is suffering from the effects of low prices.

"If oil can serve to bring peace in Syria, I don't see how Saudi Arabia would back away from trying to reach a deal", a Saudi diplomat told the New York Times.

Persistent production

It is evident that the output freeze could bring stability to the market, but it will not lower record high oil supplies. The only thing that is certain is the suffering of high cost producers, including the US shale industry, which is set to continue.

Markets have been rightly sceptical of Saudi Arabia and Russia's announcement of a production freeze. Although Iran welcomed the deal, it has made no promise of curtailing its production. And when it comes to OPEC's commitment to a production freeze, the potential for "quota cheating" (where struggling members overproduce to increase revenues) is as high as ever.

How long we can trust the Saudi-Russia deal to last is open to question too. While Russia and Saudi Arabia appear to have put aside their differences for the time being, their longstanding mutual distrust could well change things. Russia has always shunned OPEC, the Saudi-led oil exporters cartel and historically resisted any binding coordination with it to bolster global oil prices. There is little reason to expect a real change of heart.

So the output freeze may stabilise the market for the time being and send a clear message to Iran that there is still a long way for it to regain back its economic glory. But it is a long way from ensuring the struggling economies of oil producing countries survive the biggest crisis in the global oil market.

Nafis Alam does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 Geopolitics – from the US to Syria to Iran – are at the heart of Saudi Arabia and Russia's decision to freeze oil production at January levels. Nafis Alam, Associate Professor of Finance, Director- Centre for Islamic Business and Finance Research (CIBFR), University of Nottingham Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/52879 2016-02-02T14:38:03Z 2016-02-02T14:38:03Z How Saudi Arabia's grip on oil prices could bring Russia to its knees
When Saudi Arabia led an OPEC decision to end a restraint put on oil production in November 2014, it marked the beginning of a new era in oil economics. It has given us a tumbling oil price, prompted huge losses and job cuts at oil firms like BP and might yet give us economic and political drama in the heart of Moscow. To understand why, it's worth drilling down to the start of the whole process, and the costs of getting oil out of the ground in the first place.

Historically, the OPEC cartel of oil-producing nations has been able to manage oil prices because of the lack of flexibility in global supply. The whole business of setting up wells, operating pipelines and building rigs entails large and long-term investments which makes producers slow to respond to price movements. And a small cut in OPEC supply can have a significant impact on the global oil price.

The advent of the US shale oil boom changed this dynamic. The industry has lower fixed costs but higher variable costs and is more like an industrial process than a major one-off investment. That makes it more responsive to price movements and more flexible in adjusting short-term output.

Overall though, shale is a relatively high cost source of oil, especially compared to Middle East production. As a result, when US shale threatened OPEC's market share, the cartel allowed a position of global oversupply to develop. It was a simple trick: make oil prices fall to make shale unprofitable.

The chart below is a useful guide to how production costs stack up as production heads towards 100m barrels a day (which is pretty much where we are now). Focus on the blue square in the bottom left, which shows onshore Middle East production costs at as little as US$10 a barrel, while US shale (the purple block) can come in at more than US$70.

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  Rystad Energy/Morgan Stanley/Business Insider

Rigged game

The plan to cripple shale oil production has certainly had a significant effect. The price of benchmark Brent oil has fallen from a high of US$115 a barrel in mid-2014 to a low of US$27 in January 2016.

However, the reaction of producers to this collapse, in particular in the shale fields of the US, hasn't been as dramatic as you might think; business has carried on. What is evident is that supply continues to outstrip demand and, according to the International Energy Agency, will carry on doing so throughout 2016, putting even more pressure on the oil price.

 <img alt="" src="https://images.theconversation.com/files/109796/original/image-20160201-32227-18y4tt5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/109796/original/image-20160201-32227-18y4tt5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=444&fit=crop&dpr=1 600w, https://images.theconversation.com/files/109796/original/image-20160201-32227-18y4tt5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=444&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/109796/original/image-20160201-32227-18y4tt5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=444&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/109796/original/image-20160201-32227-18y4tt5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=558&fit=crop&dpr=1 754w, https://images.theconversation.com/files/109796/original/image-20160201-32227-18y4tt5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=558&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/109796/original/image-20160201-32227-18y4tt5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=558&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 Oil supply and demand projections for 2016 in millions of barrels a day. IEA Oil Market Report January 2016, Author provided

So, why haven't US producers been laid low given that the oil price has already fallen below the cost of shale oil production? There are a number of answers. The first is that many companies managed to hedge their production when prices were higher, selling future supplies of oil at a high enough price keep profits coming in. A second is that many got bank loans to pay for investment. Loans need to be repaid, and so lower oil prices led to a need for higher output at almost any price.

A third, and important reason, is that the cost of US shale production has decreased thanks to efficiency gains, a focus on the most productive regions and a drive to sharply reduce costs. In some regions the cost of production has hit as low as US$30 a barrel.

