Cheap oil and the OFWs

Last week, I was invited by Kapatiran DLSU, a student organization, plus some development studies classes, to speak on this subject.

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My presentation was divided into two parts, with an open forum after Part 1, before proceeding to Part 2.

Part 1: Cheap oil and gas

  1. Oil and gas, prices and output
  2. Oil and gas, number of rigs vs. production
  3. Medium term outlook
  4. Concluding notes

Part 2: Employment impact

  1. Macroecon, jobs indicators, rich & emerging markets
  2. Global remittances by country
  3. OFWs destination countries
  4. Saudi government finance
  5. Concluding notes

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Glut in oil storage is mainly due to fast growth in US shale oil output, from 5-6 M bpd in the previous decade to current 9+ M bpd. An  interesting chart below — as the number of shale rigs decline, output increases. Meaning only high output rigs are running while the smaller output rigs are closed, temporarily.

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US and global demand stabilizing while supply keeps expanding, meaning the supply curve moves to the right. The decline in prices (from P1 to P2) is much larger than the increase in output from Q1 to Q2.

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Yes, no mercy for both Saudi and non-OPEC oil exporters. Both did not cut their output. The uncompleted fracking wells are just closed temporarily.

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U.S. crude oil production (including lease condensate) increased during 2014 by 1.2 million barrels per day (bbl/d) to 8.7 million bbl/d, the largest volume increase since recordkeeping began in 1900. On a percentage basis, output in 2014 increased by 16.2%, the highest growth rate since 1940.

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If already low nominal  prices are deflated or adjusted for inflatio  in to get real prices, it’s down to $20, $17 a barrel.

The same story can be said  of natural  gas. The number of shale gas rigs is declining but the overall output is rising.

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Concluding notes:

* Cheap oil is good. Especially for us oil consumers. Cheaper cost of air, land and sea transport. Cheaper cost for farmers using tractors, harvesters; for fisherfolks; for manufacturing, etc.

* Cheap oil though has negative effect on many OFWs based in Saudi Arabia and UAE.

* Cheap oil hurts dictatorial governments more, many of them in OPEC. Like Saudi Arabia, Iran, Venezuela. Also outside OPEC like Russia.

* Global capitalist competition is good. OPEC oil vs. Russia oil vs. US shale oil and gas vs. others

* Medium term outlook, cheap oil will stay. Something like $40/barrel average for the next few years.

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The  open forum questions centered on the medium term outlook, for how long is cheap oil going to be sustained. Then I continued in Part 2.

Part 2: Employment impact

  1. Macroecon, jobs indicators, rich & emerging markets
  2. Global remittances by country
  3. OFWs destination countries
  4. Saudi government finance
  5. Concluding notes

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Notice that unemployment rate in rich and middle class economies have tapered off, somehow. Meaning the feared dislocation of workers from oil-dependent sectors and sub-sectors could be bloated.

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Fiscal effect on Saudi Arabia — from budget surplus to budget deficit, rising from $14 B in 2014 to $98 B in 2015, highest in Saudi’s fiscal history, despite significant spending cuts. Meaning lower budget for public health, social sectors, physical  infrastructures, etc. Both direct and indirect spending (via private contractors and suppliers).

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I think one indicator if there are indeed “so many” displaced workers now back in the country is the volume of vehicle traffic at NLEX, SCTEX, SLEX. If there is high increase in vehicle volume in 2014 vs 2015, that means more motorists are driving more frequently, the tourism sector in many provinces in Luzon — and the rest of the  country — is booming, thanks to cheap oil.

Governments should not introduce new oil taxes or raise existing ones because that would mean lesser freedom and mobility for the people.

The full 27-slides powerpoint is posted in my slideshare account.

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Cheap energy now and in the future

Jan 16* This is my article in the monthly business magazine in Kathmandu, Nepal, January 2016 issue.
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Cheap energy now and in the future

Cheap oil has become even cheaper. High oil, coal, natural gas supply and inventories have become even higher. The prospect for more economic prosperity of many developing  countries has become bigger.

This is the current and near-future scenario in global energy prices and supply. There is more supply of oil, coal, natural gas and other energy products than the world can use and consume and store. So the natural and predictable result is low and even lower prices.

