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Oil Market Report: A floor under prices?

MD Staff

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OPEC and some non-OPEC oil ministers met in Vienna last week and agreed to curb their output by 1.2 mb/d in order to address growing surpluses in the market. The agreement aims to achieve relative stability and to bring the market towards balance. So far, the Brent crude oil price seems to have found a floor, remaining close to $60/bbl much where it was when the ministers met. Recently, prices have been volatile; in early October Brent crude oil prices reached $86/bbl on concerns that the market could tighten as Iranian sanctions were implemented. Then, thirty-seven days later, they fell back to $58/bbl as producers more than met the challenge of replacing Iranian and other barrels. Such volatility is not in the interests of producers or consumers.

Last week’s meeting reminded us that the Big Three of oil – Russia, Saudi Arabia and the United States – whose total liquids production now comprises about 40% of the global total, are the dominant players. Cooperation between Russia and Saudi Arabia is now the basis of production management with these two countries having a large capacity to swing output one way or the other. For them, prices falling further would place their budgets under great stress. The third, non-playing member, so to speak, of the Big Three is the United States, which is now the world’s biggest crude oil producer and where production management is a company level, economically driven decision. The United States is also the world’s biggest consumer and lower prices are welcome, although its producers will want to see them stay high enough to encourage further investment.

While the US was not present in Vienna, nobody could ignore its growing influence. On the day OPEC ministers sat down to talk, an important piece of data was published: according to the Energy Information Administration, in the week to 30 November the US was a net exporter of crude and products for the first time since at least 1991. The number, 211 kb/d, is modest and even if it proves to be an isolated data point, the long-term trend is clear. In 2018 to date, US net imports have averaged 3.1 mb/d. Ten years ago, just ahead of the shale revolution, the figure was 11.1 mb/d. As production grows inexorably, so will net imports decline and rising US exports will provide competition in many markets, including to some of the countries meeting in Vienna last week.

New data in this Report shows little change to our 2018 estimates. Demand will grow by 1.3 mb/d although there are signs that the pace is slackening in some countries as the impact of higher prices lingers. As far as non-OPEC supply is concerned, our estimate for growth is revised slightly up to 2.4 mb/d. For 2019, our demand growth outlook remains at 1.4 mb/d even though oil prices have fallen back considerably since the early October peak. Some of the support provided by lower prices will be offset by weaker economic growth globally, and particularly in some emerging economies. For non-OPEC supply, we have revised our growth forecast for 2019 down by 415 kb/d, partly due to expected cuts from Russia agreed last week, and to lower growth in Canada. The serious build-up of stocks arising from logistical bottlenecks in Alberta led the provincial government to act very decisively to curb output. The initial cutback of 325 kb/d for three months to allow blockages to ease is a significant development. Apart from lowering production, it should narrow the differential between West Canadian Select prices and WTI, which reached $51/bbl at one point.

Time will tell how effective the new production agreement will be in re-balancing the oil market. The next meeting of the Vienna Agreement countries takes place in April, and we hope that the intervening period is less volatile than has recently been the case.

IEA

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Corporate tax remains a key revenue source, despite falling rates worldwide

MD Staff

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Taxes paid by companies remain a key source of government revenues, especially in developing countries, despite the worldwide trend of falling corporate tax rates over the past two decades, according to a new report from the OECD.

A new OECD report and database, Corporate Tax Statistics, provides internationally comparable statistics and analysis from around 100 countries worldwide on four main categories of data: corporate tax revenues, statutory corporate income tax (CIT) rates, corporate effective tax rates and tax incentives related to innovation.

The new OECD analysis shows that corporate income tax remains a significant source of tax revenues for governments across the globe. In 2016, corporate tax revenues accounted for 13.3% of total tax revenues on average across the 88 jurisdictions for which data is available. This figure has increased from 12% in 2000.

Corporate taxation is even more important in developing countries, comprising on average 15.3% of all tax revenues in Africa and 15.4% in Latin America & the Caribbean, compared to 9% in the OECD.

Corporate tax revenues have also held up when considered as a percentage of GDP, where the average share increased from 2.7% of GDP in 2000 to 3.0% in 2016 across the jurisdictions included in the database.

