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SBERBANK OF RUSSIA
Oil: Mid-term Moderate Optimism
December 10, 2014
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Fall in oil prices in 2014 is objective, but increased by temporary
factors. Prices will rise in 2015, but their growth is slowed down by
exporters policy
Demand growth will not exceed the growth of productive capacity in
the coming years. The period of relatively low oil prices is to come
There are significant risks of a sharp rise in oil supply in the coming
years. Volatility in oil prices will rise seriously
The “Shale Revolution” is accomplished: it defines the trend of industry
development until 2020. Price war has already begun
Russia has the greatest potential for shale oil extraction, but faces a
technology problem
OPEC will continue to be the dominant player through 2020, the states
of the former Soviet Union will take the second place in exports
Consistency of OPEC policy will be reduced, and disputes within the
cartel will grow
Developing countries, especially in Asian region, are becoming central
to the expansion of demand. The role of the United States and Europe is
reducing
Sectoral structure of demand is changing slowly, the possibility of
switching between grades of oil are limited, which supports the price
differential between them
The world economy as a whole will benefit from the decline in oil prices
Lower Prices in 2014, i.e. Inevitable Correction
Prices will rise
in 2015,
2015.
but
what extent?
But to
how?
© Center of Macroeconomic Studies
We believe that in 2015 oil prices will recover from their current low
levels. The expected demand growth next year could send the prices back
to $85-90 per barrel, but the policy of the leading exporters supports the
excess of oil supply on the market and keeps prices down.
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Fall of 2014: a
fundamental
correction enhanced
by temporary factors…
Falling of oil prices in the second half of 2014 by 35% was the most
significant after the 2008 crisis (see Chart 1 below). This decline is largely
due to objective factors, but according to most analysts, time factor played
a significant role in it as well. The main factor was a fundamental change in
the structure of the oil market, associated with the shale revolution in the
United States. The gradual increase of oil production there has intensified
pressure on the world prices. But in recent years this trend was masked by
other events: Iran export limitation in 2010, the "Arab spring" in 2010-11,
the lower expectations of growth rates of the world economy in 2012-13.
In 2014, the fall renewed and a number of negative factors have provoked
the current "piqué". Firstly, political tensions reduced and production
increased (+1.5 mb/d million barrels per day) in Libya and Nigeria (the
award was 5-6% of the price). After it was followed by the liquidation of
speculative positions, equivalent to a reduction in demand by 1.65 mb/d.
Secondly, because of the accident at the oil refinery in Venezuela, the
demand temporarily reduced by 0.65 mb/d. Thirdly, the contribution
(around 6%) has strengthened dollar compared to other currencies due to
the scaling down of the quantitative easing program in the US. Finally, the
policy of OPEC, which refused to cut production and decided to allow the
market to "search for balance" in the face of persistent oil oversupply, is
also regarded as a temporary factor. Therefore, Bloomberg consensus
forecast for 2015 remains relatively high, $85-90 per barrel (see Table 1
below), although radical forecasters are predicting $60. Such a range of
opinions fully reflects the current "turbulence" in the market. The process
of "groping" for a new price level is going to be interesting: reserves and
actual profitability of shale oil producers, as well as the fiscal stability of
the exporting countries, will become clear on completion of the current
low oil prices "stress tests".
…the effect of which in
2015 will significantly
weaken
In our opinion, market will spend at least a month or two to find a new
"equilibrium" after OPEC's decision. But in early 2015 the effect of
majority of temporary negative factors will significantly weaken allowing
the prices to slightly recover. Furthermore, the most expensive fields in
the United States will be shut. Hedged reliability margin will allow them to
hold on only for 6-12 months: hedging for a longer period is difficult and
expensive. Hereby the price increase can be just as rapid as the last fall.
Chart 1. Episodes of significant (10% or more) post-crisis declines in oil
prices
Source: Reuters
© Center of Macroeconomic Studies
Table 1. Forecasters expect a return to $90 per barrel in 2015
Source: Bloomberg
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But what if there are surprises on the supply side, i.e. the recovery of
exports from Iraq? That is why we expect more moderate growth in oil
prices in 2015 to $70-80 per barrel and a quick reduction of the consensus
forecast for the next year.
