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Is US the new swing producer of Oil/ Crude Realities: A Rift fueled by Oil?

Osama Rizvi

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Have you ever noticed that The United States of America, the police-man of the world, also knows how to make the best burger (McDonalds), pizza ( Pizza hut) ,Chips and Beverages (Pepsi Co) in the world. If that is not enough then the most effective, powerful and smart weapons are also forged inside the Military Industrial Complex of USA. Now, it turns out that a commodity, on which for years the Middle-East and especially the Saudi monarchy have been exercising a clout, seems to shift its axis of power, veering towards another continent i.e. North America.

In 1973 the West witnessed the power wielded by Saudi Arabia they realized how the kingdom, like a ventriloquist, commands the black gold. The camaraderie betwixt West and OPEC suffered an awakening jolt and very painfully the fact was made evident on the Consumers of Energy that the friends donned in Thobes are whimsical and as well as aggressive. But it is in the very fabric of history to play with the balance of power. Things are changing now. Crude oil, inter alia, has become a commodity guided by markets. Even a news of liminal nature appertaining demand/supply gets a response in shape of a major shift in prices and sentiments [also vice-versa]. The markets are now driven by comments peddled by energy ministers, company announcements and government communiques. With all the katzenjammer in the energy industry of-late a question has been baking enough that now the billowing smoke from it is reaching analysts and markets: Will US take over Saudi Arabia as a swing producer?

The enquiry begs a little context here: The vantage point KSA stands upon is the low production cost of drilling a barrel of oil as compared to the one drilled in North Sea or US. According to the Wall Street Journal (WSJ) the Saudi’s can pump oil at $8 a barrel whereas US’s cost rise up to $23 a barrel. But it is also pertinent to note that the production costs in US have been on a gradual decline. During the recent resuscitation of oil prices many of the companies brought back their drilling gear into the field when prices broke the psychological mark of $50 whereas others balked deeming this rally an illusion. In US, what is called the shale boom, has filled the coffers of the government with shale oil. The proliferation and improvement in technology, such as fracking, has given the US producers an advantage, and by the virtue of that a position, which its Oriental rivals couldn’t have thought few years back. They now have the ability to flex production up and down with more discretion than ever. Take for example the case of drilling costs. In year 2013 US shale producers needed oil prices at $83 to economically operate a drill. In 2015-16 the rig can be operated at $39 as Mr. Nyvseen of Rystad Energy, a consultancy company, points out. Wood Mackenzie, another consultancy company, conducted a study in 2016 February and found that the energy costs in US will continue to tread downwards in the future. The Saudi strategy of keeping out the high-cost producers seems to go awry and US has accepted the gauntlet with arms wide open.

So, the air is thick now with whispers that the West has thrown a noose on its Middle-eastern counter-parts as day by day as the cost of digging up a barrel of oil in the West starts to reach nigh that of in the Middle-East. US has also lifted up the 40 year old ban on its oil exports in an effort to tap markets. Few months back Financial-Times reported that Saudi Arabia has lost its market share and that out of 10million barrels produced it only exported 7 million. Few weeks’ back Rystad Energy reported that US now holds the greatest number of reserves i.e. 264 billion of oil surpassing Saudi Arabia, Venezuela and Russia. According to different analysts, that I have talked to over internet, the vox-populi seems be that OPEC and especially KSA has lost its power subsequently the title of swing producer of the oil industry.

The thawing between US-Iran relationships is another angst for the kingdom. Notwithstanding its incessant grumbling, US had successfully completed the nuclear-deal last year with Iran. This means the lifting of sanction (gradually) from the Shia dominant country liquidating their frozen assets subsequently being used to fund Hezbollah and Houthi militants in Yemen as per Saudi Arabia. Russia on the other hand is using the “funneling” technique by bombing militants in Syria and funneling them to south. Iran unlike other OPEC countries has been successful at wringing their oil wells and increasing their production to pre-sanction level another additament to the pantheon of worries for KSA.

KSA itself seems to be aware of the fact. Hence, the endeavors of the young and ambitious scion working 18 hours a day and taking charge of the bridles of the kingdoms political and economic machinery. Mr. Everything, as he is called in West, Deputy Crown Prince Muhammad Bin Salman is changing the whole economic outlook of the kingdom first by introducing, what has been called, a plan to wean KSA of oil- Saudi Vision 2030.

