The consequences of a world awash with oil

Sunday 25/09/2016

We have been warned yet again — and by no less an authority than the world’s leading energy body — that the global oil glut, which brought down prices dramatically two years ago, is here to stay, at least until the middle of next year.
This is not good news for major producers Saudi Arabia and Russia, let alone for Nigeria, Algeria and Iran, whose people have grown used to and overreli­ant on subsidised prices for petrol, electricity and food.
Near-record output by the Organisation of the Petroleum Exporting Countries (OPEC) combined with weakening demand in China and India and peak growth worldwide explain this state of affairs, which benefits many countries in the West as it helps keep inflation low. Record inventories — 3.1 million barrels — in industrialised nations make their contribution.
Many observers said the market would show no surplus by this time of the year with a big stock drawdown expected in the third quarter. The very opposite happened and global oil demand growth has been revised lower for 2016 by the International Energy Agency by 100,000 barrels a day.
OPEC output edged higher in August and Saudi production reached an all-time high of about 10.65 million barrels a day, allowing the kingdom to overtake the United States for the first time since 2014 as the largest producer in the world. Kuwait and the United Arab Emirates had their highest outputs while Iraq and Iran raised supplies, the latter to the highest levels since sanctions against it were lifted.
Libya, however, is stuck in a rut, with production averaging 200,000 barrels a day, 12% of its pre-2011 output. General Khalifa Haftar’s forces recently seized control of the port of Sidra and the export terminals of Ras Lanuf and Brega, which strongly suggests this modest level of production will fall further.
In Algeria, production and export of crude oil and gas edged forward this year as a result of measures taken by the former minister of Energy, Yousef Yousfi, who was sacked in May 2015.
Tunisia, which has increasingly resorted to importing gas, will be comforted but low prices also mean the country is unlikely to attract much foreign interest in the next few years.
For Algeria, the situation is not comfortable. It has exhausted its strategic fund and although it holds more than $100 billion in hard currency reserves, these are dwindling. Many major infra­structure projects have been delayed and imports slashed. There has been no discernable strategy in the way these cuts were spread across the country.
Two months ago, the quarterly MENA economic analysis of the World Bank suggested that Algeria’s hard currency reserves could decline to $80 billion by late 2018. Prime Minister Abdel­malek Sellal was quick to counter that a figure of less than $100 billion was most unlikely two years hence. The World Bank’s estimates of reserves were based on the projected balance of payments deficit provided by the Algeria government — between $27 billion and $28 billion this year, in 2017 and in 2018.
The central bank of Algeria said the increase in exports of oil and gas and rigorous budgeting will help avoid a too rapid decline in hard currency reserves but, unlike the World Bank, refuses to commit itself to a forecast for 2018. The government has certainly been taking drastic measures to reduce imports, often without the slightest consultation of major economic operators, not least in the private sector.
The reality is that nobody has the faintest idea what the situation will be in 2018. The former governor of the central bank, Mohammed Laksaci, was sacked this summer for engineer­ing a de facto devaluation of the dinar, a means of slowing imports. A cheaper dinar feeds into inflation and, if the govern­ment of Algeria is afraid of one thing, it is of social unrest fuelled by cuts in subsidies and higher prices.
Too many uncertainties enter into any calculation of imports: Never has the country needed to import so many cereals — about three-quarters of what its population consumes. However, never have world prices of cereals been so low. So far so good, but as any seasoned economist knows, hard currency reserves have a funny way of falling much faster and unpredictably than many anticipate.
The really interesting question is whether lower oil prices will encourage Algerian leaders on the path of structural reform, as it did a quarter of a century ago. That seems unlikely for two reasons: One is that reserves are at a comfortable level. The second is that, unlike in 1988 when riots nearly brought down the regime, Algeria has virtually no foreign debt. In 1989, when serious economic reforms were launched, the country’s foreign debt service was equivalent to its oil and gas export income. We are very far from such a dramatic scenario today.