Russia pressure

Low-cost producers have troubles of their own. Oil revenues are a major plank of many countries' budgets. Oil exports account for over 60% of export revenues, on average, for OPEC countries and account for as much as 90% of Saudi budget revenues. In Russia they account for around half of total federal budget revenues and a similar amount of total exports. Any fall in prices can lead to both fiscal and budget deficits.

Time for another chart then, which shows the "fiscal breakeven" oil price per barrel for a variety of producers. The key observation is that all are above US$60 per barrel, with Saudi Arabia and Russia at around US$100.

 <img alt="" src="https://images.theconversation.com/files/109973/original/image-20160202-32244-12v5snb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/109973/original/image-20160202-32244-12v5snb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=371&fit=crop&dpr=1 600w, https://images.theconversation.com/files/109973/original/image-20160202-32244-12v5snb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=371&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/109973/original/image-20160202-32244-12v5snb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=371&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/109973/original/image-20160202-32244-12v5snb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=467&fit=crop&dpr=1 754w, https://images.theconversation.com/files/109973/original/image-20160202-32244-12v5snb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=467&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/109973/original/image-20160202-32244-12v5snb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=467&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 Fiscal breakeven oil prices per barrel. IMF, Deutsche Bank, Author provided

Despite this apparent pressure, the gap between breakeven and actual price can be sustained – at least for a while. Both Saudi Arabia and Russia have built up significant currency reserves during the period of high prices which are now being used to finance a budget deficit and sustain spending.

Russia though is reaching the limits of its reserves (at the current rate of spending the funds allocated to deal with a low oil price will be exhausted by early 2017). Currency devaluation is a blunt tool for Russia and others to consider, but it too can help by reducing costs in dollar terms.

That said, a tipping point may now have been reached. The bankruptcy of US oil producers has begun as banks begin to call in loans, new financing gets harder to find and hedging programmes expire, leaving producers fully exposed to a lower oil price. Many OPEC countries have begun to despair that no end of the current oil price slump is in sight. And perhaps most interesting of all, it appears that Russia is becoming increasingly desperate to coordinate a production cut with OPEC, in stark contrast to its previous reluctance to engage with the cartel.

It may just be, then, that a US$30 oil price has brought many producers to their knees, with the resulting possibility that the majority of OPEC countries, plus Russia and the US, may all be set to reduce output in 2016 and bring the oil market back into some form of balance. Only Saudi Arabia, with the largest financial reserves (about US$600 billion at the last count) and an avowed strategy to maintain market share, appears firm in its resolve to maintain production and brutally test the economic robustness of its major competitors.

James Henderson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 When you pick apart the strange economics of global energy markets, it becomes clear how the incredible power of Riyadh can take other countries to the brink. James Henderson, Senior Research Fellow, Oxford Institute for Energy Studies, University of Oxford Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/52928 2016-01-27T13:06:19Z 2016-01-27T13:06:19Z How oil and gas companies are dealing with low prices

Joining forces. shutterstock.com

Oil prices have tumbled to new lows in 2016. Slowing demand and a glut of supply has made the oil market incredibly bearish. But while prices have halved over the past year, the number of mergers and acquisitions has most definitely not. And a surge in deal making can be expected over the coming year.

Already there is a US$60 billion deal between energy giants Royal Dutch Shell and BG Group, with a proposed merger of the second and third largest global oil services firms, Halliburton and Baker Hughes, also on the cards. Meanwhile, numerous smaller deals are taking place: two Canadian companies, Suncor Energy and Canadian Oil Sands, recently merged to form the biggest player in one of Alberta's main oil sands operations.

Unlike other industries – where M&A activity tends to follow the economic activity of the broader market – the oil industry is doing the opposite in reaction to falling prices.

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 Declines in oil prices over the last two years (US$).

In a recent paper colleagues and I examined M&A activity in the oil industry worldwide over the last 12 years. We found that the greatest number of deals took place during a rapid recovery of the oil price to US$70-75 a barrel.

But the current climate of low prices also lends itself to a large amount of deal making – it is a necessity for survival and oil company profitability. Recoverable reserves are growing but in ever more inaccessible places – both geographically and politically. Merging is needed simply to maintain production levels and break even through cost sharing.

This means that companies should be prepared to deal with approaches from potential bidders – but not rush into anything.

There will be blood

The companies in the best position are those with strong balance sheets, which are able to acquire either distressed assets or those sold following other mergers, as a result of anti-trust issues. The oil companies that made big transactions before or during the oil price fall are the ones to watch for balance sheet stress.

A number of companies are laden with debt, which has increased substantially across the sector over the last ten years. For example, Spanish energy company Repsol increased its net debt levels significantly up until 2011 and was therefore eager to sell non-core assets. It has just sold a portion of its piped gas business to EDP Group for $150m, which follows a similar sale of assets to Gas Natural Distribución and Redexis for $700m in September 2015.

