PETROANALYSIS || ARTICLE

A world of nightmares

Article by

Mazhar Al-Shereidah

A new world is emerging. The diversity and complexity of the challenges that now have to be faced have completely new characteristics. These new realities need to be recognized and adapted to. At that time, October 2017, we chose Adapting to New Realities as a title to summarize the vision and express some thoughts.

A new world is emerging… but one where no possible reference can be used to foresee what might be coming. This does not just apply to the energy industry but to the strategies that were once used to shape the world order. The new challenges are diverse and their degree of complexity has completely new characteristics. Moreover, the traditional mindset does not now provide the tools and the means to set up the roadmap. It is up to geopolitics, as a science, to give birth to new theories that can be put into practice and lead to an effective set of best possible objectives. The era of the idea that oil is king has been left behind: oil is in survival mode surrounded by colossal challengers – not just natural gas but renewables.

The common wisdom that oil contaminates everything is so perfectly clear that even major oil companies are trying to keep their faces clean by showing their heavy involvement in speeding up the development of renewables. Even with the environmentally-friendly emblems standing next to oil companies’ logos, the fact that oil contaminates cannot be hidden any more.
Just how this reality will affect the countries that depend on their oil exports for socio-political and economic stability is another story. In order to diversify a macro-economic model one has to recognize that a definite problem exists. Then one needs to make a clear analysis and undertake early planning.

However, the entangled, Siamese-twin-like ties between economy and politics dictate the latter’s weight so limiting the horizon of those doing the economic planning. This is not only true with the growing complexity of the North Korean problem which includes the question of the extent to which military expenditures take their toll on more human-based needs. This also applies to the very fast evolving realities on the ground in the wider Middle East. Turkey now stands closer perhaps to Moscow – its once most-feared enemy – than to Washington that for the last seven decades was described as Turkey’s best ally. Saudi Arabia, typically dependent on the United States, is building solid relations with Russia starting up possible meaningful coordination between the world’s two largest oil exporters.

The recent referendum in Iraqi Kurdistan has caused unprecedented political and military instability, which from the point of view, surpasses that which emerged at the end of World War I when the Ottoman Empire was dismantled.

What is happening is that the pieces on the chessboard suddenly find themselves facing a new reality where traditional rules do not apply anymore and where the risk of losing vital power and opportunities is really there. The present realities need to be recognized and adapted to, and the name of this new game is restructuring.

On Nov. 21st 2018, I came across an interesting article by Javier Blas (see article), Texas Is About to Create OPEC’s Worst Nightmare, which immediately took me to the fact of how relative things are, because objectively all of us, the whole world is amidst a nightmare, although none of us knows if it is the worst, or if the future might bring still darker times. And as these lines don’t pretend to disturb anyone’s sweet dreams, just some few reflections will be made.

Personally, I fully agree with the idea that it was OPEC’s mistaken price defense stance that enabled shale oil and gas to become a fact and a powerful one that changed the whole structure of the oil market and the underlying geopolitical map. My book La Financiarización y convencionalización en el precio del petróleo, 2013, is devoted to that thorny issue.

Now, especially those OPEC countries that face serious financial difficulties have to find a way to balance their budget deficits just as it becomes clear that there is no shortage of supply, but rather a glut. Inventories hold more than once was considered as necessary, because the imaginary threats have disappeared. But the most disturbing point is that of the bank’s perception that cannot provide a solid ground for those who in the US will have to fulfil their production schedules, but by doing so shall add more barrels to an already fully satisfied market. And to complicate things further, once OPEC has a workable plan to somehow limit its production in January 2019, compliance might not be perfect because only by producing additional barrels to the agreed levels would be the way to provide some extra income.

Thus, the hardship seems to be more general rather than just limited to OPEC and other producers… the oil industry as such could be hit and the banking sector might be watching the prospects with the same preoccupations.

The above-mentioned questions are indeed minor ones if compared with tensions on very serious issues between the US on one side and a number of countries on the other. These nightmares affect and threaten the whole world.

TO BE CONTINUED

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