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The agreement between OPEC and non-OPEC countries

Giancarlo Elia Valori



[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] O [/yt_dropcap]PEC, which is the cartel of the 14 major oil producers, has recently adopted a policy that is bound to change all future political, strategic and economic equilibria.

With a view to contributing to support the oil barrel price, the Vienna-based organization of the major Middle East oil producers has agreed to accept a very considerable output reduction, together with the Russian Federation and other countries, which is worth at least fewer 1.8 million oil barrels per day.

Also all the non-OPEC oil producing countries, as well as Russia, shall follow suit and play along, otherwise the six-month agreement – which can be renewed indefinitely – will have no value.

Obviously Russia plans to reduce its oil output and it is worth recalling that, in 2014, it was exactly the excess of Russian and North American oil supply to bring down the cost of crude oil below $ 100.

Currently, after Russia’s victory in Syria, it is precisely geopolitics which is knocking on the door of those who manage oil prices.

Russia wants to resume its growth pathway and recover the costs of the war in Syria and of its future power projection onto the Middle East.

The Sunni and the Shiite world want either to grow and diversify or recover from the long season of international sanctions – as is the case for Iran.

It is worth noting that the non-OPEC producers or, better, oil extractors, are Canada, Mexico, the United States,   Bahrain – where only 8% of its GDP is generated by oil and gas, although it is a great centre of Islamic finance and aluminium production – Oman and, in Asia, China, Kazakhstan and obviously the Russian Federation, as well as, in Europe, Norway.

Saudi Arabia will account for approximately 50% of the expected total reduction in oil production, that is 486,000 out of the 10 millions produced every day.

Iran, which is very tried by sanctions, accepts the reduction which is implicit in the agreement between Russia and Saudi Arabia, but drops from 3.975 million barrels per day to 3.797.

OPEC will cut production by 1.2 million barrels per day, thus reaching 32.5 at the end of January 2017.

If the cut had not been made, the oil price per barrel would have fallen below 30 dollars, but currently the most reliable analysts estimate that oil prices may grow from 50/65 US dollars up to 70.

The higher cost of crude oil is quickly reflected in all related prices, thus favouring the start of inflation that many people – again with some naivety – are waiting in Western economies.

Incidentally, Russia does not trust much of OPEC promises but, together with other countries such as Kuwait, Algeria and Venezuela (all OPEC members), Oman (non-OPEC member), and Russia, it manages the “Review Committee on the evaluation of production agreements”. As a result of the agreements, also Russia has cut production by 100,000 barrels per day.

In this regard, it is also worth recalling that the agreement between OPEC and non-OPEC countries would enable the US shale oil producers to stabilize production or even to increase it.

At strictly technical level, Iran participates in the operation only considering the strategic situation in the Greater Middle East, while it would even need to increase its oil supply by at least one million barrels per day so as to regain its position and recover from the long period of sanctions.

However, as also the Iranian authorities know all too well, the country’s oil production is even on the wane, from 3.85 to 3.60 barrels per day.

After the end of the embargo, the Iranian ayatollahs have succeeded in increasing production only from 2.8 to 3.8 million barrels per day, but the problem is that, in such a market, the increase in supply immediately depresses the oil barrel price.

In fact, operators naively expected an unlimited oil flow from Iran which, however, failed to increase production and, indeed, OPEC itself has recently recorded a drop in the oil extracted by Iran from 3.85 to 3.60 million barrels a day, a clear sign of damage to the extraction system and of technological obsolescence – problems which cannot certainly be solved in a day.

The booming prices, caused by a substantial oil barrel market manipulation, will also benefit the Iranian Shiites, without diminishing Saudi Arabia’s economic and military chances.

At qualitative level, which is not a secondary aspect in these situations, the production of light and sweet crude oil typical of US oil fields has not much favoured the recent excess of production, unlike the OPEC sulphurous and medium-quality oil.

In recent years, the OPEC increase in oil production has originated over 50% of its excess supply exactly from Saudi Arabia and Iraq, namely 1.5 million oil barrels a day, while shale oil – which is the main enemy of the Vienna-based cartel – has decreased by over 500,000 barrels a day, considering that it is more sensitive than other sectors to the profitability guaranteed by its high price.

It is equally true that currently the increase in the oil barrel price favours even the US and Canadian shale oil, which becomes economically viable only above 60 US dollars per barrel. Some analysts even maintain that currently 60% of the remaining world oil production is precisely in the US shale oil sector, whose companies should gain a competitive advantage over the next five years.

