After fossil fuels: a case study of MENA oi producers Filip Černoch cernoch@jTLail.muni.cz Questionable future of the oil market • Peak oil and scarcity rents —► need to manage oil reserves to keep stable production and stable income —► heavy dependence of producing countries on one commodity (oil) and its volatile price. VS • Peak oil demand and oil abundance on the market —> some share of oil may never be extracted —> higher competition on the oil markets, tightened incomes, uncertain future. Expected transition driven by decarbonization • Climate change mitigation (EVs, carbon pricing etc); local pollution; technology innovation and prices, public demand. • Problem mainly for coal and oil (natural gas 'a bridge fuer). • Greenhouse gas emissions in the present estimates of global fossil fuel reserves about 3x greater than the global carbon budget —► 1/3 of global oil, V2 of gas and over 4/5 of coal to remain unused from 2010 to 2050 to stay within 2°C target. • For the Middle East it means to exploit about 60% of their reserves of oil, 40% of gas. • Oil still essential source of energy, but under growing pressure. Regional impact of the decarbonization Net fossil fuel exports (in orange) and imports (in green] as % of GDP 2016 IEA scenarios • Current Policy Scenario — oil demand is to increase over the next 3 decades, with Middle Eastern oil exports growing correspondingly • 450 Scenario — oil demand falling after 2020, Middle Eastern oil exports stable at 2020 level to 2040. Current policies scenario 450 scenario 5000 4000 3DO0 2000 idoo I.LLL LULL 1990 2014 2020 2030 £040 1990 £014 2020 2030 2040 ■ UI o b a I rj i I d s m a nd ' Middle E a st □ i I ex po rts Fossil-fuel import prices by scenario New Policies Scenario Current Policies Scenario 450 Scenario Real terms ($2015) 2015 2020 2030 2040 2020 2030 2040 2020 2030 2040 IEA crude oil (S/barrel) 51 79 111 124 82 127 146 73 SB 78 Natural gas ($/MBtu) United States 2.6 4.1 5.4 6.9 4.3 5.9 7.9 3.9 4.8 5.4 European Union 7.0 7.1 10.3 11.5 7.3 11.1 13.0 6.9 9.4 9.9 China 9.7 9.2 11.6 12.1 9.5 12.5 13.9 8.6 10.4 10.5 Japan 103 9.6 11.9 12.4 9.9 13.0 14.4 9.0 10.8 10.9 Steam coal ($/tonne) OECD average 64 72 83 87 74 91 100 66 64 57 United States 51 55 58 60 56 61 64 53 52 49 European Union 57 63 74 77 65 80 88 53 57 51 Coastal China 72 78 86 89 79 92 98 73 72 67 Japan 59 66 77 80 68 84 92 61 59 53 Middle East forecasted oil revenues, IEA scenarios (real prices) USD billion 1990 2014 ■Current Policies Scenario 2020 2030 4S0 Scenario 2040 High level of uncertainty 135 120 105 90 75 60 45 / 30 / 1965 i 1980 i 1995 i 2010 IPIRA icm IEIA IIEA Current Policies IIHS(Rivalry) lBP(base case) IIEA New Policies IBP(FT) I Wood Mac IIEA Sustainable Development lOil production (assuming 3% decline p.a) 2025 2040 Macroeconomics of the MENA region • For 5 regional oil exporters (Libya, Kuwait, Iraq, Oman, SA), more than 40% of GDP based on oil and oil-related government activities. • Four other (Quatar, Algeria, UAE, Bahrain) varies between 20-40%. • Main sources of manufacturing value-added are refinery, chemical and mining/extractive industries, construction. • In some MENA countries oil is the primary source of fiscal revenues. Non-oil fiscal revenues, however, often also relate to oil industry (Quatar — practically all investment income and the bulk of corporate income tax from Quatar Petroleum). • Oil makes more than 50% of total exports from MENA oil exporting countries. Limited economic diversification. GDP composition of MENA countries, 2016 ■ Oil ■Government ■ Other Oil and non-oil fiscal revenue in selected MENA countries, 2016 (% of general government revenue) ■ Oil revenue ■ No noil revenue Oil and non-oil exports in MENA countries, 2016 ■ Oil exports ■ Non-oil exports Note: Low shares of oil in exports from the UAE and Bahrain are because non-oil exports include a large share of re-exports. Public sector employment in selected MENA countries (% of total employment of nationals) 80% 60% 40' 20'' 0% I I I Morocco Israel Palestine Egypt Tunisia Qatar Saudi Kuwait Arabia High shares of public employment in usually protected jobs with high wages contributes to low labour productivity of MENA oil-exporting countries. Emphasized by imported cheap non-national labour (since 80s), reducing productivity also in private sector. That prevents its development to internationally competitive form. Labour productivity in selected oil-importing and oi exporting MENA countries 200 -Tunisia 0 —lracl QHMln^ln^o^MOiQHf^^lr)tflnli^MmQrt(Nrf)^lnli^s|Q)OH(Nlfl^lntD C000C003olc000CG03oiQlJl[Ji(^(ji0i3i{3ifli0iOO OOOOO O O O ^ ^—l --^ l -i—l i -.