The new OECD analysis shows that corporate tax remains a key source of revenue, despite a clear trend of falling statutory corporate tax rates – the headline rate faced by companies – over the last two decades. The database shows that the average combined (central and sub-central government) statutory tax rate fell from 28.6% in 2000 to 21.4% in 2018. More than 60% of the 94 jurisdictions for which tax rate data is available in the database had statutory tax rates greater than or equal to 30% in 2000, compared to less than 20% of jurisdictions in 2018.

Comparing statutory corporate tax rates between 2000 and 2018, 76 jurisdictions had lower tax rates in 2018, while 12 jurisdictions had the same tax rate, and only six had higher tax rates. In 2018, 12 jurisdictions had no corporate tax regime or a corporate income tax rate of zero.

The OECD analysis highlights that CIT revenues are influenced by many factors, and therefore focusing on headline statutory tax rates can be misleading. For example, jurisdictions may have multiple tax rates with the applicable tax rate depending on the characteristics of the corporation and the income. Progressive rate structures or different regimes may be offered to small and medium-sized companies, while different tax rates may be imposed on companies depending on their resident or non-resident status. Some jurisdictions tax retained and distributed earnings at different rates, while some impose different tax rates on certain industries. Lower tax rates are often available for firms active in special or designated economic zones, and preferential tax regimes offer lower rates to certain corporations or income types.

Another factor influencing CIT revenues is the definition of the corporate tax base. The OECD Corporate Tax Statistics database assesses how standard components of the corporate tax base reduce the effective tax rate faced by taxpayers, including the effects of fiscal depreciation and several related provisions, such as allowances for corporate equity.

Taking these provisions into account, the database shows that “forward-looking” effective tax rates are generally lower than statutory tax rates, with an average reduction of 1.1 percentage points observed in 2017 across the 74 jurisdictions analysed in the database. Targeted tax incentives, such as for research and development (R&D) expenditures and intellectual property (IP) income, are widely used to reduce the corporate tax burden for specific activities.

The new database is intended to assist in the study of corporate tax policy and expand the quality and range of statistical information available for analysis under the OECD/G20 Base Erosion and Profit Shifting (BEPS) initiative. In 2015, the OECD reported that base erosion and profit shifting was having significant effects on the corporate tax base, estimating revenue losses to governments from BEPS in the range of USD 100-240 billion (2014 figures), equivalent to 4-10% of corporate tax revenues.

The new database, which will be updated annually, aims to improve the measurement and monitoring of BEPS. Future editions will also include an important new data source – aggregated and anonymised statistics of data collected under country-by-country reporting now being implemented under BEPS Action 13 – that will allow “backward-looking” assessment of effective tax rates actually paid by firms.

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Global Commission Describes New Geopolitical Power Dynamics Created by Renewables

MD Staff

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Political and business leaders from around the world have outlined the far-reaching geopolitical implications of an energy transformation driven by the rapid growth of renewable energy. In a new report launched today at the Assembly of the International Renewable Energy Agency (IRENA), the Global Commission on the Geopolitics of Energy Transformation says the geopolitical and socio-economic consequences of a new energy age may be as profound as those which accompanied the shift from biomass to fossil fuels two centuries ago. These include changes in the relative position of states, the emergence of new energy leaders, more diverse energy actors, changed trade relationships and the emergence of new alliances.

The Commission’s report ‘A New World’ suggests that the energy transformation will change energy statecraft as we know it. Unlike fossil fuels, renewable energy sources are available in one form or another in most geographic locations. This abundance will strengthen energy security and promote greater energy independence for most states. At the same time, as countries develop renewables and increasingly integrate their electricity grids with neighbouring countries, new interdependencies and trade patterns will emerge. The analysis finds oil and gas-related conflict may decline, as will the strategic importance of some maritime chokepoints.

The energy transformation will also create new energy leaders, the Commission points out, with large investments in renewable energy technologies strengthening the influence of some countries. China, for instance, has enhanced its geopolitical standing by taking the lead in the clean energy race to become the world’s largest producer, exporter and installer of solar panels, wind turbines, batteries and electric vehicles. Fossil-fuel exporters may see a decline in their global reach and influence unless they adapt their economies for the new energy age.

