Atlantic Councilâs Manning: US May Benefit, But Must Review Its Strategy, in a New World of âPeak Demandâ
World oil prices have slipped again after the global cartel, OPEC, declined November 27 to cut the amount of crude petroleum its members pump from the earth. Instead, OPEC followed pressure from Saudi Arabia to keep its production levels unchanged. With crude oil prices having fallen by about a third since June, Atlantic Council analyst Robert Manning underscores that they are likely to remain âin a range of $70 to $100 [a barrel] well into 2015, and perhaps beyond.â
Manning, a senior fellow at the Councilâs Brent Scowcroft Center on International Security served for years as a State Department and intelligence strategist on energy issues. The global energy market is changing so fast, he has written, that the US government should launch a broad review of its energy and foreign policies to adapt.
The OPEC meeting reflects not only the growth in US oil and gas production, but also the globeâs entry into âa world of what some have called âpeak demand,ââ Manning wrote in e-mailed comments this week. âAs growth slows in much of the OECD [the worldâs most developed economies] as well as in China, there is ample supply of oil, but demand is flat.â The International Energy Agency recently lowered its forecast for new demand for oil through next year. âAs economic growth continues to be modestâand as transport increasingly becomes more efficient with a rise in fuel standards and over time, electrification of transportâthis trend may continue,â Manning wrote.
Saudi Arabia vs North Dakota
OPECâs decision represents an expected victory within the organization for Saudi Arabiaâs campaign to let prices fall as a way of fighting for market share. The cartelâs share of the world oil market has been falling for years and it now sells roughly 40 percent of the worldâs crude oil.
The United States has upended the world market, and weakened OPEC, by pumping big new supplies out of shale rock, such as the Bakken geological formation below North Dakota. But that new production is expensive, and can be sustained only if the oil price is high. (Thatâs because it requires high-tech wonders such as drilling horizontally through underground rock that is too âtightâ or impermeable, to let oil flow into cheaper, vertical wells. Also, such âtight oilâ wells get depleted faster, requiring more exploration to keep supplies flowing.)
By letting the price drop, Saudi strategists hope to squeeze North Dakotaâs expensive new supplies out of the marketââto slow down if not undermine the shale revolution,â according to Manning. Bloomberg News reported last month that a crude oil price of $80 a barrel would halt nearly all growth in the US production of tight oil from shale; and at $70, the market forces could âcut production 28 percentâ from the Bakken formation.
Winners and Losers
âWithin OPEC, the Saudis and other [Persian] Gulf producers will be winners,â Manning wrote this week. âThe US and other OECD [Organization for Economic Cooperation and Development] oil-consuming nations, particularly in the less developed areas like Africa, the Caribbean, and much of East and South Asia alsoâ will benefit, as will âoil-intensive industries like airlines and trucking.â
Globally, âthe biggest losers will be Russia, Iran and Venezuela, along with other OPEC members,â Manning added. Companies of âthe shale[-petroleum] industry and the banks that lent to them are also at growing risk. Most shale tight oil can still turn a profit, albeit a smaller one, if oil is in the $70-$80 range. But as oil goes below $80 âŠ it becomes increasingly difficult for shale producers,â he wrote.
While the Saudisâ main target is US shale producers, Saudi Arabiaâs competition with Iran for influence in the Middle East âis an added factor,â in Manningâs view, with Saudi policymakers aware that Iran will be hurt economically much more than Saudi Arabia by continued low oil prices.
âFrom a US perspective, with sanctions on Iran and Russia, if oil stays at about $80 or below it will be devastating to the Iranian and Russian economies,â Manning wrote. âIt may improve the prospects for a nuclear deal with Iran, and certainly put more pressureâ on the Iranian government. âIn regard to Russia, which is still actively destabilizing Ukraine and supports [President Bashar] al-Assad in Syria, $80 oilâ will deepen the problems of President Vladimir Putin,â he added. Putin âneeds $110 [per barrel] to avoid a budget deficit.â
On Russia and its war on Ukraine, Manning added these comments:
--âRussia is already facing major economic difficulties â $100 billion in capital flight, a youth brain drain, the ruble down 23 percent, and a lot of corporate debt coming due in 2015 for starters. Negative cycles tend to feed on themselves. The Russian economy will be in recession or [have only] 1 percent growth next year and 2016. It cannot take advantage of the cheap ruble due to sanctions and difficulties in getting investment. The average Russian will suffer, but Moscow has enough foreign reserves to get by for now.â
--âIn regard to Ukraine, Putin has never been accused of being an economist. He appears motivated by revenge for Russiaâs fateâ following the collapse of the Soviet Union in 1991. âHe appears intent on reconstituting as much former Soviet space as is achievable, and intent on preventing a democratic Ukraine from successfully modernizing. If he wanted a reasonable deal in Ukraine, he could have gotten one from German Chancellor Angela Merkel and the EU. Instead, Putin appears to seek destabilization of Ukraine, and perhaps to create a land bridge from eastern Ukraine to Crimea,â which Russia invaded and annexed from Ukraine in March. âIf oil prices stay in the $80 range into 2016 and the costs of his war and occupation increase, Putinâs calculus may change.â
European Union Aims to Put New Muscle into Limiting Deficits; Will it Succeed?
