The global economy depends on oil as the human body on blood. It is because oil is the major source of energy to drive the wheels of production across the globe. Interestingly, it is the converging point of economics and politics. That is why it is sold in a world market in which every barrel, regardless of its source, competes with every other barrel. The United States, with about 5 per cent of the world’s population, is responsible for 25% of the world’s oil consumption. Every US President since Richard Nixon has openly expressed his fears about dwindling oil reserves predicting problems. Saudi Arabia, termed the world’s oil superpower, possesses both the world’s largest known oil reserves, which are 25 per cent of the world’s proven reserves, and produces the largest amount of the world’s oil. It ranks as the largest exporter of petroleum, and plays a leading role in OPEC; its decisions to raise or cut production almost immediately impact world oil prices. The country is capable of producing up to 12 million barrels of oil a day.
Price
Petroleum politics have been an increasingly important aspect of since the rise of the industry in the in the early 20th century. As competition grows for an increasingly scarce but vital resource, the strategic calculations of major and minor countries alike place more prominent emphasis on pumping, refining, transport and use of petroleum products. The oil price hit $101.08 (Brent crude) a barrel in February, 2011 the highest since October 2008 (In June 2008, they were jogging around $147 a barrel). In June, 2011 they fell to $90 a barrel amid fears of supply disruption due to the closure of Suez canal and Egypt unrest but it has again crossed 2011 benchmark of $101.08 as the current price is hanging at about $101.93.
Oil-weather forecast
Goldman Sachs Group Inc. has, in a recent report, said that oil supplies would become “critically tight” in 2012. Analysts of the group predict that could go even higher as spare production capacity and inventories are “effectively exhausted.” Goldman has also shared apprehension on the ability of Saudi Arabia to raise oil production in the face of eventual scarcity as it believes that Saudi Arabia won’t be able to pump as much extra oil as many people believe. On a scary note, the scarcity could occur as early as later this year. It is evident that under normal circumstances, the oil prices will remain stable at $100 plus level.
Diminished global growth and the possibility of a double-dip recession in the euro zone are widely predicted to push the price of oil below $100 a barrel at least in the first half of this year, with prices possibly rebounding later in the year alongside a recovering world economy and underlying supply risks. A Reuters poll of analysts predicted Brent crude to average $105 a barrel, not far below the $111 average of last year. Last year, the price of Brent crude rose to $140 a barrel as Europe was deprived of Libya’s exports during the civil war that ended Muammar Qaddafi’s rule, and the Arab Spring added a hefty risk premium to oil prices.
Iran escalations
This year, Iran’s sabre-rattling signals some potential to create a situation similar to Libyan embargo. In the unlikely event that it carried out its threat to block the Strait of Hormuz, choking off 40 per cent of the world’s maritime crude flow, prices would probably spiral out of control. Iranian authorities have already warned that in case of Iran US conflict, the oil prices may sky rocket to $200 or above. The subsequent lack of export options would deprive Gulf producers of the means to exploit any gains and would be likely to send the world economy into recession, undermining the long-term oil price outlook.
Analysts think that Iran will be the big loser among the major oil producers in 2012, as its intransigence over its nuclear programme led to a fourth round of sanctions by the US and Europe. As it becomes increasingly hard for international oil companies to operate in the country, and Iran finds it more difficult to get access to modern technology to rejuvenate its ailing production infrastructure, output is forecast to drop. The International Energy Agency says Iran’s oil production could be cut by as much as 890,000 bpd to just under 3 million bpd by 2016. In the near term, the EU may impose an embargo on nearly 600,000 barrels per day of Iranian crude imports
Oil-based Middle East economies
Economies in the Gulf should continue to benefit from healthy income from their crude trade. The Institute of International Finance predicts revenue from hydrocarbon export will hit US$725 billion (Dh2.66 trillion), down only slightly from last year. A large proportion of this income would feed into the domestic economies, as regional governments have initiated huge infrastructure programmes and public-sector pay increases in response to the Arab Spring. Nevertheless, many analysts believe an average GDP growth of 7 percent in the GCC will not be repeated this year. “While sustained fiscal stimulus will continue to bolster non-oil sectors, a weaker global environment and reduced contribution from oil sectors will see growth dip to 3.7 percent in 2012,” says a report by the Saudi American Bank.
