COVER STORY

32 > QATAR TODAY > OCTOBER 2016

HAVE WE REACHED THE END OF AN ERA

WHEN OIL WAS THE MOST DEFINING
FACTOR IN THE ECONOMICS OF NATIONS?
ARE WE IN THE AGE OF
OIL IRRELEVANCE? OR DOES THE DIP
IN OIL PRICES AND THE SUBSEQUENT
ECONOMIC DOWNTURN REFLECT THAT LIFE
WITHOUT OIL IS A DELUSION?
BY SINDHU NAIR
33 > QATAR TODAY > OCTOBER 2016

COVER STORY

has been an integral part of our lives for as long as we

remember. Oil has built beautiful megacities and even
brought some down. Our daily commutes and our long
haul vacations are fueled by oil. Our grocery carts are filled
with Lebanese vegetables, Saudi Arabian milk, European
cheeses and Indian spices, all thanks to oil. We sit within
air-conditioned rooms, powered by electricity that is
produced mainly by petroleum products. The safe cocoon
we have built around us has largely been associated with oil,
in more ways than we can think of. Its inevitable that we
feed on this resource as it was easily available and procured.
Oil is like winning the energy lottery, according
to Richard Heinberg, an American journalist who has
written extensively on energy and sustainability. He says
it is predictable that oil became an integral part of energy
economics. Imagine this: the amount of energy from a
gallon (approx 3.78 litres) of oil is equivalent to six weeks
of human labour.
But we all know that the lottery effect does not last
too long.
Weve generally assumed that this black gold will
continue to feed into national coffers and cushion the
future. But the oil economy is slowly going to be consigned
to history. We will soon be moving to an era where oil will
not play as big a role as it has played so far.
Heinberg has stated: We have built a regime where we
believe that every year there has to be more oil available to
fuel economic growth. Soon the economy will not be able to
grow due to world peak oil.
According to international oil economist and visiting
professor of energy economics at Europe Business School,

Dr Mamdouh Salameh: No other commodity has been so

intimately intertwined with national strategies and global
politics and power as oil. The close connection between oil
and conflict derives from three essential features of oil: (1)
its vital importance to the economy and military power of
nations; (2) its irregular geographic distribution; and (3)
peak oil.
While not in the immediate future, but it is a reality that
economies thriving on oil revenue might soon diminish and
energy from various other resources will slowly take centre
stage.
The IEA figures
According to International Energy Agency (IEA) figures,
global oil demand growth is slowing at a faster pace than
initially predicted. For 2016, a gain of 1.3 mb/d is expected
a downgrade of 0.1 mb/d on previous forecasts due to
a more pronounced 3Q16 slowdown. Momentum eases
further to 1.2 mb/d in 2017 as underlying macroeconomic
conditions remain uncertain.
World oil supplies fell by 0.3 mb/d in August, dragged
lower by non-OPEC producers. OPEC crude production
edged up to 33.47 mb/d in August testing record rates as
Middle East producers opened the taps. Kuwait and the
UAE hit their highest output ever and Iraq lifted supplies.
Output from Saudi Arabia held near a record, while Iran
reached a post-sanctions high. Overall, OPEC supply stood
at 930 kb/d above a year ago.
One change that is not reflected in the IEA figures was the
very recent OPEC decision to cut the output. This would be
the first time in eight years that the oil cartel has agreed to