Below are the charts for the last five years of West Texas Intermediate (WTI) and Brent crude prices. These are low prices which have not been seen since six or more years ago.

Figure 1. Crude oil prices as of December 19, 2015

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Source: http://oil-price.net/

While the members of the Organization of Petroleum Exporting Countries (OPEC) are unhappy with these low oil prices, most industries and sectors that rely on oil products are relieved. People who save on their land travels because of high oil prices can now drive and visit more places. Airlines, shipping lines and bus lines should be capable of cutting their fares as their fuel costs have significantly decline There should be more tourism, more use of farm tractors and machines and less of farm animals, more use of gas for cooking and less use of firewood and charcoal, saving more forests.

World coal prices too are stabilizing at low levels. The recent UN Conference of Parties (COP) climate meeting in Paris has produced a general but non-binding agreement. No penalties for countries that do not obey their promised emission cuts, or countries that do not give their share of the targeted $100 billion a year starting 2020.

Figure 2. World coal prices in the last 10 years

02Source: http://www.infomine.com/investment/metal-prices/coal/all/

Coal use by more developing countries like India, China, Indonesia, Philippines, Brazil, etc. will be rising; And rich countries too like Japan and the US.

Peak oil, along with peak food and Malthusian hypothesis of more hunger and massive deaths, has been discredited since many years ago.  The short- and medium-term scenario is that world oil prices will hover between $40-$50, still low compared to 2012-2013 levels of nearly $100. And lower than the past decade’s prices.

We are in a period of cheaper energy, cheaper food, longer lifespan, healthier people. The problem of many countries now is there are more fat/obese people than thin and undernourished people. When people die at 50 or 60 yrs old, some would say, “he/she died young”. In 1900, when a person dies at 40 yrs old, that’s “long” already because life expectancy was only around 33 years.
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So a few decades from now, if a person dies at 70-80 years old, other people will say, “he/she died young.” Why, because the average life expectancy then will be around 90-100 yrs old.

This period of cheaper energy is a good opportunity for countries and governments to depoliticize energy pricing and procurement, to depoliticize the pricing of gas and  other petroleum products.

Governments should not heed any advice from multilateral agencies (World Bank, IMF, ADB, etc.) to raise fuel taxes and royalties. It is not a wise move by governments and the multilaterals to make cheaper energy to become expensive again.

More energy at cheaper price, more prosperity.

Cheap oil, natural gas and coal prices

Last Saturday, a $35 a barrel oil at West Texas Intermediate (WTI) was breached. Airlines and shipping lines’ fares should go down, more tourism. More farm mechanization, more cows and carabaos will be spared of heavy farm work.

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http://oil-price.net/

Some oil products other than WTI and Brent are actually cheaper than these. Like Western Canada, Iraq heavy, etc.

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Source: http://www.bloomberg.com/news/articles/2015-12-14/never-mind-35-the-world-s-cheapest-oil-is-already-close-to-20

The anti-fossil fuel planet saviours

Many of the tens of thousands of planet saviours and climate hangers who went to the UNFCCC COP 21 meeting in Paris who hate fossil fuel may be shivering with this development. They want the world to cut petroleum use while they do their frequent jet-setting global meetings and junkets on airplanes that fly and cars that run on petroleum.

They will dislike that there will be more trucks, more buses, more cars, more planes, more ships that move more people and goods across cities, islands, countries and continents, as oil prices keep falling.

The animal rights activists should welcome this development too. Millions of cows, carabaos, horses, other big animals will be spared of heavy and punishing farm work as it is cheaper and faster to use more tractors and machines than those animals.

OPEC now a price taker, not price dictator

The old, tested greed by OPEC member-governments have been shattered by heavy competition from shale gas/oil drillers and producers in the US, Canada, etc. Before, whenever oil prices fall down, OPEC would quickly cut their output from 30 M barrels per day (bpd) to around 29 M bpd. Now they cannot and will not do that. They are forced to keep producing at 30-31 M bpd, accept low prices and lower revenues, just to keep their market share.