 <img alt="" src="https://images.theconversation.com/files/109356/original/image-20160127-26809-mt0zit.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/109356/original/image-20160127-26809-mt0zit.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/109356/original/image-20160127-26809-mt0zit.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/109356/original/image-20160127-26809-mt0zit.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/109356/original/image-20160127-26809-mt0zit.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/109356/original/image-20160127-26809-mt0zit.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/109356/original/image-20160127-26809-mt0zit.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 Energy giants Shell and BG group are merging. Lee Jordan, CC BY-SA

Shell has also announced $30 billion of asset disposals in the next two to three years. The sales are needed to balance the company's books, to reduce the debt after recent acquisitions.

But debt fears linked to the recent commodity price rout are bound to limit the number and appetite of bidders. So, while this deal-making is helping a number of companies survive the low prices, there will be blood – and bankruptcies of over-leveraged companies can be expected.

Plus, it's worth remembering that the weakness in the oil price has implications not just for companies, but for states, too. Saudi Arabia, the world's second largest oil producer has felt the squeeze of falling prices, which have led to its consideration of listing its national oil company, Saudi Aramco to raise capital. It is an example of something we found in our research – that sales are often driven by necessity and it analogous to forced sales by indebted companies.

Valeriya Vitkova does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 While oil prices have halved over the past year, the number of mergers and acquisitions has most definitely not. Valeriya Vitkova, Research Fellow at the M&A Research Centre, Cass Business School, City, University of London Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/53352 2016-01-19T16:25:29Z 2016-01-19T16:25:29Z Why we need to rethink the financial future of oil

Oil prices are rattling investors. Carsten ten Brink, CC BY-NC-ND

The price of oil keeps moving in one direction – down. Even political tension between Iran and Saudi Arabia (historically a cause of price rises) has not stopped the drop. It may come as a surprise to some, but it drives home the point that it is not politics but market fundamentals that set prices.

The global marketplace is awash with crude, thanks in part to US shale, Russia pumping at its limits, OPEC countries incapable of agreeing to a cap on production, Saudi Arabia remaining in a fierce price war with US shale producers, and Iranian stocks entering the market. Industry stocks are as high as almost ever before.

Demand also remains sluggish in emerging regions such as Asia. Wall Street augurs even see additional downward potential, suggesting US$20 as a likely floor price – which is remarkable given that from 2010-14 US$100 oil was the "new normal". In short, the market environment is soft, which is why oil futures traders are not paying heed to the hostilities between Iran and Saudi Arabia.

Oil giant BP reacted by shedding 4,000 jobs, while globally some US$1.5 trillion of energy investment has been put into question. Clearly, oil assets are on the losing side and the future does not bode well for global oil. This, however, is for reasons related to climate change, not because of tumbling prices. Two actors are key: the US government and financial investors.

 <img alt="" src="https://images.theconversation.com/files/108543/original/image-20160119-29793-1mxgz1y.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/108543/original/image-20160119-29793-1mxgz1y.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=336&fit=crop&dpr=1 600w, https://images.theconversation.com/files/108543/original/image-20160119-29793-1mxgz1y.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=336&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/108543/original/image-20160119-29793-1mxgz1y.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=336&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/108543/original/image-20160119-29793-1mxgz1y.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=422&fit=crop&dpr=1 754w, https://images.theconversation.com/files/108543/original/image-20160119-29793-1mxgz1y.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=422&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/108543/original/image-20160119-29793-1mxgz1y.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=422&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 Oil prices 2011-2015.

Shale squeeze

In the US, it is particularly the "independents" that have become squeezed. These are small to mid-sized companies which form the backbone of the recent shale gas revolution. So far, they have shown a remarkable ability to cope with an oil price spiralling downward, thanks to their innovative nature and their ability to cut costs and streamline production processes. Now, they have hit their limits. While some unconventional oil wells on the Barnett, Eagle Ford or Bakken formations still break even at US$30 a barrel, many no longer do, leaving the independents in the red.

The US government's decarbonisation strategy, meanwhile, has a strong incentive to keep these independents alive and well. By and large it relies on replacing coal with gas, in addition to tougher power plant regulation. This strategy so far has worked thanks to lots of additional gas coming online as a byproduct of oil production, keeping the market oversupplied and gas cheap. A faltering shale oil industry therefore also questions whether a US climate policy that relies on "market signals" remains sustainable.

If the events of 1998, when low oil prices brought the US oil industry to its knees (and Russia went bust), are any good predictor, Washington will keep the industry from collapsing – so long as the independents are needed to help bridge America's pathway into an unfolding low-carbon energy economy.

Tipping point

The finance industry, in turn, shows signs of a serious rethink in its fossil fuel investment strategy. To be sure, Wall Street and the City of London have valued oil – the world's most actively traded commodity – as an investment opportunity. It is not only bankers who put their money into oil assets, but also managers of more conservative outfits such as pension funds, Ivy League university endowments and insurance companies.

Yet, doubts are emerging over whether oil remains as attractive as it has been in the past. Already in 2013, Citibank, a global financial firm, declared that global oil demand was "approaching a tipping point" and that "the end is nigh" for growth. It cited the trends of substituting natural gas for oil, coupled with improvements in the fuel economy of vehicles, as the reasons.