mb/d

World Oil Demand

100

OPEC Crude oil supply

mb/d

97.5

95

40

30

92.5

20

90

10

87.5
0
85

1Q2013
1Q2013

3Q2013

34 > QATAR TODAY > OCTOBER 2016

1Q2014

3Q2014

1Q2015

3Q2015

1Q2016

3Q2016

3Q2013

1Q2014

3Q2014
Supply

1Q2015

3Q2015

Series 2

1Q2016

3Q2016
2016 OECD/IEA

a lower output. The agreement was reached on September

28 at a meeting in Algiers. And oil prices surged more than
5% in reaction.
A global glut of oil supply had caused oil prices to crash
over the last two years. And OPEC nations, led by Saudi
Arabia, refused to lower production until now.
Under this recent agreement in Algiers, OPEC oil
production is expected to be reduced to a range of 32.5 to
33 million barrels of oil per day from 33.4 million. Saudi
Arabia, the largest oil producer, is expected to give up
350,000 barrels a day, according to a senior OPEC source
quoting the final proposal. Other OPEC nations are
expected to lower production too, though more details
were not immediately clear.
Three countries are exempted from the production cuts:
Iran, Nigeria and Libya. Economic sanctions were lifted on
Iran earlier this year, and Libya and Nigeria have had some
of their oil facilities damaged by terrorist attacks in recent
months.
Will this cut of production raise the price of oil? And
with demand decreasing what will the effect on the
OECD countries?
Will oil continue to hold on to its prominence? Or will it
lose some of its shine?
Oil and OPEC
Dr Salameh believes that oil has a lot more of glitter to add
to the economy. He says that any energy gap during the
coming years will have to be filled with unconventional
and renewable energy sources. However, it is very
doubtful whether these resources could bridge the energy
gap in time as to be able to create a sustainable future
energy supply.
Those who are prematurely talking about the decline
of the supremacy of oil should think again. They should
look no further than the adverse impact that the collapse of
oil prices since July 2014 has had on the global economy,
says Dr Salameh.
He predicts that oil will continue to reign supreme for
the rest of the century and maybe even beyond.
Contrary to widely accepted wisdom, oil will remain an
integral part of the Middle East economies throughout the
21st century and far beyond. Even if cheap alternatives to oil
in transport, water desalination and electricity generation
were to become readily available in the future, oil will not
be left underground because the Arab Gulf oil producers
will use it to power thousands of water desalination plants
to generate enough water not only for drinking but also for
irrigation, thus making the desert bloom again. They will
also use it to dominate the global petrochemical industries
and any industries in which oil is a feedstock.
Gopal Balasubramaniam, Partner, Head of Oil and Gas,
KPMG, reflects on the power oil has had on economies and
how the demand-supply equation has been tilted, bringing
in more players from the non-OPEC sector into play.
Powerful countries have always been major consumers

For some time now, it has become evident that oil is not
the be-all, end-all commodity that it used to be. It is not
the only or the most reliable form of riches that many
policy-makers once assumed it to be."
Mehran Kamrava

Director
Center for International and Regional Studies
Georgetown University School of Foreign Service in Qatar.

of oil with the valuable commodity supporting growth

through manufacturing and energy provision. With
consistently high consumption, world leaders have been
able to strike favourable, long-term contracts with oil
producers, taking advantage of economies of scale of
buying. These countries have also invested heavily in
infrastructure to store and transport oil to help mitigate
against any potential supply issues. Over the past few
decades, we have also seen some of these powerful
countries allocating state funds for exploration and
production of hydrocarbons tilting the demand-supply
equation. The top three oil-producing countries presently
are Saudi Arabia, Russia, and the United States.
With shale oil and gas discoveries in the US, Canada
and some parts of Europe, it is likely that some powerful
countries may become self-sufficient in oil and could in fact
begin to export in the near future.
Balasubramaniam says that new technologies are
being developed to reduce shale oil production costs
and reduce its environmental damage. As the viability
35 > QATAR TODAY > OCTOBER 2016

