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The agreement between OPEC and non-OPEC countries

Giancarlo Elia Valori

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[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 “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. 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 “Honorable” of the Académie des Sciences de l’Institut de France. “

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Economy

How to build your entrepreneurial mindset today

MD Staff

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An entrepreneurial mindset is a way of life. Even if you aren’t starting your own business, an entrepreneurial mindset teaches you that no problem is insurmountable: you can overcome challenges through perseverance and resilience.

Here are five things you can remember to build an entrepreneurial mindset today. If you’re aged between 18-30, why not start by applying to be a Young Champion of the Earth in 2019? Stay tuned—the competition is opening soon!

Transform problems into opportunities

There are so many clues in everyday life. Is there anything that you experience daily that frustrates you? Perhaps it is the prominence of unsustainable materials in your local shop and restaurants, such as plastic straws or unnecessary food packaging? Often, alternatives to problems do exist, but no one has thought of connecting them in specific circumstances. A good example is supplying restaurants and bars with paper straws. Entrepreneurial mindsets apply a lens which identifies problems not as negative issues but as opportunities to be solved, towards creating value in our economy.

Dare to dream and believe in yourself

If you can dream it and believe it, you are halfway there. How big you can dream is a component of your potential for success. Everyone has ideas—but daring to dream big, and then believing in yourself to apply an entrepreneurial mindset and bring them to reality, takes effort. This year, why not push yourself to think creatively? You could come up with a problem once a week, and each week, come up with one matching solution, for example. The key is to think outside the box, to think of a problem as a potential solution.

Know yourself and discover what you are passionate about

Solving problems, especially those associated with the environment, can be daunting. You will constantly be faced with challenges in your journey to change the world. Some environmental challenges feel so large—like those brought about by climate change. But helping to break down large issues into smaller ones which everyone can take steps to solve, is part of the entrepreneurial journey. Remember that you are capable. Find problems that you are passionate about solving and connect with others passionate about solving them too. This will help you through the tough times to stay motivated.

Go for it and don’t take no for an answer

We all have the foundations of an entrepreneurial mindset. We can all identify problems and think up ideas about how to solve them. Being an entrepreneur pushes you to go out there and take actions to achieve them. Often, this process forces you to think through a specific problem in more detail. It helps you to truly understand pathways towards a solution which others might not have thought about. An idea does not have application in the real world if it is not hammered out in real situations. Part of being an entrepreneur requires following this process, identifying real experiences which can be made better or more efficient, and talking with other people who experience similar challenges to find solutions. Using the resources you have at your disposal will force you to be creative. Keep improving your solution. As you go on, you will eventually gain traction and interest. From there, the possibilities are endless.

Learn, embrace uncertainty and accept failure

Eric Ries from the lean startup says that entrepreneurship is “management under conditions of extreme uncertainty”. Forging your own path to solve a problem that no one has solved before is scary—things change constantly. There will be many obstacles and there will be failure. But an entrepreneurial mindset teaches you that failures are opportunities to learn in disguise. An entrepreneurial mindset embraces uncertainty and learning, to leverage the opportunities that emerge from the space between them.

UN Environment

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Iran’s oil market facing the new sanctions era: What to expect

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After an expected hiatus in Iran’s oil exports to some of the country’s main customers following the reimposition of the US sanctions, once again the country’s old buyers are coming back to take advantage of the 180-day window which has been presented by the waivers granted in November.

Although it took some of these buyers more than a month to make necessary arrangements or to contemplate on the matter, it seems that finally the convenience of buying oil from Iran has outweighed the skepticism overshadowing Iranian oil industry.

With the customers coming back everything was seemed to be, once again, in favor of Iran’s oil industry, however the US government’s disappointing comments last weekend could change all the equations for Iran’s oil market in the months to come.

“The United States is not looking to grant more waivers for Iranian oil imports after the reimposition of US sanctions.” Brian Hook, the US special representative for Iran, told an industry conference in the United Arab Emirates capital Abu Dhabi.

Considering this new stand, the immediate question which comes to mind is what would become Iran’s oil market after the 180-day period is over? To answer this question two main aspects should be taken into account, one is the consideration of Iran’s ability to bypass the sanctions and the second is the possibility of Iranian oil customers being pushed away in the wake of difficulties resulted from the sanctions.