Moreover, as the Paris climate deal of December 2015 underlines, there are significant social and environmental costs stemming from unabated climate change. The 196 world parties to COP21 acknowledged that humanity must therefore manage its remaining "carbon budget". This means that it needs to limit, and eventually end, the use of fossil fuels, including oil.

As a consequence, many barrels of oil will need to stay in the ground as "stranded assets". The volumes of oil that "cannot be used" by 2035 due to carbon restraints are projected at 500 billion to 600 billion barrels – roughly a third of today's proven reserves. Some studies suggest that up to 80% of coal, oil and gas reserves held by stock market listed companies cannot be burnt and should be written off.

Reacting on this, the global insurance companies Allianz and Axa already announced an end to investing in coal. Oil is likely to follow. With the global divestment movement gaining further traction, there will be additional impetus from civil society to abandon oil. This is why some observers have already called on established international oil companies "to sell their existing oil reserves as quickly as possible".

Ultimately, the future politics of oil present a fundamental and inescapable paradox. As ironic as it is, it is the very same climate change imperatives that are helping to stabilise America's oil industry in the short run while sounding its death knell in the long term. Going short on oil therefore makes both climatic and financial sense.

Andreas Goldthau is also Associate with Harvard's Belfer Center for Science and International Affairs and Fellow the Global Public Policy institute. This article benefited from funding from the People Programme (Marie Curie Actions) of the European Union's Seventh Framework Programme (FP7/2007–2013) under REA grant agreement n° PIOF–GA–2012–331962.

Benjamin Sovacool is also Professor of Social Sciences, Aarhus University in Denmark.
 The future does not bode well for global oil. This, however, is for reasons related to climate change, not because of tumbling prices. Andreas Goldthau, Professor in International Relations & Director, Centre of International Public Policy, Royal Holloway Benjamin Sovacool, Professor of Energy Policy, University of Sussex Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/53149 2016-01-14T13:01:51Z 2016-01-14T13:01:51Z Why the commodities crunch could hurt stability in Latin America

  shutterstock.com

Much of Latin America has seen an unusually long period of relative political stability since the early 2000s. With the exception of Cuba, democratically elected governments seem embedded throughout the region. The political rules of the game largely seem to be followed. Indeed, the international outcry following the 2009 coup that removed Honduras' president, Manuel Zelaya, served to reinforce how much Latin American politics had changed since the 1970s, when military dictatorships were the dominant form of government.

It is no accident that political stability has been accompanied by an extended period of high prices for the natural resources that Latin American countries export. The region has benefited from a prolonged surge in demand for its commodities from China and other large emerging markets.

This raises the question of whether this period of political stability, and commodity-led economic growth has changed Latin America fundamentally. Has political stability strengthened institutions and rule of law, for example? And has economic growth led to sustainable development and a reduction in the region's traditionally exceptionally high levels of inequality.

Certainly, commodity revenues have driven a drop in inequality. But it still remains high throughout the region. An important reason for this is that governments of all ideological persuasions have used windfall revenues to bolster welfare spending, particularly using conditional cash transfer schemes. These involve low-income families being given cash payments in return for meeting conditions such as sending their children to school or immunising them.

The commodity boom also coincided with a period of financial prudence. Both governments and – more importantly – international financial institutions, learned from debt crises and hyperinflation in the 1980s and 1990s. This means that Latin America was able to weather the global financial crises relatively robustly. Even countries with economies closely aligned to the US, such as Mexico, suffered only short-lived downturns.

Longstanding problems

The region does continue to grapple with longstanding problems, however. Relatively free and fair democratic elections may now be widespread, but there is little evidence of the institutions that are fundamental to stable democratic systems.

Stable political parties, for example, have been notably absent from much of Latin America. Instead, short-lived political movements are created around individuals. Moreover, judiciaries and police forces remain inefficient and often corrupt. Indeed, the rise of drug-related violence and organised crime in much of the region has exposed these challenges and meant that, despite economic growth, much of the region is more dangerous than in the past.

High commodity prices and buoyant economic growth were able to mask some of these challenges. After several years of boom, commodity revenues fed through into increased construction and consumer spending, a widespread increase in living standards and a decline in inequality. In oil-producing countries – notably Venezuela – high prices fuelled heavy spending on social programmes that guaranteed government support.

This might suggest that Latin America has suffered from a classic case of resource curse where a natural resource boom funds corrupt politicians and leads to profligate spending and irresponsible policy making. In many countries that suffer from the resource curse, enough natural resource wealth filters through to the wider population that the extent of politicians' negligence is not clear – particularly as the international community frequently lauds apparent economic success stories.

Boom and bust

The recent decline in commodity prices, however, is already beginning to expose issues of corruption and poor governance that have been simmering for a number of years. The Brazilian government, for example, has been badly undermined by a corruption scandal involving its state-controlled oil company Petrobras.