Saudi Arabia doubly profited from the shock to the oil markets caused by the Arab Spring and the outage of Libyan crude. It increased production to make up the Libyan deficit, and has profited from prices kept well above the US$100 a barrel mark for most of the year due to geopolitical uncertainty and continued demand from the Asian growth markets. The kingdom’s production peaked at a 30-year record in November, and is set to remain high this year after Opec amended its production ceiling. The government has launched a US$385 billion (Dh1.41 trillion) infrastructure programme, in part to address the root causes of regional social unrest. Abu Dhabi, the UAE’s hydrocarbon powerhouse, should continue to earn handsomely from its exports in 2012. Efforts to increase production capacity to 3.5 million barrels per day by 2018 are likely to start bearing fruit and could help offset a decline in oil prices if the global economy contracts.
No other country will see economic growth driven up by oil more than Iraq this year. The country’s GDP will grow by 8.4 percent this year, the biggest growth in the region, according to estimates by the Institute for International Finance. Devoid of significant hydrocarbon revenues and stripped of its business-friendly tag by unrest last year, Bahrain’s outlook for 2012 is the least optimistic of the Gulf countries. The Institute of International Finance nevertheless estimates growth will stand at 3.3 percent this year. Bahrain will benefit from a US$10 billion (Dh36.72bn) injection coming from a fund established by the GCC in the aftermath of the region’s tumultuous spring, and assistance from neighbouring Saudi Arabia. Kuwait should experience strong GDP growth on the back of its oil production, which peaked at 3 million barrels a day last year. Despite expectations that crude prices will decline this year on the back of the continued economic woes of the euro zone and the US, economists predict oil will help Kuwait’s GDP hit a growth rate of 4.4 percent.
Oman managed to overcome the turbulence of the Arab Spring and end the year with a healthy fiscal surplus, which Saudi American Bank estimates at about 10 percent of GDP. However, the high level of 10 percent growth is impossible to be continued this year. Qatar enters the new year on the back of a huge growth in gas exports. Its GDP growth is likely to remain at about 8 percent as the government steps up infrastructure spending.
Europe
The continued struggle by Europe and the US to shrug off the malaise from the financial crisis of 2008 is likely to restrict growth – even in the buoyant Asian economies that supported high oil prices last year. “Europe has now entered another recession, only a little more than two years after the last recession ended,” says Joachim Fels, an analyst at Morgan Stanley, in a research note. “Our US base case remains anaemic growth of just over 2 percent next year. Unsurprisingly against this backdrop, growth prospects for emerging-market economies have dimmed further.”
Bottom-line
The significance of oil in global economy can be testified from a June 2006 speech of former U.S. president who said, “We may be at a point of peak oil production. You may see $100 a barrel oil in the next two or three years, but what still is driving this globalization is the idea that is you cannot possibly get rich, stay rich and get richer if you don’t release more greenhouse gases into the atmosphere. That was true in the industrial era; it is simply factually not true. What is true is that the old energy economy is well organized, financed and connected politically.” However, the extracts of 1999 speech of , the US Vice President and former CEO of (one of the world’s largest energy services corporations), carries much political motivation than Clinton.
He said, “By some estimates there will be an average of two per cent annual growth in global oil demand over the years ahead along with conservatively a three per cent natural decline in production from existing reserves. That means by 2010 we will need on the order of an additional fifty million barrels a day. So where is the oil going to come from?….While many regions of the world offer great oil opportunities, the Middle East with two thirds of the world’s oil and the lowest cost, is still where the prize ultimately lies, even though companies are anxious for greater access there, progress continues to be slow.”