Iran’s capabilities

Even though at first the markets were almost certain about the severe impact of Trump’s plans on Iranian oil industry, but the surprising decision on granting eight countries waivers to continue buying Iranian oil significantly mitigated the harsh outlook.

Now, nearly three months after the reimpostion of the US sanctions on Iran, the market has witnessed that the Iranian oil exports are not plunged as much as expected.

Although due to the confidentiality of Iran’s crude oil sales data, especially in the sanctions era, there is not an exact report for the level of the country’s oil exports in recent months, however based on the estimations presented by institutes which track Iranian oil vessels, the country’s oil exports stood at near 1.1 to 1.3 million barrels per day in November and December.

Furthermore, considering the exempted countries which are going to resume their oil purchasers from January, and the new approaches which Iran is taking to sell its oil like offering oil at energy exchanges or finding new customers, the country can definitely maintain an even higher level of exports in the months to come.

According to a FGE report, Iran will ship 1.08 million barrels per day in January and exports 1.115 million barrels per day in February.

We should not also forget Iran’s experience in bypassing sanctions to sale its oil. As I mentioned before, Iran has acquired certain ways to bypass sanctions and sell its oil even during the sanctions.

Iranian oil buyers

Nearly two months after the US granted eight countries waivers to continue purchasing oil from Iran, recently some of the Asian buyers have signaled willingness for resuming oil imports from the country.

China, India and South Korea have placed orders for loadings in January or February and Japanese refineries have also expressed hope to resume shipping in Iranian oil as from late January provided that some final clearance and paperwork were made.

As reported by S&P Global, the presidents of Japan’s JXTG Holdings and Cosmo Oil stated that they aim to load Iranian barrels at the end of January upon making some final clearances.

“Cosmo Oil aims to load around 1.8 million barrels of Iranian crude at the end of this month” the report read.

Last week, head of South Korea’s SK Innovation, which owns South Korea’s biggest oil refiner SK Energy also told Reuters that South Korean oil buyers are expected to restart Iranian oil imports in late January or early February.

India’s Ministry of External Affairs has also stated recently that the Asian country will continue importing Iranian oil. According to data provided by FACTS Global Energy Group (FGE), four Indian refineries namely, Indian Oil, Bharat Petroleum, HMEL and HPCL have placed orders for 321,000 barrels of Iranian oil in February.

Regarding Greece, Italy, and Taiwan which were exempted from the US sanctions, no news has been officially out since November.

Even though Europe opposed Trump’s actions, and have reassured Iran’s government that they want the nuclear deal to continue, refiners in the green continent have had little choice but to comply with sanctions. The US can cut off access to their financial system for any company judged to be doing business with Iran.

The customer preferences

With all that said, there are still other considerations which should be taken into account to have a rather clear view of what to expect for the future of Iranian oil.

The fact that it took near two months for some of the Asian buyers of Iranian oil to make necessary arrangements to come back to Iran’s market, is an indication of the hardships that the customers of Iranian oil will be facing in trade with Iran.

The heavy bureaucratic process which the exempted countries have to go through in order to buy Iranian oil, could push some of the more cautious customers like Japan and even South Korea away from Iran.

Most Asian customers of Iranian oil are very sensitive and conservative in their relations with the United States, and this is likely to be a barrier in the way of their energy relations with Iran.

Japan is a clear example of this situation; despite being granted sanction waiver the Japanese refineries have conditioned the resumption of their purchases upon “making some final clearances”.

Regarding Iranian oil buyers’ future decisions, yet another fact that should be taken into account is the reality that with Saudi Arabia, Russia and US producing almost at their peak, and with prices hovering near $60 there is currently a lot of cheap oil in the market.

In such a market, it is natural that some of the Iranian oil customers prefer to purchase their oil from other oil suppliers instead of exposing themselves to the consequences of breaching the US sanctions.

So in the end, it all comes to the incentives which Iranian government is willing to provide to make its oil attractive enough to worth the risk.

It seems that the country has taken some steps in this regard, since earlier this month, the Iranian Deputy Oil Minister for International Affairs and Trading Amir-Hossein Zamaninia said despite the US. sanctions more oil buyers have approached the country for negotiations.

“Despite US pressures on Iranian oil market, the number of potential buyers of Iranian oil has significantly increased due to a competitive market, greed and pursuit of more profit.” Zamaninia said.