In Venezuela, the collapse of oil revenues following the death of its charismatic former president, Hugo Chavez, has exposed systematic government incompetence and abuse. In Peru, allegations of corruption against the current government and its predecessors are undermining public confidence in politics in the run-up to presidential elections later this year.

Latin America has seen commodity booms in the past. Invariably the collapse of commodity prices has led to serious economic crisis, which has undone any gains achieved, thanks to the short-termism of governments. There is a significant risk of this happening again, potentially exposing the fragility of state institutions.

Given that much of the region's population is now urban, a key to the region's outlook will be whether the decline in commodity revenues affects consumer spending in cities. This has already begun. And if it continues, the drop in domestic demand would likely lead to significant economic slowdown. In turn, this would likely lead to a significant and widespread backlash against corruption – as was seen last year in parts of Central America.

Neil Pyper does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 There could be trouble ahead. Neil Pyper, Associate Head of School, Coventry University Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/52585 2015-12-21T17:02:59Z 2015-12-21T17:02:59Z How plummeting prices are spurring reform in oil producing countries
It has been a turbulent year for oil. Prices were strong in summer 2014, before plummeting in the second half of that year. After a modest stabilisation in early 2015, they dropped even further and are now more than two thirds lower than in summer 2014 – as the graph below shows. It's bad news for oil producers but is forcing some, at least, to reform their economies as a result.

Russia is losing an estimated US$2 billion in revenues for every dollar fall in the oil price. Its economy is heavily dependent on energy revenues, which account for 50% of its federal budget revenues. Even a dramatic interest rate hike to 17% has not helped the steep devaluation of the ruble, the stock-market drop or the amount of money leaving the country.

The situation is even worse for the world's largest exporter of oil, Saudi Arabia, which is expected to end the year with a deficit of $150 billion – about 20% of its GDP and the largest in its history. It has already started cutting project budgets and military acquisitions as a result. It is even introducing VAT for the first time.

The severity of falling oil prices on Saudi Arabia's economy can also be seen in its decision to open its stock market to foreigners in June 2015. It has also relaxed rules to allow qualified investors direct access to stocks to reduce the economy's dependence on crude.

In Venezuela, the economy was already in a shambles when oil was at $120 a barrel. And in Malaysia the government is realigning its budget by removing gasoline and diesel subsidies. Similar steps were taken by governments across the world to remove oil subsidies – Indonesia abandoned a four-decade-old policy of subsidising gasoline while India also stopped subsidising diesel and raised fuel taxes.

Of course, falling oil prices are not bad for all. They increase households' scope for consumption and at the same time decrease companies' production and transportation costs, which normally leads to higher profits and increased investments. Rapidly developing economies such as China and India, which are net importers of oil, are experiencing the most obvious immediate benefits. They are able to use savings on oil imports to reduce their trade deficit, improve government budgets, reduce inflation and redistribute money to infrastructure projects.

 <img alt="" src="https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=349&fit=crop&dpr=1 600w, https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=349&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=349&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=439&fit=crop&dpr=1 754w, https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=439&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=439&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 Out of pocket: drivers in India will no longer benefit from government diesel subsidies. Steve/flickr, CC BY-NC-ND

Blessing in disguise

This is not the end of the rout. OPEC's commitment to glutting the market, along with the prospect of US and Iranian supplies joining it, has sparked predictions that prices could drop to $20 a barrel. OPEC recently raised its production ceiling to 31.5m from 30m barrels a day. Iran, meanwhile, is gearing up to pump an extra 500,000 barrels per day onto the market as soon as sanctions are eased, which could be within months. And the US Congress has just lifted the country's 40-year export ban.

Nations that are dependent on oil revenues will therefore require immediate economic and financial reforms in 2016 to balance their budgets. One method being adopted by many Islamic states is the issuing of sharia law-approved bonds, known as sukuk. These bonds can be used to finance big projects such as the building of important infrastructure, including airports, and developing other natural resources.

Malaysia has been leading the way on this, banking on its burgeoning Islamic finance industry to reduce its oil earnings shortfall. It is planning to sell $1 billion to $1.5 billion of sovereign credit in 2016 on top of global Islamic bonds this year.

The Saudi Arabian government is similarly depending on both conventional sovereign bonds and sukuk to finance its budget deficit. In 2015, the kingdom issued sovereign bonds worth around 100 billion riyals ($26.5 billion) to ease the shortfall. It's all part of a $130 billion spending plan to diversify its economy away from oil. But to increase its share of the Islamic finance market, it will need to follow Malaysia's lead in making the regulations clear for trading sukuk.

Many more oil exporters are turning to sukuk bonds to cover their deficits, including Bahrain, Oman, Qatar and Nigeria, Africa's largest oil producer. The sukuk bond market is forecast to grow by 15% in 2016 as a result.

The emergence of sukuk has been a significant development in Islamic capital markets for many oil rich nations in the Middle East and South East Asia. Funds raised through sukuk can be allocated in an efficient and transparent way. Sukuk issuance has proven its resilience during recent periods of turbulence in global capital markets and it is showing its potential to act as a cushion for falling oil prices for oil rich countries.