Real Prices Reduction Trend
Demand will continue
to grow, but at a
moderate pace
Now, the situation with the demand for oil is somewhat more predictable
and understandable. With an average global growth of 4% per year
(according to IMF forecast for the next 5 years) the demand growth will be
1.2-1.3 mb/d per year (see Table 2 below). This means that demand will
not exceed supply until 2018, and the real decline in oil prices is mostly
probable.
In mid-term
The
mid-term
effect,
effectthe
the "shale
"shale
revolution"
revolution"
in
in the
the
USUS
starts
starts
to to
decline …
decline…
Fundamental factors indicate that the probability of a rise in prices will
increase significantly in 2018, as the peak of production in the US will
happen in 10 years according to the current estimates (see Chart 4 below),
and demand growth will begin to "eat" the effect of production growth in
the US by 2018. Even with the uncertainty of supply growth market will
begin to respond to the decline in production in the US before than it
begins to limit the markets in fact. Indeed, the situation with the growth of
oil production looks much less predictable than before. In Figure 1 we
present some analog supply curve, which shows how many barrels of oil
can be produced on the basis of particular oil prices. In addition, more oil
may be requested from the stock.
Figure 1. Curve of oil production cost, USD/bbl
Source: Seadrill, Morgan Stanley Investment Research, IEA
© Center of Macroeconomic Studies
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… but it is difficult to
predict the rate of
unfolding situation
Of course, events may unfold faster and change direction. Firstly, fields in
the United States can begin to close faster than is now expected. Secondly,
technologies are developing rapidly, and it can extend the life of shale
fields. Thirdly, the world economy can speed up (or slow down). Finally,
the current OPEC omission does not mean that at some point the decision
"to let prices float freely" can not be reversed and the production can not
be reduced.
Table 2. Forecast of supply and demand to 2019
World, mb/d
Demand
Growth
Productive capacity
Growth
2014 2015 2016 2017 2018 2019
92.8 94.2 95.5 96.8 98.0 99.1
1.4
1.3
1.3
1.2
1.1
97.7 99.4 101.2 102.8 104.0 105.0
1.7
1.7
1.6
1.2
1.0
Source: IEA
Oil Supply Forecast
Technology Determines Everything: Shale vs. Traditional Production
Shale oil producers use
the business model of
mining industry
Shale oil producers operate on the business model of mining industry:
small capital expenses, large operating expenses (up to 50% of the capital
expenses). It is appropriate to draw an analogy with the coal industry. So,
in coal industry the annual operating expenses are about 30-40% of the
capital expenses. Due to the high operating expenses the shale production
is much more sensitive to oil price fluctuations. Hedge culture is very
common among non-traditional producers, which softens the effect. But
on the 6-12 months horizon of low oil prices the oil shale productions in
paricular will be closed first. Shale oil is still one of the most expensive oils
in the world (see Chart 5 on page 8). According to the current estimates,
the price of $80 per barrel will maintain profitability of the US production,
but at a price of $70 per barrel many fields will have to shut (See Table 3
below).
Chart 2. $80 per barrel would keep most of the US shale fields
profitable
Source: Wood Mackenzie
© Center of Macroeconomic Studies
Table 3. Cost of oil shale production at the largest US shale
fields
Source: Robert W. Baird & Co, Reuters
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Horizontal fracturing
technology made the
"shale revolution"
possible
The shale revolution in the United States became under discussion even
before the crisis. But at that time many experts treated the news from
North America as another phony sensation, bubble-project which viability
was maintained by public subsidies solely. One could understand the
skeptics: most of the "breakthrough technologies" ended their lives on the
shelves due to their inability to compete on costs with traditional oil
production. The revolution began in 2003, when the horizontal drilling
technology has been combined with hydraulic fracturing technology. After
that, it took 5 years to reach the required level of profitability, and another
5 years to raise production in the United States to the level of 1984 (see
Chart 3 below). The success of shale oil was largely determined by the cost
structure which was fundamentally different from traditional production.
In
the traditional
… поэтому
production
включать/capital costs
are
many times as large
выключать
as
operating costs that
мощности
has a lot of effects
Traditional production required and requires large capital investments in
exploration and well construction. But after construction the operating
costs (personnel, wellbore pressure maintenance, pipelines pumping, etc.)
are relatively small, and lifetime of fields is long, i.e. nearly 20 years. This
cost structure has produced some specific features of the oil industry.