In the end I would like to quote David Sanger, Chief Washington correspondent of The New York Times, he writes: “increased US oil and shale extraction and production have fractured the mutual dependency that was once a key part of the US-Saudi alliance.” By utterly concurring to his viewpoint I still opt a cautious tone by saying that the US-Saudi alliance may have not reached to the point of collapse but the chasm between 70 years old allies is, certainly, widening.

Independent Economic Analyst, Writer and Editor. Contributes columns to different newspapers. He is a columnist for Oilprice.com, where he analyzes Crude Oil and markets. Also a sub-editor of an online business magazine and a Guest Editor in Modern Diplomacy. His interests range from Economic history to Classical literature.

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Five Reasons Why Countries in the Arabian Gulf are Turning to Renewables

MD Staff

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photo: IRENA

As global leaders look to renewables as a way address the growing and multi-dimensional threat of climate change, traditional energy countries in the Gulf Cooperation Council (GCC) are embracing renewables faster than ever before. Led by efforts in the United Arab Emirates and Saudi Arabia, the GCC has become crucial to global efforts in support of the energy transformation.

As the IRENA Director-General Francesco La Camera said recently at the International Energy Forum in Riyadh, Saudi Arabia: “It is perfectly possible to generate sufficient cheap, reliable energy from renewable sources. Not only is it possible, but it is also our best option, as it would bring higher socio-economic benefits than business as usual, and it would allow us to effectively address climate change.”

For the Gulf, renewables bolster energy security and support economic diversification whilst offering nations rich in renewable energy resources, an opportunity to explore their full economic potential. They also offer a second chance at energy leadership. Today, much of the global cost reductions witnessed in renewables have come from the Gulf. And by driving down the price of renewables and investing abroad, the Gulf is also shaping the energy transformation in other regions.

Here are five reasons why GCC countries are turning to renewables:

Renewables are the most practical and readily available climate solution

According to an IRENA analysis, the accelerated deployment of renewable energy in the GCC region can reduce emissions of C02 by 136 million tonnes. As nations are being urged to step up their renewable energy targets to keep the world well below 2° Celsius of warming, the UAE has more than doubled its existing pledge, committing to 50 per cent clean energy by 2050 at the UN Climate Action Summit in New York, resulting in even more C02 reductions than predicted.

Renewable energy is the most competitive form of power generation in the region

The business case for renewables is a central motivating factor for the Gulf’s transition towards renewables. Today, renewable energy is the most cost-competitive source of new power generation in the GCC, replacing traditional energy sources as the answer to the region’s fast-growing domestic energy demand. Recently, the 900 megawatt (MW) fifth phase of the Mohammed Bin Rashid Al Maktoum Solar Park in the UAE received one of the lowest bids for a solar PV project in the world at 1.7 cents per kilowatt hour (kWh).

Renewable energy creates jobs

Long-term policy objectives seen in the GCC region, including private enterprise, education, training and investment in local skills and human resources, can facilitate the rise in the number of jobs in the renewable energy sector. IRENA’s data suggests that renewable energy can create more than 207,000 jobs in the region by 2030 with solar technologies accounting for 89 per cent of them. The proliferation of rooftop solutions alone could employ 23,000 people by 2030 in the region.

The GCC region is endowed with considerable renewable energy potential – and not just solar

The suitability analysis for solar PV technology in the GCC reveals strong potential for deployment in all GCC countries, with Oman, Saudi Arabia, and UAE as leaders. Furthermore, areas in Kuwait, Oman and Saudi Arabia also boast good wind resources. Technologies such as biomass and geothermal power may hold additional potential but remain underexplored. According to IRENA analysis, based on targets in 2018, which, if met, could result in about 72 GW of renewable energy capacity in GCC by 2030.

Renewables save water

Water scarcity is an acute challenge in the region, with four of the six GCC countries ranking within the top 10 most water challenged on earth according to the World Resources Institute. And with one of the fastest-growing populations in the world, the region’s demand for water is expected to increase fivefold by 2050. If the GCC countries were to realise their renewable energy targets, this would lead to an estimated overall reduction of 17% and 12% in water withdrawal and consumption, respectively, in the power sectors of the region. Much of this reduction would be in Saudi Arabia and UAE, due to their plans to add significant shares of renewable energy in the power sector.