The rest of us, oil consumers around the world, benefit from this global competition among oil and gas producers. In the Philippines, the minor Peso/$ depreciation contributed to small price rollback. Besides, the $35 per barrel is for 1 or 2 months delivery, meaning by January or February 2016, not December 2015.

Peak Oil theory is discredited

Peak oil, along with peak food and Malthusian hypothesis, climate alarmism, discredited. The short- and medium-term scenario is that world oil prices will hover between $40-$60, still low compared to 2012-2013 levels of nearly $100. And lower than the past decade’s prices.

We are in a period of cheaper energy, cheaper food, longer lifespan, healthier people. The problem of many economies now is more fat/obese people than thin and undernourished people. When people die at 50 or 60 yrs old, some would say, “he/she died young”. In 1900, when a person dies at 40 or 50 yrs old, that’s “long” already because life expectancy was only around 33 years.

So few decades from now, if a person dies at 70-80 yrs old, other people will say, “he/she died young.” Why, because average life expectancy then will be at around 100, 110 yrs old.

Regulated fares and the LTFRB

But why despite oil and fuel prices going down, public vehicles in the Philippines do not automatically bring down their fares?  When fuel prices go up, PUV operators and drivers ask for a fare hike again.

The Land Transport Franchising Regulatory Board (LTFRB) of the DOTC is a jerk government agency. MARINA (regulator for shipping companies and operators) and CAB (regulator for airlines) allow fare deregulation. So airlines’ fares can go up or down depending on the travel season. The LTFRB officials, past and present, are among the hard-core central planning bureaucrats. No fares can go up or down unless they give permits, unless they affix their signatures.

Not only world oil prices, natural gas prices are also falling, chart over the last 7 1/2 years. More energy at cheaper price, more prosperity.

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http://www.infomine.com/investment/metal-prices/natural-gas/all/

And world coal prices too. Since the Paris climate agreement is non-binding, no penalties for countries that do not obey their promised emission cuts, then more developing countries like India, China, Indonesia, Philippines, Brazil, etc. will be using this energy source to further empower their economy. Rich countries too like Japan and the US. Prices chart over the last 14 years.

coal
http://www.infomine.com/investment/metal-prices/coal/all/

Global capitalist competition will spring us more surprises, for the better. There are lots of shale gas/oil rigs that have been temporarily closed because of low prices. But there are lots more shale oil and gas deposits around. More global prosperity is the game.

Deflation

Yes, cheap energy prices can contribute to deflation or declining overall prices of commodities and services. But it will be a good type of deflation. More output per unit of input. In this case, more oil, more natural gas, per rig.

There is a distinction between good and bad deflation. The good is productivity-driven (cheap oil, cheaper mobile phones and flat tv, cheaper food and shoes, etc.). The bad deflation is due to poor economic outlook in the future (people seldom spend even if they have the money).

There is little role for governments in this type of deflation, and they should not intervene more, like imposing higher petroleum taxes. The WB and IMF have been lobbying for this tax hike for sometime now. They believe that petroleum being a “public bad” should be taxed more. Nehh? Those WB, IMF, UN, other multilaterals’ officials and bureaucrats love to jet-set and travel a lot, on petroleum-powered planes and SUVs, meaning it is useful for them, then declare petroleum as a “public bad”?

Low oil prices and South Asia

* This is my article in Business 360, a monthly magazine in Kathmandu, Nepal, September 2015 issue.

1Low oil prices and opportunities for energy development in  South Asia

Low world oil prices are seen as “negative” by many analysts because they pull down stocks and equity values of many energy companies and contribute to deflationary pressure. But in the perspective of ordinary oil and energy consumers, they are good and positive news.

Whether people move and transport themselves, their  family or  other people, or they move various commodities, oil is a very important raw material for such large-scale transportation of goods and people.

As of August 24, 2015, West Texas Intermediate (WTI) prices were trading  at $38-$39 a barrel. These are lower than the levels reached during  the sub-prime and housing prices turmoil in the US that spread to the rest of the world in 2008-2009. And these are prices that were seen in 2004 and earlier years.

Oil companies and oil-exporting countries are fighting for world market share and care less about the price, whether  they are OPEC or non-OPEC member-countries. With the revolution  in drilling technology and shale oil fracking, it seems that the average break even price for many companies could be $30-$35 a barrel, so that at $38, they can still make marginal profit.