Firstly, manufacturers can almost painlessly turn on/off the capacity. This
flexibility factor creates significant uncertainty in the potential volume of
supply in the market. In addition, there are stocks that can at any time be
offered to the market, and these stocks have become huge. For example,
the volume of oil tankers amounts to 45 million barrels (the so-called
floating storage). Secondly, large sunk capital costs of traditional
production create significant inertia in the amount of production capacity.
Therefore, the market's attention is focused to a greater degree not to the
new wells, but to a potential production increase at the existing ones. For
the same reason, the traditional fields are closed at last when prices fall.
Thirdly, the lead-time horizon of the industry stretches over decades. This
explains the more "quiet" attitude to income volatility. Traditional
manufacturers almost do not hedge the income, being in great contrast to
non-traditional producers.
Chart 3. Shale oil has allowed the United States to return to the
peaks of production 1984 (mb/d)
Source: EIA
© Center of Macroeconomic Studies
Chart 4. EIA predicts oil production in the US
will peak as early as 2020 (mb/d)
Source: EIA
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… but shale became a
strong competitor
Shale oil extraction technology are widespread in the US and Canada for
now. This was possible through the interest of land owners, the
availability of the necessary expertise, funding, integrated infrastructure
and water available for hydraulic fracturing. The combination of these
factors, coupled with government support has allowed producers of shale
oil to provide 90% growth of the American production in a few years. In
addition, due to the returnes of the scale these fields now remain
profitable even at an oil price below $80 per barrel. But it is still
significantly higher than that of traditional fields and the lifecycle of shale
projects lasts for only 3-5 years.
Shale Oil in the World: Technological Problem
The greatest
potential for shale oil
extraction is in Russia
According to EIA estimates world reserves of shale oil is 5 times higher
than in the US. But because of inaccessibility, lack of infrastructure, legal
framework, resentment of the local population the production of other
countries did not come out on an industrial scale. The most promising
country for the development of shale oil is Russia. The estimated reserves
are 75 billion barrels, which is by a third more than in the US (EIA
estimate). Western Siberia location is characterized by low population
density and the presence of certain infrastructures and this creates
advantages. The only barrier is lack of technology, chemicals and drilling
rigs. In terms of sanctions Russia has to develop these technologies
independently, overcoming the stereotypes of traditional oil producers.
This process is expected to be long.
Leaders of Exports in Geographical Terms: OPEC and The Former
Soviet Union
World export structure
will not change in the
coming years
World oil exports will
continue to grow
Africa will concede
market share to
countries of the former
USSR
© Center of Macroeconomic Studies
The structure of the world's oil exports will not change significantly in the
coming years. OPEC will remain the major player. If it is possible to
implement ambitious projects to increase production, Russia will elevate
the former Soviet Union to the second place in exports.
The global supply, according to the forecast of the International Energy
Agency, will grow by 9 mb/d to 105 mb/d by 2019 (an average of 1.5
mb/d per year). At the same time oil trading volumes in the years 2013-19
will be reduced by 1.1 mb/d (up to 34 mb/d), but it will happen only
because of the increased processing depth in the United States and the
Middle East. Delivery will become East-oriented, imports in Asia will
increase by 2.8 mb/d (на 14%).
African exports will stagnate at 6.3 mb/d, so Africa will yield its share in
global exports. It will be reduced to 19% by 2020. Even this year it will
cede the second place in global exports to the countries of the former
Soviet Union (Russia, Kazakhstan, Azerbaijan). Due to plans of production
increasing, their share will rise from the current 18% to 20% in 2019
(another percentage point will be "bitten off" from Latin America).
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Production n Russia
and Kazakhstan will
increase but it will fall
in Azerbaijan
The level of production in Russia will ensure the production replacement
from the old fields by entering new ones. This also will happen through
the joint projects with foreign companies (in the case of their realization,
because at the moment the most promising projects in the Kara Sea are
frozen), changing the tax code for stimulating the development of nonconventional deposits (for example in the group of the Bazhenov
Formation oil beds). In Kazakhstan, the main production growth (around
0.2 mb/d) will ensure the offshore field Kashagan. However, there is a risk
of further delays in the planned production volumes that has happened in
recent years. Finally, production in Azerbaijan, on the other hand, will
decrease (by 0.1 mb/d) due to the depletion of their largest field.