Furthermore, it is worth noting that in recent years the production cost of the US oil barrel has dropped by 30-40%, while it has declined by only 20% in the OPEC area.

Hence, paradoxically, a clearly anti-American geoeconomic choice becomes an asset for the new US economy – halfway between oil and domestic manufacturing companies – according to Donald J. Trump’s designs.

Moreover, currently Saudi Arabia has reached its maximum production level, but it may have technological capabilities to increase it by 25% for a short lapse of time.

Today, after the agreement between OPEC and non-OPEC countries, the Brent futures maturing in February 2017 have temporarily exceeded 57 US dollars – a rise by over 5% compared to the closing of last Friday.

According to Merrill Lynch, the agreement between the two groups of oil producers – an agreement that Russia has developed for years (and it is worth recalling Putin’s statements in favour of Russia’s becoming an OPEC member) – will make the oil barrel price rise to 70 dollars by mid-2017.

Hence speculative capital will come back on oil markets, thus temporarily abandoning the other alternatives: non-oil commodities, currencies, gold and precious metals, as well as many government bonds.

Behold, Italy shall recalibrate its supply of public debt securities. It will not be an easy task.

Nothing, however, is yet decided and stable.

In fact, you may recall the underground war against OPEC waged by Kuwait in 1985, when the OPEC countries reported much larger oil reserves than the real ones because this boosted their production quota.

In principle, the OPEC reserves are supposed to be only 0.8 billion barrels as against the 1.3 billion barrels reported by the Vienna-based cartel.

In general terms, all OPEC official oil reserves could be larger than the actual ones by over one third.

Not to mention the fact that the real data on Saudi oil and gas reserves is still a state secret in the country.

Therefore the current OPEC’s policy line is to attract in the cartel, at least indirectly, all the external oil production, by marginally favouring even the US and Canadian production, which had been the target of the long bearish fight of Middle East oil countries.

The geopolitical effects are before us to be seen: much of the Middle East is united in adhering to the Russian strategies, while the United States – not to mention the ludicrous EU – are left at the starting post.

Egypt will receive one million Iraqi oil barrels a day, at a much lower price than Saudi Arabia’s, which had been initially promised to Al Sisi in the framework agreement envisaging 23 billion US dollars of aid on a yearly-basis.

Saudi Arabia did not implement the agreement with Egypt so as to punish it for its participation in the Russian-Alawite system in Syria.

Al Sisi has even reopened the hidden channels with the Lebanese Hezb’ollah and will contribute to the construction of an oil pipeline from Iraq to Egypt through Jordan – not to mention the fact that Egypt is already training four Iraqi army units for anti-terrorist operations.

Moreover, Egypt is fighting actively against the “Islamic State” in Libya, and especially in the Sinai region, and Daesh can now hit Egypt from its bases in Southern Libya.

Hence Al Sisi has envisaged to strengthen his ties with Algeria, which has similar problems.

In fact, this is exactly where the new oil proceeds will be channelled. They will be used to defend the extreme lines against the jihad – hence Egypt, Jordan, Iraq and Syria.

They will also be used to stabilize the situation in Syria and the increase in crude oil price will also fund the modernization and diversification of the Russian economy.

Europeans will not jump on the bandwagon and, like the kids living in the outskirts, will remain in the railway stations to watch the trains leaving.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs "La Centrale Finanziaria Generale Spa", he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group and member of the Ayan-Holding Board. In 1992 he was appointed Officier de la Légion d'Honneur de la République Francaise, with this motivation: "A man who can see across borders to understand the world” and in 2002 he received the title of "Honorable" of the Académie des Sciences de l'Institut de France

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231,000 New Jobs Added in Western Balkans amid Ongoing Economic Challenges, Emigration

MD Staff



A 3.9 percent increase in employment over the last year has led to the creation of 231,000 new jobs throughout the six countries of the Western Balkans, according to the “Western Balkans Labor Market Trends 2018” report, launched today by the World Bank and the Vienna Institute for International Economic Studies (wiiw). Unemployment also fell from 18.6 percent to 16.2 percent, reaching historic lows in some countries.

Leading the way for employment in the region was Kosovo, which saw an increase of 9.2 percent, followed by Serbia (4.3 percent), Montenegro (3.5 percent), Albania (3.4 percent), FYR Macedonia (2.7 percent), and Bosnia and Herzegovina (1.9 percent). Despite this progress, however, low activity rates – particularly among women and young people – along with high rates of long-term unemployment and a prevalence of informal work, continue to pose challenges for sustained economic growth in the region.