IRENA

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“Oil for development” budget, challenges and opportunities

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Iran has recently announced that its next fiscal year’s budget is going to be set with less reliance on oil revenues.

Last week, Head of the Country’s Budget and Planning Organization (BPO) Mohammad Baqer Nobakht said “In the next year’s budget – it starts on March 19, 2020 – oil revenues will be only spent for development projects and acquisition of capital asset, and not even one rial is going to go to government expenditures and other areas.”

At first glance, the idea is very appealing and it seems if the government manages to pull it off, it will be a significant step for Iran in its movement toward an oil-independent economy. However, it seems that cutting oil revenues from the budget and allocating them only to a specific part of the country’s expenditures is not going to be an easy task.

Although, BPO has already suggested various substitute sources of revenue to replace those of oil, some experts believe that the offered alternatives are not practical in the short-term.

So, how successful will the government be in executing this plan? What are the challenges in the way of this program? What are the chances for it to become fully practical next year?

To answer such questions and to have a clearer idea of the notion, let’s take a more detailed look into this [so called] ambitious program. 

The history of “oil for development”

It is not the first time that such a program is being offered in Iran. Removing oil revenues from the budget and allocating it to development projects goes way back in Iran’s modern history.

In 1927, the Iranian government at the time, decided to go through with a plan for removing oil revenues from the budget, so a bill was approved based on which oil incomes were merely allocated to the country’s development projects.

This law was executed until the year 1939 in which the plan was once again overruled due to what was claimed to be “financial difficulties”.

Since then up until recently, Iran has been heavily reliant on its oil revenues for managing the country’s expenses. However, in the past few years, and in the face of the U.S. sanctions, the issue of oil being used as a political weapon, made the Iranian authorities to, once again, think about reducing the country’s reliance on oil revenues.

In the past few years, Iran’s Supreme Leader Ayatollah Seyed Ali Khamenei has repeatedly emphasized the need for reducing reliance on oil and has tasked the government to find ways to move toward an oil-independent economy.

Now that Iran has once again decided to try the “oil for development” plan, the question is, what can be changed in a program that was aborted 80 years ago to make it more compatible with the country’s current economic needs and conditions.

The substitute sources of income

Shortly after BPO announced its decision for cutting the oil revenues from the next year’s budget, the Head of the organization Mohammad-Baqer Nobakht listed three alternative sources of income to offset oil revenues in the budget planning.

According to the official, elimination of hidden energy subsidies, using government assets to generate revenue and increasing tax incomes would be the main sources of revenues to compensate for the cut oil incomes.

In theory, the mentioned replacements for oil revenues, not only can generate a significant amount of income, but they could, in fact, be huge contributors to the stability of the country’s economy in the long run. 

For instance, considering the energy subsidies, it is obvious that allocating huge amounts of energy and fuel subsidies is not a good strategy to follow.

In 2018, Iran ranked first among the world’s top countries in terms of the number of subsidies which is allocated to energy consumption with $69 billion of subsidies allocated for various types of energy consumption including oil, natural gas, and electricity.

Based on data from the International Energy Agency (IEA), the total amount of allocated subsidies in Iran equals 15 percent of the country’s total GDP.

The budget that is allocated for subsidies every year could be spent in a variety of more purposeful, more fruitful areas. The country’s industry should compete in order to grow, people must learn to use more wisely and to protect the environment.

However, practically speaking, all the above-mentioned alternatives are in fact long term programs that take time to become fully operational. A huge step like eliminating hidden subsidiaries cannot be taken over a one or event two-year period.

The development aspect

One big aspect of the government’s current decision is the “development” part of the equation.

A big chunk of the country’s revenues is going to be spent on this part and so the government is obliged to make sure to choose such “development” projects very wisely.

Deciding to allocate a huge part of the country’s income on a specific sector, makes it more prone to corruption, and therefore, a plan which is aimed to help the country’s economy could become a deteriorating factor in itself if not wisely executed.

The question here is, “Is the government going to spend oil money on all the projects which are labeled as ‘development’ even if they lack the technical, economic and environmental justification?”

So, the government needs to screen development projects meticulously and eliminate the less vital ones and then plan according to the remaining truly-important projects.

Final thoughts

Even if the “oil-free” budget is a notion that seems a little ambitious at the moment, and even if there are great challenges in the way of its realization, but the decision itself is a huge step toward a better future for Iran’s economy. Although realizing this plan seems fairly impossible in the short-term, it surely can be realized with proper planning and consideration in the long term.