The Middle East will
remain the main
source of oil …
The Middle East will remain the leading world exporter, but its share of
world exports in 2020 will be reduced to 47% (current 49%), including by
increasing the processing depth in the region. Exports in 2019 will be
reduced by 0.9 mb/d to 16.1 mb/d. This is the largest absolute reduction
of the expected among major exporters.
… and Saudi Arabia
will continue to "set the
tone" to OPEC
Saudi Arabia will continue to play the key role in OPEC. At the moment, it
gathers 3 of 5 mb/d OPEC spare capacities. It was Saudi Arabia whose
efforts reduced OPEC's production during the crisis of 2008-09, and
increased production at the time of interruption due to the Arab Spring.
Saudi Arabia in particular has launched an active struggle to maintain
market share by convincing OPEC not to reduce production in November
2014. It is Saudi Arabia with its huge reserves, who can afford a long-term
(1-2 years) extrusion market policy against unconventional oil producers.
Risks for Oil Exporters: the Budget and Politics
The fall in prices will
become a test for all oil
exporters
Low oil prices have
increased the problems
of weak fiscal discipline
In recent years fiscal discipline has been deteriorating in most oilexporting countries, and dependence on oil revenues has grown (see Table
4 below). Several countries (Saudi Arabia, UAE, Kuwait and Qatar) will be
able to smooth out the shock of the fall in oil prices at the expense of the
reserve funds. The rest need to prepare for the fact that the budgetary
problems can quickly be transformed into internal and political.
Despite the fact that the oil market still remains a seller's market, the
Table 4. Price balancing the budgetin exporting countries is
constantly growing
Chart 5. Shale oil still remains one of the most expensive
* Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Russia,
Saudi Arabia, United Arab Emirates, Venezuela, Yemen
Source: Reuters, IMF
© Center of Macroeconomic Studies
Source: Robert W. Baird & Co, Reuters
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possibility of variation of the oil-exporting countries have declined
significantly in recent years. In only three countries (the United Arab
Emirates, Qatar, Kuwait) budget is balanced at a price below $80 per
barrel in 2015. For the rest (see Table 4 below) even $100 per barrel is not
enough. In other words, the falling price of oil only intensified the
problems caused by the weak budgetary discipline of the oil exporters. If
oil prices remain at $60-70 per barrel, many countries will not have
enough reserve funds for even a couple of years. We expect a sharp
deterioration in OPEC's discussions. Saudi Arabia can meet a more
aggressive opposition to their policies already at the meeting of the cartel
in June. And the less predictable policy, the higher the price volatility.
… even in Saudi Arabia
Saudi Arabia itself is an excellent illustration of reducing budgetary
discipline. The price balancing the budget was $78 as early as in 2012,
then $89 in 2013, $98 in 2014, and the budget for the next year implies
$106 dollars per barrel. However, its reserve fund (SAMA) is large enough
and is about 100% of GDP, i.e. it can afford to live with a 10% budget
deficit for 10 years and the question of fiscal discipline is not as prevalent
for her as for other OPEC members for the next few years.
Iraq is the main source
of growth and
uncertainty …
It is the Middle East where the biggest political risk to oil supply side is
retained. Almost the entire growth potential (+6.2 mb/d) of OPEC
accounts for Iraq and African countries. The main focus now is Iraq. On the
one hand, oil export capacity is a critical need for the government to
restore the war-ravaged infrastructure. On the other hand, one can not
ignore the military conflict with ISIL, which is expected to protract.
… and the budget
problems in Nigeria
will likely become
political
And we do not believe
in the rejection of
Iran's nuclear
program
Disorders continue in Nigeria, which became the largest African economy
in 2014. The country is subsidizing the cost of fuel, therefore, corruption
and smuggling are common. The stability of supplies will depend on the
success of the Nigerian authorities to calm the situation.
Lifting sanctions against Iran seems unlikely in the coming years: the
nuclear program of Iran still is for fundamental political question.
However, if it is decided to ease the sanctions, the potential of oil supply
inforcement becomes enormous: Iranian authorities declare their
readiness to increase production by 4 mb/d.
Price War Will Determine Future Proposals
The risk of increase in
production is higher
than the reduction risk
…
Risks are of different directions, it is difficult to assess the likelihood of
political outcomes. But, specifically, the potential to increase production
capacity is higher than that to decrease. In other words, even taking into
account the revaluation of the traditional production capacity, the supply
of oil could rise faster than 1.5 mb/d, putting even more downward
pressure on prices.