COVER STORY

Oil ECONOMICS AND QATAR

EXPERTS TALK

Austerity Measures

Sanjay Bhatia

Managing Director, Alpen Capital Investment Bank

(Qatar) LLC

slump in the oil prices has slowed down the oildependent GCC economies, thus adversely affecting
business sentiments in the region and forcing most
of the member countries to resort to austerity measures.
Consequently, spending on business travel and MICE events
has reduced within the region. Any significant fluctuation in
the exchange rate between the US-dollar and other currencies
is likely to have an effect on travelling plans of visitors to the
GCC region. This is because the currencies of most of the GCC
nations are pegged to the US-dollar. This was evident when a
drop in the oil prices led to a sharp devaluation of the ruble
against the US dollar, thus affecting tourism spending by the
Russians. Chinese spending in the GCC was also affected due
to the depreciation of the yuan against the US dollar. Thus,
depreciation of currencies such as the ruble, euro, pound, and
yuan against the US dollar has made the GCC an expensive
destination. The euro and pound depreciated further
recently with the UKs decision to exit the European Union.
A continued weakness in these currencies is likely to have a
negative impact on tourism spending in the GCC region.
All these factors are likely to have a negative impact on
the travelling plans of tourists, thereby impacting sectors
such as hospitality and retail. The current economic scenario
with sustained decline in oil prices also poses a challenge to
the GCC construction and healthcare sectors, both of which
are heavily reliant on government expenditure. Government
spending in these two sectors might be curtailed as part of the
severity measures undertaken by GCC governments. The lack
of liquidity in the markets has also put pressure on the growth
of the construction sector in particular.

36 > QATAR TODAY > OCTOBER 2016

of these technologies increases, shale will become a

cost-competitive hydrocarbon resource. This will put
pressure on the big oil producers from the Middle East
(and elsewhere) who will need to price their oil exports
competitively moving forward. And the threat is not just
from shale production, but also from renewable energy.
Professor Paul Stevens a distinguished fellow at
Chatham House, the Royal Institute of International
Affairs in London, a specialist on the Middle East affairs,
says that there is no doubt that oil will lose its prominence.
We now face peak oil, not in the old sense of the running
out of oil, but in the fact that there is far more supply than
there is demand for oil, he says.
He reminds us of the famous words of the former Saudi
oil minister, Sheik Ahmed Zaki Yamani, who warned his
OPEC colleagues: The Stone Age didnt end because we
ran out of stones. And the Oil Age will not end because we
run out of oil but because we find other alternatives.
And the future will be electric, he predicts, it will be an
increasingly electric world.
Putting the focus on Organisation of the Petroleum
Producing and Exporting Countries (OPEC) and the
dominance of this entity, Prof . Stevens dismisses the power
of the organisation, saying, OPEC was never dominant and
increasingly over the last few years it has been losing its
relevance. (He spoke to us before the OPEC decision to cut
oil production.)
Since OPECs decision in November 2014 not to cut oil
production, it lost its relevance. Its role was to control the
oil market and once they decided not to change production
they basically gave up on that control. The oil price then
started to be determined by the competitive market. This
was the first time this happened since 1928.
The only way that OPEC can gain control, according to
Prof. Stevens is if they reinstate the quota system which,
according to him, is highly improbable.
OPEC as an institution is effectively dead. There is a lot
of talks about the prospects of an agreement in Algiers but
that is highly unlikely as the Russians have made it clear
that they will not make any deal unless OPEC agrees on a
strategy. he stated. Saudi Arabia and Iran, however, are at
such different levels of what they want that a strategy too
seems to be quite doubtful.
If they do have a deal in place, then it doesnt mean
much as the agreement will not last and they will cheat on
the deal as they have done so before, he says.
In his recent research, Prof. Stevens also specifies the
challenges that face the International Oil Companies, in
the face of declining oil prices.
The only realistic option for the IOC lies in restructuring
and realising many of their current assets to provide cash for
their shareholders. Inevitably, this means that they must
shrink into the remaining areas of operation, functionally
and geographically, where they can earn an acceptable
return. This would require a major change in the corporate
culture of the IOCs. It remains to be seen whether their
senior management could handle such a fundamental shift.