“The region has made great strides in improving labor market outcomes over the last year – meaning more people are finding jobs,” says Linda Van Gelder, World Bank Country Director for the Western Balkans. “However, we continue to see high rates of people who are not in employment, education or in training programs and we need to find ways to link them to future opportunities.”

Youth unemployment of 37.6 percent is a key challenge for the region. However, this rate is down from last year and nearly every country in the region is experiencing the lowest levels of youth unemployment since 2010. Country rates range from 29 percent in Montenegro and Serbia, to more than 50 percent in Kosovo. According to the report, it may be difficult for young people who become detached from jobs or education for long periods to reintegrate into the labor market. They also face a wage gap, earning up to 20 percent less than those who find employment sooner.

The report also notes that female employment rates are on the rise but they still remain low by European standards. The employment rate for women across the region stands at 43.2 percent, varying from a low of 13.1 percent in Kosovo to a high of 52.3 percent in Serbia. The gender gap in employment has also narrowed since 2010, ranging from 28.9 percentage points in Kosovo to 9.8 percentage points in Montenegro.

“Economic trends in the region look to be headed in the right direction,” says Robert Stehrer, Scientific Director of the Vienna Institute for International Economic Studies. “Getting more people, particularly young and women into employment remains one of the key challenges in the region to sustain economic and social convergence.”

A number of obstacles to employment need to be addressed to reduce ongoing emigration from the region, especially common among young, educated people. In order to address this, further knowledge is needed. Countries in the region should synchronize their data on emigration and improve the registration and publication of migration statistics. By utilizing high-quality data that is in-line with international standards on workforce composition – both domestically and internationally – will produce accurate analysis of labor market dynamics in the region and allow for the design of policies that can simultaneously address the challenges of emigration and reap the benefits of migration.

Better linkages between secondary graduates and the labor market, as well as earlier interventions to retain students, can improve opportunities for employment. Policies, such as child care, care facilities for the elderly, flexible work arrangements and more part-time jobs would also promote labor market integration among women.

The report was produced with financial support from the Austrian Ministry of Finance.

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Economic Growth in Gulf Region Set to Improve following a Weak Performance in 2017

MD Staff



The Gulf Cooperation Council (GCC) region witnessed another year of disappointing economic performance in 2017 but growth should improve in 2018 and 2019, according to the World Bank’s biannual Gulf Economic Monitor released today in Kuwait.

The region eked out growth of just 0.5% in 2017 – the weakest since 2009 and down from 2.5% the previous year. The GCC region’s economies experienced flat or declining growth as lower oil production and tighter fiscal policy took a toll on activity in the non-oil sector. External debt issuance continued to rise to help finance large fiscal deficits.

Economic growth is expected to strengthen gradually, helped by the recent partial recovery in energy prices, the expiration of oil production cuts after 2018, and an easing of fiscal austerity. The World Bank expects growth to firm to 2.1% in 2018 and rise further to 2.7% in 2019. Growth in Saudi Arabia is expected to rebound close to 2% in 2018-19 and to strengthen similarly elsewhere in the region.

“Policy attention is shifting towards deeper structural reforms needed to sever the region’s longer-term fortunes from those of the energy sector,” said Nadir Mohammed, World Bank Country Director for the GCC. “While the recent increase in oil prices provides some breathing space, policy makers should guard against complacency and instead double down on reforms needed to breathe new life into sluggish domestic economies, to create jobs for young people and to diversify the economic base. Any slippage could negatively impact the credibility of the policy framework and dampen investor sentiment.

Looking forward, there are several downside risks that may weigh on activity. Lower than expected oil prices could exert pressure on the OPEC producers to extend or deepen their production reduction agreement and dampen medium-term growth in the GCC countries.

Although fiscal and current account balances are improving, the region continues to face large financing needs and remains vulnerable to shifts in global risk sentiment and the cost of funding. Geopolitical developments and relations within the region could slow growth prospects. Slippage in the implementation of country reform plans arising from weak institutional capacity will rob the GCC of the benefits of fiscal adjustment and of deeper structural reforms that aim to diversify their economies.

Over the longer term, the enduring dominance of the hydrocarbon sector in the GCC economies argues for the vigorous implementation of structural reforms.  The terms of trade shocks in 2008-09 and in 2014-16 barely dented the dominance of the hydrocarbon sector in the GCC, with the bulk of the adjustment so far driven by spending cuts rather than the emergence of other traded sectors.