“This report represents the first comprehensive analysis of the geopolitical consequences of the energy transition driven by renewables, and a key milestone in improving our understanding of this issue,” said Commission Chair Olafur Grimsson, the former President of Iceland. “The renewables revolution enhances the global leadership of China, reduces the influence of fossil fuel exporters and brings energy independence to countries around the world. A fascinating geopolitical future is in store for countries in Asia, Africa, Europe and the Americas. The transformation of energy brings big power shifts.”

“The global energy transformation driven by renewables can reduce energy-related geopolitical tensions as we know them and will foster greater cooperation between states. This transformation can also mitigate social, economic and environmental challenges that are often among the root causes of geopolitical instability and conflict,” said Adnan Z. Amin, Director-General of IRENA.

“Overall, the global energy transformation presents both opportunities and challenges,” continued Mr. Amin. “The benefits will outweigh the challenges, but only if the right policies and strategies are in place. It is imperative for leaders and policy makers to anticipate these changes, and be able to manage and navigate the new geopolitical environment.”

The Commission says countries that are heavily reliant on fossil fuel imports can significantly improve their trade balance and reduce the risks associated with vulnerable energy supply lines and volatile fuel prices by developing a greater share of energy domestically. With energy at the heart of human development, renewables can help to deliver universal energy access, create jobs, power sustainable economic growth, improve food and water security, and enhance sustainability, climate resilience and equity.   The report was launched by the Commission at IRENA’s ninth Assembly in the presence of ministers and senior policy makers from more than 150 countries.

IRENA

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Global Economic Prospects: Middle East and North Africa

MD Staff

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Growth in the Middle East and North Africa is estimated to have improved to 1.7 percent in 2018, contributed by acceleration in activity of both oil exporters and importers.

Growth among oil exporters is estimated to have strengthened in the year that just ended. Among the countries of the Gulf Cooperation Council (GCC), increased oil production and prices have eased fiscal consolidation pressures, enabling higher public spending and supporting higher current account balances. Among non-GCC oil exporters, anemic growth in Iran associated with US sanctions has been a drag on regional growth. Growth in Algeria is estimated to have accelerated to 2.5 percent in the year that just ended, supported by public spending.

Egypt, an oil importer, grew a faster 5.3 percent last fiscal year as tourism and natural gas activity continue to show strength, unemployment rate has generally fallen, and policy reforms progress. Favorable agricultural harvest and tourism helped support growth in Morocco and Tunisia in 2018, which are estimated to grow at a 3.2 percent and 2.6 percent rate, respectively.

Outlook: Regional growth is projected to rise to 1.9 percent in 2019. Despite slower global trade growth and tighter external financing conditions, domestic factors, particularly policy reforms, are anticipated to bolster growth in the region.

Growth among oil exporters is expected to pick up slightly this year, as GCC countries as a group accelerate to a 2.6 percent rate from 2 percent in 2018. Higher investment and regulatory reforms are anticipated to support stronger growth in the GCC. Iran is forecast to contract by 3.6 percent in 2019 as sanctions bite. Algeria is forecast to ease to 2.3 percent after a rise in government spending last year tapers off.

Egypt is forecast to accelerate to 5.6 percent growth in FY2019, as investment is supported by reforms that strengthen the business climate and as private consumption picks up. Growth for both Morocco and Tunisia are anticipated to reach 2.9 percent in 2019, sustained by policy reforms and improvement in tourism. Growth forecasts for the region are predicated on the assumption that geopolitical conflicts do not escalate significantly and regional spillovers from conflict-affected economies are limited.

Risks: Risks to the regional outlook are tilted to the downside. New conflicts in fragile economies can escalate and inflict even greater damage to incomes and economic activity, not to mention health and welfare; and may compound the impact of the refugee crisis on host and origin economies. Escalation of U.S.-Iran tensions would have adverse repercussions for the region. Geopolitical factors, combined with uncertainty about oil exporters’ oil production responses, could trigger volatility in oil prices. Lower oil price prospects could impact the region’s outlook, especially for the oil exporters, while it could help oil importers.

Tighter global financing conditions could affect oil importers and exporters in the region alike. High external debt denominated in foreign currency in some oil importers suggests these economies would be vulnerable to a sharp appreciation of the U.S. dollar.

On the upside, rising reconstruction spending in conflict-affected economies (e.g., Iraq) may have positive spillovers to neighboring economies.

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