… and the price war for
the redivision of the
market is inevitable
Therefore, we believe that the next few years will be held under the
banner of the struggle between the US and OPEC producers for a share of
the oil market. And the mere expectation of struggle will be enough to
significantly increase the volatility of the market. Only the recent decision
© Center of Macroeconomic Studies
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of OPEC's November 27 provoked a fall in price by 6% in one day. Now we
see only the first episode of this war for market share, which was triggered
by a decrease in the rate of demand growth (of 0.7% yoy in 2014). The
second episode will unfold next year and is associated with the beginning
of large-scale export of oil from the United States. Completion of this
"revolutionary" cycle and the transition to the new market equilibrium, in
which shale producers will already become traditional, familiar and
understandable for all participants, is only expected by 2018. But another
qualitative stage is waiting for us in the years 2020-25: it is attributed to
the beginning of the reduction in the US production.
Oil Demand: the Return to Growth
Demand for oil is little
responsive to price
In the short term, the market may be balanced at any price of oil from $30
to $130 per barrel, as short-term elasticity of demand for oil at the price is
very low. According to the IMF, even in the long term 10% decline in
prices leads to an increase in demand by only 0.5-0.7%.
… but reacts strongly
to economic growth
Short-term elasticity of demand for GDP higher is next larger. In the short
term GDP growth by 1% leads to an increase in demand of 0.7%, and longterm one leads to 0.3% increasing. And in developing countries, the effect
is stronger due to greater industrialization and greater energy
consumption. Therefore, demand for crude oil in the coming years will
continue to grow, mainly due to the emerging markets, especially Asia.
Contributing to the growth in OECD countries will be less, including by
investing in energy-saving technologies.
The Contribution of European and US Demand Decreases
Demand in developed
countries declines
The largest consumer of oil in the world is the US (~ 19 mb/d), followed
by European countries (~ 14 mb/d). Demand in developed countries has
several features typical to post-industrial economies. Firstly, the potential
level of economic growth and growth rate of the gross energy
consumption are reducing together with the changing demographic
structure (by the projections the labor force in the EU will stabilize at
current levels). Secondly, the declining level of industrialization leads to
lower energy-output ratio: economic growth does not impact so much on
oil demand. Thirdly, energy efficiency and cleaner production have great
importance. The EU spends up to €30 billion per year for the program of
energy-efficiency, developing alternative energy sources. These sources
already account for about 10% of the energy balance and its share
continues to grow. Thus, the whole set of factors suggests that in the
coming years, growth in demand in Europe and the US will slow down, and
even stop at all if the negative scenario of economic development of the
euro zone becomes real.
… so by 2019 the
developing countries
will overtake their
import volume
By 2019, the oil market will face an important structural change. Imports
of OECD countries will fall by 4.2 mb/d to 16.4 mb/d, while imports of
© Center of Macroeconomic Studies
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other countries will grow by 3 mb/d to 17.6 mb/d. Thus, developing
countries by 2019 will overtake the developed ones in the volume of
imported oil. For now, countries outside the OECD account 41% of
imports; in 2019 their share will rise to 52% (see Chart 8 below).
The US Stocks Have Little Effect on Prices and Demand (Against
Stereotypes)
US strategic reserves
will be enough to live 3
months without oil
imports
The US stocks of produced crude oil account for more than 1 billion
barrels, 67% of which are the government's strategic petroleum reserves
(SPR, Strategic Petroleum Reserves). SPR are used in the case of a physical
shortage of oil in the US market. The IEA recommends its members to hold
oil reserves of import substitution for 3 months, now the total in the US is
for 93 days.
… but they are used
only in emergency
situations and have
little effect on the
world market
The value of stocks in the SPR is more important for the US rather than
the global oil market. Market sale or the oil rent are carried out only in
case of emergency: when hurricane Katrina, refinery accidents, the Libyan
crisis in 2011, etc. This "feeding" stabilized domestic prices (WTI grade)
without leading to significant changes in the world markets (Brent grade,
see Chart 7 below).
It should be borne in mind that even in the most extreme scenario, the
infrastructure will allow to pump oil from the reserves at a rate of 4.4
mb/d. (7 months to complete exhaustion). For comparison, the spare
capacity of Saudi Arabia is about 3 mb/d, but the proven reserves are of
250 billion barrels.