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Continuous innovation and development  in drilling  technology using big data and robotics have significantly reduced the cost and time of drilling and finding oil. From a Forbes report last August 23, an article said that “Faster drilling means cheaper drilling, which makes marginal oilfields economical at lower oil prices. It costs about $20,000 a day to contract an onshore drilling rig, so shaving four days off a well yields an immediate $80,000 in savings. If smarter computers can reduce a rig’s head count by one, cut another $200,000 a year in salary, benefits and accommodations.”

Many developing countries in South and South East Asia can  take advantage of this to hasten their growth and development. Below are some basic  data on their total primary energy supply (TPES) in tonne of oil equivalent (toe) and electricity consumption. High TPES means higher energy input for growth and development.

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In South Asia, Nepal and Bangladesh are producing energy at very low levels. In South East Asia, the Philipines, Cambodia and Myanmar need further expansion in energy production.

At below $40 a barrel, diesel oil power plants that  are used as peaking plants (used only during peak hours) may be used for baseload power (capable of running 24/7) production.

4The cost of air, land  and  sea transportation should decline significantly and hence, more people and goods can be transported at lower costs. Minus the effects of currency depreciation, tourism and related sectors (airlines, hotels, restaurants and other shops) should  benefit from cheap oil.

For Nepal, Bangladesh, Cambodia  and Myanmar, today are good days to expand productive capacities, from fishing to farming to trucking and air/sea cargos.

Their governments should  resist temptations to raise oil and energy taxes because this will negate or cancel out the gains from low  oil  prices.

On low global oil prices

* Based on a publication by the Alas Oplas and Co. CPAs, Economic Update, August 2015.

Global oil prices have slightly recovered in recent days, West Texas Intermediate (WTI) for instance went down to as low as $38/barrel in late August, then recovered to $48+, and $46 a barrel as of this writing. Still, these are very low compared to prices 5-6 years ago.

My sister’s accounting and auditing office, Alas Oplas & Co. CPAs, produced its most recent monthly Economic Update, August 2015 entitled Opportunities for Low Oil Prices. Among the data shown there are the following.

Net increase in global oil supply (supply minus demand) has increased from a deficit of 0.2 million barrels per day (mbpd) in 2013 to a surplus of 1.1 mbpd in 2015, and rose to an average of 2.9 mbpd in July this year. That is a huge number. If it is 2.9 million barrels per week, the price should not decline significantly. On the other hand, oil demand by Organization for Economic Cooperation  and  Development  (OECD) countries is declining, from an average of 46 mbpd in 2012-2014 to only 45.4 mbpd in the second quarter of this year.

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Non-OPEC supply keeps rising, led by the US then Canada. These are mostly shale oil. Russia is still the second largest oil producer in the world (third is Saudi Arabia). Four ASEAN countries retain their average annual oil output with a combined supply of 2.2 mbpd. Indonesia has left OPEC several years ago.
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source: OPEC
Developing countries like ASEAN members except Singapore can seize this opportunity to further expand and optimize economic growth. For instance, there is low total primary energy supply (TPES), expressed in tons of oil equivalent (toe), and low electricity consumption among developing ASEAN economies. High TPES means higher energy input for agriculture, industry and services sectors.
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The opportunities for them, among others, are the following.
One, higher electricity production at lower prices because oil-based power plants that are used only for peak hours can be made to run more frequently.
Two, the cost of air, land and sea transportation should decline and hence, more people and goods can be transported at lower costs.
Three, agriculture and fishery sectors can benefit as more farmers and fisher folks can afford to use more hand tractors and motorized boats in their work.
Governments, often prodded by the World Bank and IMF to raise oil tax rates during periods of low global oil prices, should not heed these institutions. Low oil prices has better welfare impact on the poor compared to high oil prices due to higher oil taxes.

Cheap oil and Nepal

1* This is my article for the monthly magazine published in Kathmandu, Nepal, January 2015 issue.
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Cheap oil: an opportunity to deregulate and demonopolize the oil industry

The continued decline in global oil prices is at least good news for many developing economies who can take advantage to grow faster. After all, most economic activities require oil input – from buses and cars, tractors and fishing boats, airplanes and ships, bulldozers and backhoes, oil power plants and generator sets, and so on.