If they can, the IOCs will be able to slip into a gentle decline
but ultimately survive on a much smaller scale.
Dr R Seetharaman, Group CEO, Doha Bank, is of the
opinion that GCC should emphasise on fiscal prudence and
diversification in the near future to withstand shocks from
low oil prices.
Balasubramaniam from KPMG also agrees that the focus
will now be on unconventional oil and renewable energy.
The giants in Asia China and India have historically
been the biggest importers of oil and energy, however, they
are investing heavily in wind and solar energy and have
made good headway. Even within the Middle East, we are
seeing an increased investment in solar energy, taking
advantage of the regions climate, he says.
Still an oil rich country?
For ages we have described Qatar as a small thumb-like
projection that rose from being a pearl harvesting country
to an oil-rich one. Will the status quo of being an oil rich
country change to a new resource that Qatar will harvest?
Or will oil-rich country lose its saleability and will we opt
for the next new oil for our economy to depend on?
Mehran Kamrava, Director of the Center for
International and Regional Studies at Georgetown
University, School of Foreign Service in Qatar, gives us a
very broad perspective of how oil has affected different
countries and how each county has an inexorable tie with
this commodity.
For some time now, (three or four decades), it has
become evident that oil is not the be-all, end-all commodity
that it used to be. It is not the only or the most reliable form
of riches that many policy-makers once assumed it to be. It
has had increasingly declining importance in social welfare
and in enabling the states to deliver on social services, says
Kamrava.
Kamrava divides the role of oil into three broad
categories.
The first comprises those countries with huge
populations; the oil production is enough for the population
and also generates some revenues for the governments but
it is not enough to be the sole source of revenue. These
countries include Algeria, Libya, Iraq and Iran.
The second category, countries which has lot of oil and a
smaller national population.
This enables the governments to provide cradle to grave
social services for its citizens as a result of the oil revenues,
as these governments have created very elaborate welfare
states, he explains. These second category includes all the
countries of the Arabian Peninsula: Saudi Arabia, UAE,
Qatar, Kuwait and, to a lesser extent, Oman too.
The third category is the group of countries that dont
have much oil.
But this group is dependent on indirect oil revenues. The
revenues accrued indirectly through oil-related activities.
Egypt, for example, has three main sources of revenue:
one is tourism revenue; another is the revenue through

We now face peak oil, not in the old sense of the running
out of oil, but in the fact that there is far more supply than
there is demand for oil."
Stevens Paul
International oil economist and visiting professor of energy
economics at Europe Business School
Chatham House

tariff collected for passage through the Suez Canal; and

then there is a remittance. So their economy depends on
revenues collected indirectly from oil producing countries,
through remittances from neighbouring oil producing
countries like Libya and GCC countries, he explains.
So the effect of an oil price decline will affect all these
countries, albeit differently.
It all depends on how directly dependent they are on this
commodity and how they have planned their future in the
absence of this commodity.
Countries which belong to the first category: Algeria,
Iran and Iraq, for example, have had periods of political
instability. Algeria had its civil war, Iran had its revolution
and its consequences, and Iraq has lived under occupation
and is slowly coming out of it. Instability has not been new
to these countries and they have a mechanism to deal with
popular uprising and insecurity. They have been witness
to so much political instability that they have developed
a certain adaptability and can mitigate or manage the
pressure of oil price decline, he says.
37 > QATAR TODAY > OCTOBER 2016

COVER STORY
Oil ECONOMICS AND QATAR
EXPERTS TALK

Fiscal Prudence And

Diversification
QATAR EXPECTED
TO GROW AT

3.4
%
4

IN 2016 AS AGAINST

IN 2014

Dr R Seetharaman
Group CEO, Doha Bank

he oil price boom which we saw from late 2004 to 2008

and again from 2009 to mid-2014 had contributed
to the GCC economic growth. The GCC economies
sovereign wealth funds (SWFs) had capitalized on the oil boom
and built their reserves and also diversified their overseas assets.
GCC SWFs have accumulated close to $2.67 trillion at the start
of 2015 and constitute more than 37% of Global SWFs. The UAE
SWF is more than $1.07 trillion, $763 billion by Saudi Arabia,
$548 billion by Kuwait and $256 billion held by Qatar. Oman and
Bahrain maintain $19 billion and $11 billion respectively. Prior to
the fall in oil prices the GCC GDP at current prices was expected
to exceed $2.1 trillion in 2013 and the current account surplus
was expected to exceed $330 billion in 2013. (almost 15% of GDP
at current prices).
The WTI and Brent fell below $100/ barrel in July 2014 and
Sept 2014, respectively, on account of excess supply from nonOPEC producers. The oil prices have continued to a witness a
downtrend since mid-2014. GCC GDP at current prices in 2014
was at $1.647 trillion and is expected to be $1.302 trillion in 2016
on account of the fall in oil prices. The GCC current account
surplus in 2014 was at $238.07 billion (14.5% of GDP at current
prices) and is expected to fall to a current account deficit of $91
billion (7% of GDP at current prices) in 2016. This year WTI and
Brent had touched an all-time low below $30/ barrel in February
2016 on account of slowdown in the Chinese economy and excess
oil supply concerns.
Most of the GCC economies will witness a slowdown in
economic growth on account of the fall in oil prices. Saudi Arabia
is expected to grow by 1.2% in 2016 as against 3.64% in 2014.
Bahrain is expected to grow at 2.2% in 2016 as against 4.45% in
2014. UAE is expected to grow at 2.4% in 2016 as against 4.6%
in 2014. Oman is expected to grow at 1.8% in 2016 as against 3%