China Will Become the World's Main Importer
Demand in China will
slow down as well as
the growth of the
economy …
China is one of the largest consumers and importers of oil, and its role in
the market is only growing: at the end of this year, China may bypass the
US in terms of oil imports. Its share of world consumption is about 12% (~
10.7 mb/d), it is increasing, albeit in decelerating pace. There are two
main factors slowing growth in oil demand. Firstly, the decline in
economic growth, i. e. 9% in the last 5 years prior to the forecast of 7% in
the future five years. Secondly, the energy intensity of the economy will
decline because of the increase in the share of services in GDP (currently
46% + 5pp to 2006). Also, the Chinese authorities are making efforts to
Chart 6. Strategic reserves far more than that of market (%) ...
Source: EIA
© Center of Macroeconomic Studies
Chart 7. ... but also their use (red line) had little effect on oil
prices in the world market
Source: EIA
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improve energy efficiency and reduce emissions into the environment.
…, and the government
will struggle to reduce
energy consumption
The stated purpose of the authorities was to reduce the energy intensity
of the economy rate of 3% per year up to 2015 and now it is performed
automatically as economic restructuring, as well as through additional
measures for the development of energy-saving technologies, especially in
the transport sector. So, in parallel with the increase in gas imports from
Russia and the United States, the structure of domestic demand also
changes. In 2012, China purchased about half a million units of public
transport with gas engines (instead of diesel). Rapid changes in the
structure of the fleet of personal vehicles is not worth the expects, as the
period of use of the car is about 15 years, which is beyond the horizon of
this review. However, the strenthening of control over energy
consumption of 1.4 billion China's population is inevitable in the long
term. Even as we speak, there are quotas in big cities for the issuance of
license plates and the level of regulatory requirements for energy
efficiency and environmental technologies is promoted. The rapidly
developing China has the smallest among the large economies of the world
number of cars per capita, i. e. 54 per 1000 people. Even in South Africa, a
country with similar levels of GDP per capita, this figure is twice as high.
This means that demand for cars could rise sharply, that will force the
Chinese authorities to actively inhibit the growth of private vehicles
amount.
Sectoral Structure of Demand is Changing Very Slowly
The transport sector
will be the main
consumer
Fuel type matters
The biggest area of consumption on the sectoral side is the transport
sector (~ 50.4 mb/d, or ~ 55% of world demand). And the vast majority of
fuel is used for road transport, i. e. gasoline and diesel fuel. The share of
the latter is gradually increasing due to the high efficiency of diesel
engines. For the European consumers the additional factor is smaller tax
rates on diesel, against gasoline. But changes in the fuel consumption
pattern will not happen quickly, because refinery capacity is arranged in
such a way that the migration to a different type of oil may take several
years.
An important aspect of crude oil consumption in the automotive industry
is the low substitutability of dark and light grades in the production of
Chart 8. World oil demand, mb/d, and the share of OECD
Source: IEA
© Center of Macroeconomic Studies
Chart 9. Top oil-importing countries in 2013, mb/d
Source: EIA
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gasoline
and
diesel
engines
(see
Chart
10
below).
In Europe diesel engines are more popular because until recently they
were considered more environmentally friendly. In the US prevails
gasoline. It is more difficult (lower yield) to produce diesel from light
grades of oil (for example, of WTI) than from the Urals and Brent. The
restructuring of the refinery is possible, but the inertia of the vehicle fleet
makes this procedure quite meaningless. In our opinion, this is one of the
most important constraints on the demand side. It largely determines the
possibility of switching between grades of oil in the medium term.
Petrochemicals is in
second place, but its
importance is growing
About 10% of the fuel is used in the petrochemical industry, and then for
the needs of the production of clothing, construction, electronics, etc. The
use of oil is the energy sector is growing rapidly and is likely to continue to
contribute to global demand growth. But for the production of electricity
oil and petroleum products are less used due to their high cost. As a result,
approximately 5% of world demand comes from electricity production
and household consumption.
The Macroeconomic Effects of Price Reduction
Exporters are going to
bear tests (although
systemic effects are
unlikely)
How will the global economy react at a low level of prices? For exporting
countries, this would obviously be a challenge. Export earnings will
diminish, economy will slow down, many political promises will have no
financial base. But for many exporting countries budget price of $80 per
barrel is still quite comfortable, so systemic effects in the world economy
are not expected.
