Oil and gas

Muna Al Fuzai

Oil prices went down markedly last week – Brent crude fell below $50 a barrel. What is happening? Is it due to the crisis in the GCC, US oil shale, or what? Traders had been expecting crude prices to remain stable, and the market had gained recently due to rising tensions in the Middle East and some indicators of a gradual decline in huge US oil shale reserves.

It seems to me that it is becoming increasingly difficult to determine a stable forecast for future oil prices in light of the tense situation in the region. OPEC and other oil producers promised to lower oil production by 1.8 million barrels, but some reports have raised doubt on OPEC’s ability to implement production cuts.

I don’t see the current crisis in the GCC behind the fall in oil prices. Saudi Energy Minister Khalid Al-Faleh recently said that he doesn’t expect political and diplomatic issues with Qatar to affect the agreement signed between OPEC and non-OPEC countries on reducing oil production. Also, a Bloomberg report predicted continued high oil prices, and disruption of gas supplies from Qatar is not expected. I agree, and believe it is in everyone’s best interest to abide by the terms of the agreement.

Talking about the future of oil, many economists have pointed out that in the next 10 years, oil-producing countries will face more economic problems if they do not expand their investments and diversify their sources of income. The new discoveries in the West of oil and shale gas will lead to a decline in demand for energy from traditional gas and oil producers.

On the other hand, Russian oil company Lukoil previously mentioned in its forecasts for the next 10 years the price of oil at the level of $50 per barrel. Lukoil is the second largest Russian oil company, and operates in many countries of the world with large investment projects. Iraq is the main Arab country with projects of this company.

It makes sense to give credibility to this statement because it is based on logic. It is crazy to expect an imaginary rise, such as a price of $120 a barrel or more in view of the tense international conditions. It is normal for Gulf markets to fear a drop in the price of a barrel to below $75, which affects government spending, performance of the economy and companies, decline in government deposits and quality of sovereign credit.

Government policies, especially in Kuwait, should not rely too much on hopes, but on reality. Therefore, the financial estimates of government spending, whether for salaries or privileges for senior officials, official flights and government projects should be reviewed very seriously since oil is the basic and only source of income.

What worries me most is that the salaries item for employees in the government sector consumes the bulk of the state budget without a real review to keep wages balanced with the requirements of the job. It is sad that some consider any change in salaries as a violation of their rights. The state’s fiscal policy must be designed to achieve sustainability and stability at all times.

In light of all the variables surrounding international oil markets, the expectation of fixed prices of oil is not right, because it is affected by major international conflicts, and the issue of oil shale is adding some pressure too. Future oil prices will remain hostage to changes, and therefore sound policies are key.

 

By Muna Al-Fuzai
muna@kuwaittimes.net

This article was published on 17/06/2017