38 > QATAR TODAY > OCTOBER 2016

in 2014. Qatar is expected to grow by 3.4% in 2016 as against 4%

in 2014. Kuwait is expected to grow by 2.4% in 2016 as against
0.03% growth in 2014. Liquidity conditions in the GCC banking
system and banks borrowing costs are expected to tighten amid
falling public deposits, coupled with a modest increase in loans
and future increases in US interest rates.
The GCC region has cut spending to battle fiscal deficits which
could reach 11.6% of gross domestic product in 2016. Ambitious
fiscal consolidation measures are being implemented this year.
A combination of lower growth, higher debt levels and smaller
domestic and external buffers leave Saudi Arabia less well
positioned to weather future shocks. The Abu Dhabi governments
sizeable fiscal buffers will help the UAE government to cope with
the challenges from the ongoing economic slowdown and allow
it time to adjust its fiscal policy to lower oil prices. The impact
of low oil prices on Qatars government balance sheet and on
its external balance sheet is manageable. The sharp decline in
oil prices, fiscal consolidation efforts and upcoming refinancing
needs are expected to keep commercial debt issuance in GCC.
The GCC sovereign bond issues were active during this year
which includes, Qatar $9billion, Emirate of Abu Dhabi $5
billion and Oman $3 billion respectively.
We also have to wait and see whether oil producers come up
with any action to balance the oil market. According to IMF
April 2016 Outlook, economic growth in GCC is expected to slow
to 1.8% this year from 3.3% in 2015 on account of tighter fiscal
policy, weaker private sector confidence and lower liquidity in
the banking system. GCC non-oil growth is projected to be 3.25%
over the next five years, well below the 7.75% recorded during
2006-2015. Further risks to growth include a more profound
knock-on from fiscal tightening, more oil price declines or
faster-than-expected US rate rises.

Kamrava doesnt foresee a doom and gloom situation

when the oil revenues significantly wane.
It would stand to reason that the GCC countries are
countries that are most directly dependent on oil, he says.
However these are the countries that have planned most
elaborately probably being aware of the dire consequences
that a post-oil era would bring them.
Qatar is trying to forge a knowledge-based economy;
UAE has pegged itself to an industrial-based economy and
Saudi Arabia is implementing major economic adjustments
to reduce or alleviate the dependence onoil.
We have seen, historically, that there are regular cycles
of oil boom and oil bust. Over time, these states have
developed a mechanism to deal with this fluctuation and
the increasing lack of centrality of oil revenue makes it
much easier for the countries to make sure that they do not
keep all their eggs in one basket, he says.
Taking the example of one GCC country that was
dependent on oil revenue for some time till it ran out of
oil, Kamrava says, Bahrain ran out of oil about 50 years
ago and they turned themselves into a banking centre. The
country did not implode, says Kamrava. Maybe they did
not resort to flashy expenditure as some of their neighbours
did but they survived.
The third category of countries has had to learn how to
live with severe limited revenues due to reduced income.
They will also have to look for alternative sources. Egypt
had to learn with severely reduced tourism revenue. For
Egypt, tourism has been what oil has been to Saudi. It was
revenue that was available, without much work. But since
oil has been indirect revenue they also had to face a fall in
lifestyle.
The biggest costs to all of these governments are the
subsidies that they have promised to their citizens that
have become very expensive over the years.
Many governments and policymakers know that they
need to make changes; for example reduce subsidies on two
key items, bread and fuel.
The UAE was the first Gulf country to have cut the fuel
subsidy. Saudi Arabia has also already started cutting its
subsidies, first going after fuel. Saudi Arabia also plans to
cut public-sector wages as well as other subsidies by 2020,
scaling back the state largesse that helped ensure political
loyalty in the largest Arab economy.
The Saudi cabinet approved the National Transformation
Program, part of the Vision 2030 plan unveiled by deputy
crown prince Mohammed bin Salman that include reducing
public-sector wages to 40% of spending by 2020, from 45%.
Some countries and their governments are reluctant to
impose taxes even if that will be an important tool to add
to the dwindling state coffers. Other governments do not
impose taxes but they include hidden taxes like license
costs etc which contribute to the economy as well, says
Kamrava.
Fuel prices in Qatar were allowed to fluctuate in response
to changes in the global market from May 1. The monthly
revision in local fuel prices followed the governments