—i —i HHHHHHHHHHHHHHHHHHHHfiJtNINfNfNrtlMINfMrNOrSrtfMnlr^fN Post tax energy subsidies in selected MENA countries, 2015 Changes in primary energy supply and GDP 270% ^ 240% o 210% 6 180% o 150% CM o; 120% £ 90% CO u 60% ^ 30% 0% 250% ^ 200% 1S0% C2 o = ° 100% B0% EU28 United States Russia Africa Asia (excluding India Middle East China China) .ill ■■■■■■■■II 0% ■ Primary energy supply • GDP Rentier state theory MENA oil-producing countries (—rentier states): • Relies on substantial external rent to sustain their economy, reducing the pressure to develop a strong productive domestic sector. • Have a small proportion of the population engaged in generation of the rent, while the majority of the population is only involved in the distribution or in the utilisation of it. • Their governments are the principal recipients of the external rent. = role of the state is in providing private favours through the ruler's benevolence. = income is not related to work and risk bearing, but to chance or situation. = rentier states are not looking for legitimacy (through democratic representation), but for acceptance of its population. = diversification or going for „ until the last drop"? Diversification option • Since 80s, global oil demand rising. Between 2000-2014 oil prices increasing. • Enough oil for decades — no serious incentives for change. Projected years of future oil and gas production at 2015 reserve level and average production of last 5 years Oil Gas Algeria 21 55 Iran 111 196 Iraq 120 More than 200 Kuwait 90 118 Libya 170 137 Oman 16 21 Quatar 37 147 SA 63 83 UAE 74 112 Population Our World in Data 1800 1850 1900 1950 2000 2019 Source: Gapminder; HYDE & UN Population Division (2019) OurWorldlnData.org/world-population-growth • CC BY Expected population growth between 2015-2050 Kuwait Saudi Arabia Qatar Algeria World Oman Middle-income countries High-income countries 0% 10% 20% 30% 40% 50% 60% 220 200 180 160 140 120 100 30 60 40 20 0 12015 fiscal breakeven price 2015 oil price 314 J / J * * / / / / / J Source: IMF (2016) Oil-related sovereign wealth funds Country IS03 Region Value per capita « GDP code (bnS) revenue United Arab Emirates ARE Middle-East 12 14 134 304« SOB« Saudi Arabia SAU Middle-East 792 26 106« 2fi4« Kuwait KWT Middle East 592 isa 362 « 527« Qatar QAT Middle-East 256 118 1 2. 1 'X, 2579S Iran IRN Middle-East 62 1 15« 100« Oman OMN Middle-East 40 9 103« Iraq IRQ Middle-East 1 □ o« 1« Libya LBY North Africa 66 11 16096 392« Algeria DZA North Africa SO 1 23« 70% Angola AGO Sub-5aharan Africa 5 0 4% 10« Nigeria NG A Sub-Sariaran Africa 1 0 f. )■■:. 2« Russia RUS Other: CIS 139 1 7K 20% Kazakhstan KAZ Other: CIS 79 s 36« 149« Azerbaijan AZE Other: CIS 37 4 128« Canada CAN Other: Americas IS 0 IK 3« Mexico MEX Other: Americas 6 o o« 2« Venezuela VEN Other: Americas 1 0 OK 1« Norway NOR Other: Europe 343 165 170« 316« CL FOB - Crude Oil WTI (NYMEX) CUM: 56.69 □ Vol: 1326265 2000000 = 1000000 - 0 2003 i i|| n li n i n n i n m 11 mul I n III ij. ■■■■ 160.00 140.00 20.00 0.00 2010 2012 2014 2016 Saudi Arabia • 80% of budget revenues from oil, 45% of GDP, 90% of earnings. Natives in state sector, 80% of workforce in private sector comes from abroad — both low and high skilled jobs. • Young population (half of population under 18). % of Saudi under 30 unemployed. Unfitting education. Even if import of worker is limited still shortage of jobs. (Saudis 6x more expensive than foreigners). • Rigid authoritative regime (royal family), Wahabi religion (Mekka, Medina). • Shia population (10%), religion tensions. Disputes with Iran. • ^Between 2014 and 2017, Saudi Arabia used $240bn of its foreign reserves to cover the large