Nafis Alam does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 Oil exporters have had a tough year ... but there is hope for economic reform via the Islamic bond market. Nafis Alam, Associate Professor of Finance, Director- Centre for Islamic Business and Finance Research (CIBFR), University of Nottingham Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/46694 2015-10-13T04:21:20Z 2015-10-13T04:21:20Z What Nigeria can do to weather low oil prices and slow economic growth

A billboard campaigning against crude oil theft. Nigeria is under pressure from falling oil prices and China's economic slowdown.  Reuters/Akintunde Akinleye

Ever since Nigeria started harvesting its petroleum endowment, its economy's umbilical cord has avoidably been firmly tied to the volatility of this commodity's price.

This vulnerability is demonstrably reflected in that about 65% to 70% of annual government expenditure comes from oil revenues. Historically, it's been as high as 90%. And every downturn in global oil prices has curiously hit Nigeria like a predictably repeated below-the-belt punch.

Most would have thought that any well-meaning national leadership would by now have long found a way of dealing with such a well-understood problem, which often bears huge consequences. These include regressive austerity policies, deferral of vital investment projects, a decline in economic growth and an increase in unemployment.

Nigeria's pace of economic growth is forecast to slow to 2.63% in 2015, more than half the 2014 rate. The official unemployment rate has stagnated at around 8%, while fiscal deficit has grown from 0.1 to about 3.0 as a percentage of GDP.

There is also intense devaluation pressure on the currency. International investors are also pulling away from Nigeria alongside the delisting of its sovereign bond from JP Morgan's Government Bond Index-Emerging Markets.

For the umpteenth time, the question is: how should Nigeria weather yet another episode of oil price shock? This time it's likely to be worsened by two events of significant global effect. Those are the slowdown in China's economic growth and the likely interest rates hike by the US.

Interestingly, the US' discovery of less expensive ways of extracting oil and gas from formerly inaccessible parts, which triggered the current glut in global oil supply, is unlikely to reverse trend any time soon. And Europe is still mired in the Greek debt matter and Russia's apparent aggression. These events also have global economic impacts.

The slowdown in China would cause a huge decline in demand for oil and other commodities. And the tapering off or reversal of quantitative easing, by way of interest rates hike by the US central bank, would mean shortage of internationally supplied funds to developing countries.

Such funds had in the recent past aided investment activity in many promising, developing countries – including Nigeria. Now the cost of external funds would, no doubt, increase and put pressure on the external debt bills of these countries. This would in turn beget further cutback in investment activity.

Immediate-term effects

Nigeria should see this as an opportunity to truly restructure its economy and society. This should be viewed as a blessing in disguise that presents an opportunity to fine-tune, if not relaunch, the economy.

Nigeria's immediate past finance minister, Ngozi Okonjo-Iweala, had some sensible ideas on how to counter this accelerating economic headwind:

the initiation of a higher surcharge on luxury imports – private jets, boats and ski gears, SUVs and the like; and

extending tax collection to formerly untaxed groups in the informal sector and under-taxed multinational firms.

These quick steps would yield immediate increase in fiscal resources.

Another low-hanging fruit is the scrapping of the corruption-ridden petroleum subsidy. This is believed to cost billions of US dollars annually.

This season of low expenditure expectations, low oil prices and that most Nigerians do not own cars make this a most opportune time to act. This removal should be accompanied by a corresponding spending on mass public transportation – buses, trains and ferryboats – roads, railways and waterways infrastructure.

Fight corruption

President Muhammadu Buhari's government should focus on stopping state corruption that diverts contract and salary payments, and delays continuation of vital infrastructure projects. It should take these steps transparently, within the law and without impunity.

As the source of the problem, the oil industry also can help counter the current downturn. The commodities sectors of many African countries are notorious as the biggest source of illicit financial outflows from Africa, with Nigeria a prominent poster-boy. In Nigeria this sector is subject to state capture. Abuse by powerful cartels and the game-playing with the Petroleum Industry Bill could mean that the sector will keep on haemorrhaging stupendous amount of resources.

A less market-determined way of providing for infrastructure projects on course is the use of bilateral arrangement to barter oil for technical and/or construction assistance. In addition to ensuring the supply of vital infrastructure, this kind of astutely negotiated bilateral exchange would also minimise graft by tying oil harvest to identifiable project deliveries.

 <img alt="" src="https://images.theconversation.com/files/97744/original/image-20151008-9685-juqqdo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/97744/original/image-20151008-9685-juqqdo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/97744/original/image-20151008-9685-juqqdo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/97744/original/image-20151008-9685-juqqdo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/97744/original/image-20151008-9685-juqqdo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/97744/original/image-20151008-9685-juqqdo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/97744/original/image-20151008-9685-juqqdo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 One of the major tasks Muhammadu Buhari has is to fight against corruption. Reuters/Afolabi Sotunde

Leave the currency

The temptation to devalue the currency for an immediate counter effect is as ill-advised as adding fuel to a burning house. The same can be said of adopting austerity policies, whose effects are usually regressive and felt over a longer period.