… and importers are
waiting for the
acceleration of
economic growth
For the countries-importers fall in oil prices will mean the long-term cost
reduction, i. e. increase of their competitiveness. Reduced price of $20,
according to the OECD assessment, will accelerate growth in the OECD
countries by 0,4pp for 2 years. On the other hand, the decline in prices in
the energy sector will have a strong deflationary effect that complicates
the activity of the central banks of countries in the liquidity trap. For
example, the European Central Bank in the euro area can not raise
inflation by 1% yoy even for 14 months. And the current deflationary
effect of reducing the price of energy products will exacerbate the
situation.
Moreover, the total
effect on the world
economy will be
positive
In general, the effect on the world economy will be positive. Propensity to
savings for companies is lower than that of the population, so the
redistribution of income from producers to consumers will increase
demand, and at the same time the world economy will grow as well.
According to the IMF, the price reduction of $10 will accelerate the growth
of the world economy by 0.2pp per year.
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SBERBANK OF RUSSIA
Cheap energy can
define a new vector of
global development …
The decline in energy prices could set a new vector of global development.
The main reason for moving production in previous decades was labor
costs. It were the cheapest workers who formed the base of exportoriented growth model of South-East Asia and in particular China. In
recent years, the gap in labor costs declined significantly. In some
industries started the process of return of production to the United States.
The new "energy landscape" could further accelerate this trend. The main
beneficiaries of the shale revolution, of course, will be the United States
and Canada, which now accounts for more than 2/3 of the world shale oil
production. Moderate growth in labor costs combined with a significant
reduction in the cost of energy and excellent investment climate create big
incentives for placement of capital-intensive industries. Given the current
capital mobility, it could happen within a few years.
… and a new round of
struggle for
competitiveness
The main losers of "energy revolution" may be the countries where the
high cost of labor is combined with high energy prices. In particular this
applies to Japan, which abandoned nuclear power in favor of gas after the
Fukushima, and European countries which are actively subsidizing
renewable energy sources. Russia, unfortunately, also risks to become a
part of that group (see Table 5 above).
Conclusion
Prices will rise in 2015,
but the oversupply will
persist
Lower prices in 2014 were provided both by fundamental and temporary
factors. The "after-game" of temporary and seasonal effects will provide
the oil price rise to $70-80 per barrel. But pressure on prices (in real
terms) will continue until production in the United States grows. Falling
prices in the medium term than in the past decade to a new "equilibrium
level" has become an objective reality. The growth in demand, at least in
the coming years, will not exceed the growth of production capacity. At the
same time we see the political risks on the supply side (Iran, Iraq, Libya,
Venezuela, Mexico, Russia). This means that the inherent volatility of oil
prices will not decrease, but only increase.
OPEC remains the
industry leader
OPEC's share of world exports in 2019 will drop to 47%, but the potential
of varying capacities will maintain a dominant position in the market and
in the medium term. The second place on the volume of exports will go
from African countries to the countries of the former Soviet Union (Russia,
Kazakhstan, Azerbaijan).
Table 5. Key factors of competitiveness in the next decade
Chart 10. Road transport demand, the share of diesel
Source: EIA
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SBERBANK OF RUSSIA
Shale revolution
determines the
development of the
market in the next
decade
Shale Revolution was accomplished. The final stage will be the
construction of infrastructure for the export of shale oil. Production
processes are debugged, and the price of oil, preserving profitable
production, dropped (on average) up to $65 per barrel. The oil of
traditional fields received a full-fledged competitor on the horizon till the
year 2020-2025. The US production will begin to fall after this and a new
stage of market development will start. But changing technologies can
delay this moment.
The world economy
will benefit from lower
prices
The world economy as a whole will benefit from lower oil prices. The
acceleration at lower prices of $10 can be up to 0,2pp year. Thus, countries
who will become first in taking advantage from the "shale dividend" (after
the United States and Canada) will get a great chance to accelerate in the
medium term due to lower costs and the influx of capital-intensive
industries.
© Center of Macroeconomic Studies
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The Review Was Created By
Yulia Tseplyaeva
The director of Macroeconomic
Research Center
[email protected]
Nikolay Frolov
Chief analyst
[email protected]
Alexey Kiselyov
Lead analyst
[email protected]
Gennady Andrianov
Commodity Strategist Sberbank
CIB
[email protected]
For all questions related to the sections you can contact us by the telephone of MRC (495) 747-38-79 or be e-mail.
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