budget deficits caused by falling export revenues and to defend its currency peg. " OurWorld in Data — Saudi Arabia Population by country Total Population in the last five centuries (Clio-lnfra Data) 20 million 15 million 10 million 5 million 0 1500 1600 Source: Population by Country (Clio Infra) 1700 1800 1900 2000 OurWorldlnData.org/world-population-growth/ • CC BY-SA 100+ Male o.o% 0.0% Fe mal 95-99 0.0% 0.0% 90-94 0.0% 0.0% b5-89 0.1% 10.1% bo-84 0.1% 1 0.2% 75-79 D.2%Id.3% 70-74 0.4% ^ 0.4% 65-69 1.0% 1 J 0.7% 60-64 1.7% J J 1.0% 55-59 2.5% 1 |l.4% 50-54 3.6% 1.7% 45-49 4.6% 1 1 z.7% 40-44 5.0% 1 13.5% 35-39 5,3% | |3.5% 30-34 5.4 vi 1 3.6% 25-29 4.2% 1 1 3.6% 20-24 3.9% 1 la.7% 15-19 4.1%| 1 3.9% 10-14 4.6% 1 1 4.4% 5-9 4.8% 1 1 4.6% 0-4 4.6% 1 1 4.4% 10% fl% 6% 4% 2% 0% 2% 4% 6% S% 10% PopulationPyramid.net Saudi Arabia - 2019 Population: 33,838,827 Reaction to Arab Spring (2011) • $10.6 billion in new funding for housing loans via Real Estate Development Fund. • $7.9 billion in funding to increase the capital of the Saudi Credit Bank. • $266 million to enable social insurance to increase the number of family members covered. • $320 million to expand social services. • $933 million to help the needy repair their homes and pay utility bills. • $127 million to support programs for needy students at the Ministry of Education. • $3,9 billion to support the General Housing Authority. • A 15% pay increase for state employees. • A 50% increase in the annual allocations for charitable organizations. • 27 million annually alocation to project of the National Charitable Fund. Vision 2030 (from 2016) • Increase SME contribution to GDP from 20 to 35%. • Increase foreign direct investment from 3.8% to 5.7% of GDP. • Increase the private sector's contribution from 40-65% of GDP. • Raise the share of non-oil exports in non-oil GDP from 16 to 50%. • Increase non-oil government revenue from $50 billion to $350 billion. • Generate 9.5 GW of new renewable energy. Egypt • Population growth increases demand for food and reduces the amount of land for growing this food (population concentrated along the Nile River). • Import of food, which is subsidized (and energy). Population by country Total Population in the last five centuries (Clio-lnfra Data) 70 million 60 million 50 million 40 million 30 million 20 million 10 million 0 1500 1600 Source: Population by Country (Clio Infra) 1700 OurWorld in Data - Egypt 1800 1900 2000 OurWorldlnData.org/world-population-growth/ ■ CC BY-SA Density of population Egypt's oil balance o I Year 1960 1970 1980 1990 2000 2010 Egypt's gas balance Consumption Production net Exports ■ net Imports I-1-1-1-1-1 Year 1960 1970 1980 1990 2000 2010 Future of the region = Speed of the energy transition will determine the role of oil. • Multiple peaks possibility. • Oil still important part of energy mix, high improbability of rapid drop in consumption (energy transitions are /usually, not always / slow) • Large investments in oil extraction needed to sustain the production. • Need for diversification — oil rent needs to be invested in reasonably fast diversification from single commodity economies. New (productive) industries need to be built with the comparative advantages in mind. Subsidy reforms and energy efficiency reforms are needed. • Produce as much as possible to monetize reserves quickly? Should producers keep the price relatively low? Sources • IEA(2016): World Energy Outlook 2016. • IndexMundi(2017): Saudi Arabia Economy Profile 2017. • Cordesman, A.H.(2011): Understanding Saudi Stability and Instabiiltay: A Very Different Nation. • Tagliapietra, S.(2017): The political economy of Middle East and North Africa oil exporters in times of global decarbonisation. • Al-Riffai, P.: How to Feed Egypt. • Our World In Data: Saudi Arabia, Egypt. • BP: Oil trade movements; Natural gas trade movements. • Nasdaq (2017): Crude Oil; WTI Price • Fahey, M.(2015): Oil prices and budgets: The OPEC countries most at risk. • Dále, S.; Fattouh, B.(2018): Peak Oil Demand and Long-Run Oil Prices. • Fattouh, B.; Sen, A. (2018): Economic Diversification in the Context of Peak Oil and the Energy Transition.