Nigeria hardly exports any manufactured good, so it needs not devalue its currency to make its trading partners demand more of its exports. Besides, its commodity exports are invoiced in US dollars.

Devaluation would simply increase the local currency cost of production of businesses that use imported inputs. It could stoke the fires of inflation and entice a lazy government into "inflation funding" its fiscal deficit. Nigeria can manage the cost of defending its currency by outlawing importation of luxury products and thus reduce demand for foreign exchange.

The good that could come from this seeming "bad movie re-run" will be found in responses whose outcomes are likely to arrive in the long run and be long-lasting. Such responses can be viewed as all restructuring that effectively diversifies the Nigerian economy. Importantly, restructuring must root out unorganised and production-stifling corruption.

Likely resolution

Building and entrenchment of institutions, and repositioning of education to produce human resources necessary for scaling up Nigeria's productive capabilities for efficient production and competitiveness would also yield welcome long-term outcomes. But these may never take hold or be sustainable unless Nigeria addresses its flawed political arrangement, which fosters social conflict and destructive corruption.

The current administration seems to be focused on fighting proximate corruption. Unfortunately this does not address the root cause of the most destructive kind of corruption that is truly bedevilling Nigeria.

Also, not to have formed a government or articulated an economic roadmap six months after winning a national election leaves most – within the country and in the wider global community – unimpressed and disturbed. This problem needs urgent attention.

Kalu Ojah does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 How should Nigeria weather yet another episode of oil price shock? This time it's likely to be worsened by two events of significant global effect. Kalu Ojah, Professor of Finance, Wits Business School, University of the Witwatersrand Licensed as Creative Commons – attribution, no derivatives. tag:theconversation.com,2011:article/45198 2015-08-18T10:06:43Z 2015-08-18T10:06:43Z Does selling oil from the Strategic Petroleum Reserve make sense now?

Stored underground: a strategic reserve, or source of funds? US Department of Energy

Some members of Congress have proposed a novel way to fund the country's Highway Trust Fund: tapping the Strategic Petroleum Reserve (SPR). One proposal put forward in the US Senate would sell 101 million barrels of crude oil held in the SPR to raise US$9 billion to extend the trust fund three years. The sale would take place over the 2018-2025 period.

The reserve has been tapped before, but this proposal comes during a surge in domestic oil production in the US and the lowest oil prices in six years.

To get a handle on what using oil from the SPR could mean, we first need to understand what it is, what it is not, and how we should decide whether it's wise to sell proceeds to fund highway projects.

Salt dome caverns

First, and briefly, what the SPR is not.

In the early 1900s, the federal government created the Naval Petroleum and Oil Shale Reserve (NPOSR) to provide oil supply security for the US Navy, whose ships were moving in the direction of being largely oil-powered. There is also the National Petroleum Reserve-Alaska (NPR-A) but none of the NPR or NPR-A is or was part of the SPR.

The SPR, on the other hand, is not one single reserve but a series of salt dome caverns that hold inventories of produced crude oil. It is being stored specifically for emergency use to address significant crude oil supply interruptions.

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 A view of one of the underground caverns in Louisiana and Texas that stores oil from the strategic reserve. US Department of Energy

The SPR was created in 1975 in response to the oil embargo of 1973-74 orchestrated by the Organization of Petroleum Exporting Countries (OPEC), and it grew out of the Energy Policy and Conservation Act of 1975. The SPR consists of 62 underground salt dome caverns distributed across Louisiana and Texas. These are linked to several pipelines that can deliver oil to Gulf Coast refineries and beyond. In addition, the SPR has access to port facilities to deliver crude, which came from both domestic and foreign sources, to refineries on the East Coast and the West Coast via marine transport.

Volumes were significantly increased during the Reagan administration, from 270 million barrels to nearly 590 million, according to the US Energy Information Administration (EIA). The level was relatively stable until 2001, when George W Bush decided to increase the SPR to its capacity. Between entering and leaving office, the Bush administration took the SPR level from 540 million to 726 million barrels.

The maximum level of inventories was 727 million barrels, which was still short of the one billion barrels of authorized capacity. As of July 17 2015, the SPR contained more than 695 barrels of crude oil.

Role of oil prices

Net imports are defined as the difference between our imports and exports of crude oil and refined oil products. Our net imports have trended down over the past five years, from over 10 million barrels per day in 2010 to 4.6 million barrels per day on average for May 2015.

The US has an obligation through its participation in the International Energy Agency (IEA) to maintain 90 days of strategic reserves based on net imports (the IEA was founded in 1974, also in response to the OPEC oil embargo). The current storage level and the net imports for 2014 imply that the SPR currently provides 138 days of supply in the event of a disruption.

Based on these figures, there does seem to be sufficient volumes in storage to accommodate a 101 million barrel sale and still have a 90-day buffer. But should our discussion stop with simple volumetric comparisons?