Since 2009, Franceâs state budget has been breaking the rules. It has been exceeding the European Unionâs limit on the size of deficits, which are limited (under the Maastricht Treaty) to 3 percent of gross domestic product unless there are exceptional circumstances. Once in excessive deficit, a country must fulfill a specific timeline agreed, by European finance ministers, for coming back into compliance. Until this week, France's deadline to bring its deficit below 3 per cent of GDP was 2015.
Ukraineâs Friends Plan a Donor Conference in February; Is That Soon Enough?
On Ukraine, the economists are declaring an emergency. Ukraine is bleeding cash in its war against Russian and Russian-proxy forces in the Donbas region. With its industrial heartland shattered by the war, the countryâs economy is shriveling. And the warnings from economists are growing that Ukraine will need a big increaseâand quicklyâin international financial support, if it is to avoid an economic collapse.
âUkraine is at risk of a financial meltdown,â economist Anders Aslund wrote last week on his blog at the Peterson Institute for International Economics. âPresumably it would be reminiscent of the Russian financial crash of August 1998âwith default, high inflation, a frozen banking system, falling output, and panic.â
Atlantic Councilâs Matthew Kroenig on the Extension of Nonproliferation Talks
As Iran and six other nations announced a seven-month extension of their effort to reach a deal to limit the Iranian nuclear program, the Atlantic Councilâs Matthew Kroenig said Iran will pose a nonproliferation threat even if a deal is struck.
Kroenig, a nonresident senior fellow with the Brent Scowcroft Center on International Security, said the US and its allies must increase their pressure on Tehran to reach an agreement, but that a deal along the lines of the current negotiation will not be comprehensive. In an interview, Kroenig also discussed his briefâMitigating the Security Risks Posed by a Near-Nuclear Iranâissued by the Council last week.
Biden concluded by saying: âEnergy can and should serve as a tool for cooperation, for stability, for security, and prosperity."
Click here to read the full event report and to watch video of Biden and DavutoÄlu's remarks.
Atlantic Council's Gopalaswamy Comments
President Barack Obama will travel to India in January, becoming the first US president to visit the country twice while in office. Bharath Gopalaswamy, deputy director of the Atlantic Councilâs South Asia Center, tells Ashish Kumar Sen why this visit is importantâand notably how it will be seen by Indiaâs main rivals, China and Pakistan.
When Hitler Invaded Poland, No One Demanded Polish Reforms Before Offering Help. Why Is It the Reverse for Ukraine?
âSeptember 3, 1939 â British and French commentators and officials said today that it could no longer be denied that Hitler was invading Poland and that the Nazi forces represented the most serious threat to the existence of that country, but they said that Warsaw could not reasonably expect allied assistance unless it carried out massive reforms first.â
That story, of course, never happened. âŠ No one suggested that Poland needed reforms before defense because they recognized that if Poland did not exist, it could not reform. (The exception was those in London and Paris with links to the Communist Party who followed the Kremlin line even when Stalin was an ally of Hitler, as was then the case.)
Future of US Economy Depends on Getting Immigration Right
After months â and even years â of anticipation, President Barack Obama has provided an imperfect solution for nearly half the countryâs unauthorized immigrants. The bold decision to wield his executive authority will extend legal status to up to 5 million unauthorized immigrants; make it easier for high-skilled workers to stay; and strengthen security along the border with Mexico. It has been a long time coming. His actions will affect many more unauthorized immigrants than even President Reagan's 1986 Immigration Reform and Control Act.
The president has provided a temporary solution to a permanent problem. That permanent problem is our broken immigration system.
The sixth annual Energy & Economic Summit began with a welcome by Atlantic Council Chairman Jon M. Huntsman, Jr., President and CEO Frederick Kempe, Ambassador of the United States to the Republic of TurkeyJohn Bass, and Summit Director Orhan Taner.
Keynote speakers at the opening session at the Grand Tarabya Hotel on the Bosphorus were US Energy SecretaryErnest Moniz, EU Commissioner for Climate Action and Energy Miguel Arias CaĂ±ete, and Turkish Minister of Energy and Natural Resources Taner YÄ±ldÄ±z.