Current low prices have not been seen since six or more years ago. Below are the charts for the last five years (left) and past month (right) of West Texas Intermediate (WTI) crude prices.

Figure 1. Crude oil price at WTI, last 5 years and last month ending December 26, 2014

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Source: http://oil-price.net/

While some big oil companies and their allied firms in other industries are not happy with this fall, most

industries and sectors that rely on bought oil products are relieved. People who save on their land travels because of high oil prices can now drive and visit more places as their cost per trip has significantly gone down. Airlines, shipping lines and bus lines should be capable of cutting their fares as their  fuel costs have significantly declined. All these help expand the production of goods and services, eventually fuelling economic activates.

But why have world oil prices gone down this much recently? The quick answer could be the expansion in oil supply, much larger than the expansion in demand for oil.

On the supply side, the huge output from US shale oil, plus Canadian oil have swamped many oil importing countries’ inventories, and OPEC member countries did not cut their collective output as they used to do, retained its output at around 30 million barrels a day in order to protect their global market share.

On the demand side, some industrial countries experienced low or flat growth. Japan even went into a recession in 2014. Thus, their oil demand either went flat or negative. Meanwhile cars’ fuel efficiency worldwide is improving, meaning they can run longer stretch of roads with the same amount of oil.

The reduction in global oil prices is also reflected in Nepal’s local oil prices, as shown below.

Figure 2. Diesel prices in Nepal, in US$ per liter, period ending December 22, 2014

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Source: http://www.globalpetrolprices.com/Nepal/diesel_prices/

From this writer’s limited readings of the oil sector in Nepal, three interrelated issues stand out.

First, the oil shortage in some areas of Nepal in recent weeks, an ironic situation since the world is awash with an over-supply of cheap oil. The reason given was that the “fuel supplied by Indian Oil Corporation (IOC) is not as per the standard set by Nepal Oil Corporation… officials are undecided on whether to return them to India or supply them in the market.”(source: Nepalupclose.com)

Second reason is state monopolization of oil trading through the Nepal Oil Corporation (NOC). Oil prices are fixed by NOC’s board, which is composed of officials from the Ministry of Commerce and Ministry of Finance, among others.

Third reason could be oil supply monopoly of Indian Oil Corporation Limited (IOCL) to NOC. IOCL is also a state-owned enterprise of  India, the biggest corporation there and among the biggest firms in the whole world.

4The first problem is temporary and not permanent, but it can occur again in the future because it is an inter-monopoly agreement and consumers normally have zero  choice in a game between monopolies.

The second problem is slowly being addressed when  NOC introduced partial fuel price deregulation in September 29, 2014, where “NOC… will let oil prices go up or fall by up to two per cent two times a month.”(source: Himalayan Times, October 19, 2014). A better approach is to fully  deregulate oil pricing, competing oil companies and  gas stations can set their prices based on the extent and degree of competition.

The third pProblem can be addressed when the oil industry is deregulated as competing oil companies can source their oil from other suppliers.

These measures are easier said than done but the public have already seen and experienced how things are working or not working under a state monopolized oil industry.

Meanwhile, many Asian economies have experienced improvement in energy efficiency per unit of economic output. Many of the economies that realized high efficiency gains in the last decade had access to cheap energy.

5Figure 3. GDP per unit of energy use, 2000 (blue) and 2011 (red), constant PPP $ per kilogram of oil  equivalent(HK’s level is $24)

Source: ADB, Key Indicators of Asia and the Pacific 2014.

This means that in Hong Kong in 2011, for every kilogram of oil equivalent, its GDP rose by $24, an improvement from only $19 in 2000. In the case of Nepal, for every kilogram of oil equivalent used in the economy, domestic output in 2011 rose by almost $6.

Low world oil prices plus rising energy efficiency are good combinations to implement market reforms where competition by different players is the main regulator in protecting the public with more affordable prices of oil and other energy products. Competing players will have wider leeway to adjust not only to each other but also to their customers, big and small groups alike.