The rules governing the sale and distribution of crude oil from the SPR, however, do not actually allow for such a sale. The crude oil in the SPR is only to be sold and distributed in response to a significant interruption in the flow of crude oil. The intent is to avoid a severe domestic fuel price increase in response to such an interruption.

According to its mandate, the SPR is not to be used to attempt to manipulate prices. It is meant to meet emergency supply shortfalls.

The currently proposed sale does not seem to meet these requirements. Rather, it appears to be a political decision to avoid the need to cut expenditures in other programs or to raise new revenues, perhaps through an increase in the federal fuel tax, to meet the needs of the highway trust fund. Indeed, historically it is the federal fuel tax that has provided the revenue support mechanism for the federal highway trust fund.

Will it fit the bill?

So far in its history, there have been six sales from the SPR. Five of these were either to meet an emergency crude oil supply interruption or to test the delivery system. The one non-emergency sale was in 1996-97 during the Clinton administration. It has been suggested that this was an effort to have an impact on gasoline prices in an election year; the release was 28 million barrels.

But if the proposed SPR sale does go forward, what is the likelihood that it will actually raise the $9 billion in revenue sought? At current prices, 101 million barrels, if sold all at once, would raise roughly $4.3 billion. The proponents assume an average price over the 2018-2015 period of about $89 per barrel.

 <img alt="" src="https://images.theconversation.com/files/91673/original/image-20150812-18068-14kutk0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/91673/original/image-20150812-18068-14kutk0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=480&fit=crop&dpr=1 600w, https://images.theconversation.com/files/91673/original/image-20150812-18068-14kutk0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=480&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/91673/original/image-20150812-18068-14kutk0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=480&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/91673/original/image-20150812-18068-14kutk0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=603&fit=crop&dpr=1 754w, https://images.theconversation.com/files/91673/original/image-20150812-18068-14kutk0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=603&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/91673/original/image-20150812-18068-14kutk0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=603&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
 An aerial view of three DOE tanks near a refinery in Nederland, Texas. US Department of Energy

To put this value in context, the current forward curve in the NYMEX futures market for West Texas Intermediate (WTI) crude oil extends only to December of 2023, and on a rising price curve reaches just $64.73; the average price over the 2018-2023 period is about $65 per barrel. So there appears to be a substantial gap between what the proposed sale is meant to generate and what the market sees as a likely price at the time of this writing.

While selling 101 million barrels from the currently held volumes would leave the US well above its IEA obligation, an important question is whether this is an appropriate use of this strategic national asset designed as an important source of US national energy security.

US Senator Murkowski (Alaska), chairperson of the Senate Energy and Natural Resources Committee, has taken a strong stand against the proposal. One key aspect of the senator's argument is that the Department of Energy has only recently begun an analysis of the role of the SPR in providing for energy security for the US in a world that is much different than the one that existed in the 1970s, when the SPR was created.

User pays

An alternative to selling off SPR barrels to raise $9 billion would instead be to increase the federal fuel tax.

Over the past five years, our gasoline consumption has averaged 8.88 million barrels per day (mmbd), which translates to about 130,000 million gallons per year. The EIA has forecast that gasoline consumption will fall from 8.7 mmbd in 2013 to 6.7 mmbd in 2040 because of improving fuel efficiency mandates and other reasons. If we take a seven mmbd value to be representative of what the average may be during the 2018-2025 period, the $9 billion could be raised over the same time period by increasing the gasoline tax by just $0.01 per gallon.

This seems a pretty modest amount to help pay for our federal highway system maintenance in what amounts to a user-pays approach. This $0.01 per gallon is also conservative (in that it is relatively high) because it does not include revenues that would be generated from increased tax on highway diesel fuel sales.

It seems that to sell SPR volumes is simply to postpone the inevitable. Since we have obligations to our IEA partners to maintain strategic reserves, at some point in the future we will have to bite the bullet and fund our highways with revenue generation that does not draw on the SPR.

Also, if we start down this path, where and when will it end?

At current crude oil prices, the sale of 101 million barrels will fall far short of the "required" $9 billion. So do we then return to the SPR for more barrels until we get to the $9 billion? And if using revenues from sales of our strategic energy security supply for highway maintenance seems a good idea, why not sell off more of the inventories to fund schools or airports, or any of myriad other non-energy security government programs in need of funding? This just seems like a bad idea.

If the studies now under way to reassess the role of the SPR find that the required level of storage can be less than we now hold, any revenues generated from selling such excess should first be used to address identified energy security infrastructure investments. We need to ensure the remaining SPR volumes can actually get into the supply system across the country and provide effective protection from severe interruptions – as the SPR was established to do.

Ronald Ripple does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
 It's been done before but tapping the Strategic Petroleum Reserve – particularly when prices for oil are low – isn't the best way to fund the Highway Trust Fund. Ronald Ripple, Mervin Bovaird Professor of Energy Business and Finance, University of Tulsa Licensed as Creative Commons – attribution, no derivatives.