Sooner or later Iran has to cut off the ties of reliance on oil incomes and start moving toward a vibrant, dynamic and oil-free economy; a journey of which the first step has been already taken.

From our partner Tehran Times

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Growing preference for SUVs challenges emissions reductions in passenger car market

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Authors: Laura Cozzi and Apostolos Petropoulos*

With major automakers announcing new electric car models at a regular pace, there has been growing interest in recent years about the impact of electric vehicles on the overall car market, as well as global oil demand, carbon emissions, and air pollution.

Carmakers plan more than 350 electric models by 2025, mostly small-to-medium variants. Plans from the top 20 car manufacturers suggest a tenfold increase in annual electric car sales, to 20 million vehicles a year by 2030, from 2 million in 2018. Starting from a low base, less than 0.5% of the total car stock, this growth in electric vehicles means that nearly 7% of the car fleet will be electric by 2030.

Meanwhile, the conventional car market has been showing signs of fatigue, with sales declining in 2018 and 2019, due to slowing economies. Global sales of internal combustion engine (ICE) cars fell by around 2% to under 87 million in 2018, the first drop since the 2008 recession. Data for 2019 points to a continuation of this trend, led by China, where sales in the first half of the year fell nearly 14%, and India where they declined by 10%.

These trends have created a narrative of an imminent peak in passenger car oil demand, and related CO2 emissions, and the beginning of the end for the “ICE age.” As passenger cars consume nearly one-quarter of global oil demand today, does this signal the approaching erosion of a pillar of global oil consumption?

A more silent structural change may put this conclusion into question: consumers are buying ever larger and less fuel-efficient cars, known as Sport Utility Vehicles (SUVs).

This dramatic shift towards bigger and heavier cars has led to a doubling of the share of SUVs over the last decade. As a result, there are now over 200 million SUVs around the world, up from about 35 million in 2010, accounting for 60% of the increase in the global car fleet since 2010. Around 40% of annual car sales today are SUVs, compared with less than 20% a decade ago.

This trend is universal. Today, almost half of all cars sold in the United States and one-third of the cars sold in Europe are SUVs. In China, SUVs are considered symbols of wealth and status. In India, sales are currently lower, but consumer preferences are changing as more and more people can afford SUVs. Similarly, in Africa, the rapid pace of urbanisation and economic development means that demand for premium and luxury vehicles is relatively strong.

The impact of its rise on global emissions is nothing short of surprising. The global fleet of SUVs has seen its emissions growing by nearly 0.55 Gt CO2 during the last decade to roughly 0.7 Gt CO2. As a consequence, SUVs were the second-largest contributor to the increase in global CO2 emissions since 2010 after the power sector, but ahead of heavy industry (including iron & steel, cement, aluminium), as well as trucks and aviation.

On average, SUVs consume about a quarter more energy than medium-size cars. As a result, global fuel economy worsened caused in part by the rising SUV demand since the beginning of the decade, even though efficiency improvements in smaller cars saved over 2 million barrels a day, and electric cars displaced less than 100,000 barrels a day.

In fact, SUVs were responsible for all of the 3.3 million barrels a day growth in oil demand from passenger cars between 2010 and 2018, while oil use from other type of cars (excluding SUVs) declined slightly. If consumers’ appetite for SUVs continues to grow at a similar pace seen in the last decade, SUVs would add nearly 2 million barrels a day in global oil demand by 2040, offsetting the savings from nearly 150 million electric cars.

The upcoming World Energy Outlook will focus on this under-appreciated area in the energy debate today, and examines the possible evolution of the global car market, electrification trends, and consumer preferences and provides insights for policy makers.

While discussions today see significant focus on electric vehicles and fuel economy improvements, the analysis highlights the role of the average size of car fleet. Bigger and heavier cars, like SUVs, are harder to electrify and growth in their rising demand may slow down the development of clean and efficient car fleets. The development of SUV sales given its substantial role in oil demand and CO2 emissions would affect the outlook for passenger cars and the evolution of future oil demand and carbon emissions.

*Apostolos Petropoulos, Energy Modeler.

This commentary is derived from analysis that will be published on 13 November 2019 in the forthcoming World Energy Outlook 2019. IEA

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