Mentioning “pursuit of more profit” indicates that Iran is probably going to provide its customers with remarkable discounts or provide them with long-term payment plans which considering the current situation in the market seems to be the best decision at the moment.

First published in our partner MNA

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Iran: Currency reconversion not a turning point in economic reformation

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One of Iran’s main economic policies, under the framework of the sixth five-year development plan, is modification of banking system and reformation of monetary policies, moving forward toward which the Rouhani administration put forward the plan to shift the national currency from Rial to Toman earlier in December 2016 by eliminating specific number of zeroes.

However, the administration decided to postpone implementation of currency reconversion policy in 2016 due to some reasons including the expressed concerns about the time unfitting economic conditions which would ignite inflation and economic instability.

The policy basically seeks to facilitate monetary transactions among the Iranians and match the currency being transcribed in official documents and banking bills (rial) with the one utilized in real daily lives of Iranians (toman). Rial has practically been replaced by Toman in daily transactions as the result of the cumulative inflation over the recent years.

On Saturday, the Central Bank of Iran (CBI) submitted the bill on lopping off four zeroes of the national currency to the cabinet, the act which drew public attention to the issue again, forming a chorus of criticism and speculations.

Through its proposed bill, the CBI seems primarily able to re-empower the depreciated national currency, tangibly decrease the ever-increasing liquidity volume, and make a nominal reduction in prices of goods and services in the country.

The most remarkable achievements of implementing the bill, however, would be a psychological one among the society.  Shifting from rial, the free market exchange rate of which is presently about 110,000 against the U.S. dollar, by cutting four zeroes to toman may cover the psychological aspects of the inflationary impacts of rial devaluation, which has unprecedentedly increased prices in Iran. It is said to be able to recover national currency’s value against U.S. dollar to some extent and cool down the inflated prices, as well.

Omitting zeroes from the national currency would surely facilitate calculations and money transfers in daily transactions and would seemingly retaliate for the sharp recent rial devaluation but it should not be expected to improve Iranians purchasing power at all.

It would not have any specific impact on economic indices, inflation, investments, job creation or demand and supply, either.

As a matter of fact, economic stability and single-digit inflation rate are the most significant prerequisites of implementing currency reconversion while Iran is experiencing none of the named factors.

Currency reconversion per se would have an inflationary effect. To curb its inflationary impact, it must be done simultaneous with taking contractionary measures and modifications in monetary policies.

In addition, printing new banknotes and injecting them to the market would impose an amount of costs on the shoulder of the central bank.

Addressing the issue in an interview with the Tehran Times, the Iranian economist and President of Iran World Trade Center Mohammad Reza Sabzalipour said that “the government aims to hit several targets with one shot.”

“It seeks to control money and liquidity volume in the society i.e. cutting four zeroes would change the present 17 quadrillion rials (about $404 billion) of liquidity down to 1.7 trillion rials (about $40.4 million) overnight,” he explained, “but the zeroes will incrementally come back and liquidity will be increased over time, in case CBI continues printing fiat money.”

“The act would appease the public opinion just for a short time when they see the price numbers of the goods and services are decreased but after a while when their income also comes with lower zeroes, they will find out that what has happened has not improved their commonwealth,” he added.

“There is no reason for us to consider a national currency with less zeroes a more valuable one,” Sabzalipour said, “having a strong economy is not necessary related to having a national currency with low number of zeroes but to positive trade balance and high quality of the nation’s livelihood.”

“The decided monetary reconversion is mere a political and a psychological move,” he underscored.

What the government is getting prepared to do should not be expected as a revolutionary step in Iran’s economic and banking reformations, that would bring the nation a better livelihood and a more prosperous economy.

It is a postponed measure that has not been implemented in previous years due to lack of proper economic conditions and it is being done under the circumstances that the country is experiencing the toughest economic conditions in its history thanks to the U.S.-led draconian sanctions and when a rampant inflation rate is expected for the upcoming Iranian year.

The costly currency reconversion would, for sure, facilitate money transfer and calculations in daily transactions and also reduce the volume of exchanged paper money and etc., but its effect would be neutralized and the omitted zeroes would snap back one after the other in the long-run, in case of monetary mismanagement or any other unpredicted international, political or economic event which would threaten the economy.

First published in our partner Tehran Times

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