Structural reforms should focus on economic diversification, private sector development, and labor market and fiscal reforms. The GCC states’ long-term ambitions are articulated in various country vision statements and investment plans, and aspire to build competitive economies that utilize the talents of their people.

Implementing these structural transformation programs requires continuing political commitment from the GCC governments.

Saudi Arabia has shown considerable leadership in this regard: the 12 “vision realization plans” associated with its Vision 2030 aspirations aim to significantly transform the economy over the next 15 years by lifting the private sector share of the economy from 40 to 65% and the small and medium enterprise contribution to GDP from 20 to 35%.

Transforming from an oil-dependent economy to a self-propelled, human capital-oriented one requires some fundamental changes in the mindset; some also call this a new social contract,” said Kevin Carey, Practice Manager at the World Bank.  “GCC countries do not need to discard their existing social contracts but rather to upgrade them to reflect new realities of low for long oil prices, increasing global competition and the long-term threats from technological and climate change.”

As with other Arab countries, the GCC states also face sustainability, equity and welfare challenges related to their pension systems. These issues need to be addressed urgently to prevent any negative impact on economic growth, fiscal sustainability, and labor market stability.

Among the potential solutions that could help improve pension outcomes, the Gulf Economic Monitor underscores the importance of improving efficiency by reducing the prevailing fragmentation in many of the GCC pension systems; making access and contributions as simple and systematic as possible through the strengthening of ID and IT systems and the capabilities of pension administration bodies; and strengthening the governance of pension institutions. If GCC countries wish to attract global talent, they will also need to consider potential solutions for expatriates that help to meet their long-term pension and financial security needs.

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Poland: Build on current economic strength to innovate and invest in skills and infrastructure

MD Staff



Poland’s economic growth remains strong. Rising family benefits and a booming jobs market are lifting household income while poverty rates and inequality are falling, says a new OECD report.

In its latest Economic Survey of Poland, the OECD encourages policy-makers to build on the country’s current economic strength and social progress in order to tackle major remaining challenges. To sustain rising living standards Poland has to develop its capacity to innovate and invest in skills and infrastructure, as is acknowledged in the government’s Strategy for Responsible Development. The report says that the level of expenditure on research and development, despite recent welcome rises and tax incentives, remains weak. Vocational training suffers from limited business engagement which is hindering many of the country’s plentiful small enterprises from modernising and improving productivity.

Poland is also ageing rapidly. The working age population is projected to decline markedly over the coming decades. The lowering of the retirement age risks increasing poverty among the elderly, particularly women, says the OECD. Women often have patchy career paths and their retirement age is now set to remain unusually low. Workers should be made aware of the benefits of working longer for their future pension income, the report says.

Despite efforts to improve childcare, it remains insufficient and expensive, especially in rural areas. More investment in childcare is required as part of a range of measures to help combine work and family life and strengthen the number of women in employment.

Presenting the Survey in Warsaw, OECD Deputy Secretary-General Mari Kiviniemi said, “Poland is in a strong position. A dynamic job market together with the Family 500 + programme has helped make economic development more inclusive. Many people now benefit from new opportunities and rising incomes.”

“The time is ripe to ensure that living standards continue to rise. Strengthening innovation, improving infrastructure and investing in skills will be crucial. With rising labour and skills shortages, many employers now realise how important it is to invest in training. The government must seize this opportunity to engage with them.”

Measures to improve tax compliance have succeeded in shrinking the public deficit despite higher spending on social benefits. But more resources – or shift in how they are used – will be needed to raise  spending in priority areas such as public infrastructure, healthcare and higher education and research.

Limiting reduced VAT rates, increasing environmental taxes and giving a stronger role to the progressive personal income tax would raise additional revenue while contributing to more equity and a greener environment.

Plans to reform higher education and improve research excellence and industry-science co-operation are welcome, the report says. The general health status of Poles and access to healthcare are very unequal, while environmental quality is below the average of OECD countries. Tax rates on air and water pollution and on CO2 emissions are low and many environmentally harmful fuel uses are exempt from taxation. Raising environmental taxes would provide stronger incentives to replace ageing coal-intensive equipment with greener alternatives.

A clear immigration policy strategy is also needed to better monitor integration of foreigners in line with labour market needs, the protection of their rights and their access to education and training.

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