There will be pressure on the big oil producers from the

Middle East (and elsewhere) who will need to price their oil
exports competitively moving forward. And the threat is
not just from shale production, but also from
renewable energy."
Gopal Balasubramaniam
Partner,
Head of Oil and Gas, KPMG

decision on fuel subsidy reforms in Qatar and will help to

reduce the revenue decline due to the oil price dip.
Looking at it from an expatriate angle, Kamrava feels
that, historically, all the Gulf countries have gone out of
their way to make life much more comfortable for the
people residing here by providing comforts to match those
in their home countries. These comforts might not take as
much precedence now, he says.
As oil revenues decline, fewer contracts will be handed
out, fewer infrastructure projects will be signed, and as
they decline there will be fewer opportunities for imported
labour and this will be part of the future for the Gulf
countries.
But even if the oil decline has been more drastic than
anticipated and an oil price of $100 a barrel will never occur
in the future, Kamrava feels nothing much will change in
the Gulf countries. The biggest challenge that the country
is the human resources challenge and even with the future
looking less prospective, there will remain opportunities
for human resources, he reassures.
39 > QATAR TODAY > OCTOBER 2016

COVER STORY

Oil ECONOMICS AND QATAR

EXPERTS TALK

The Amazing Age of Oil

Dr Mamdouh G Salameh

International oil economist and visiting professor of

energy economics at Europe Business School

hen Edwin Drake drilled one of the worlds first

commercial oil wells in Titusville, Pennsylvania,
in 1859, he definitely could not have anticipated
the tremendous impact his drilling would have on the
global economy, civilization and warfare in the years that
followed.
Since then, oil has been the lifeblood of the industrial
worlds progress and standard of living. Innumerable
everyday products from pharmaceuticals to computersdepend on oil and its refining into complex chemicals and
plastics. Modern industrial farming, which feeds much of
the world, would grind to a halt if it were deprived of dieselpowered tractors, oil and gas-based fertilizers to grow
and harvest crops, and the fossil fuels to process, package
and ship food to supermarkets worldwide to feed a world
population that has skyrocketed from 1.5 billion at the start
of the oil age to 7 billion now.
There is no doubt that oil is a leading cause of war.
Oil fuels international conflict through four distinct
mechanisms: (1) resource wars, in which states try to
acquire oil reserves by force; (2) the externalisation of
civil wars in oil-producing nations (Libya as an example);
(3) conflicts triggered by the prospect of oil-market
domination such as the United States war with Iraq over
Kuwait in 1991; (4) clashes over control of oil transit routes
such as shipping lanes and pipelines (closure of the Strait of
Hormuz or the Strait of Malacca for example).
As in the 20th century, oil will continue in the 21st
century to fuel the global struggles for political and

economic primacy. Much blood will continue to be spilled

in its name as long as oil holds a central place in the global
economy.
During the 20th century, oil emerged as an effective
instrument of power. The emergence of the United States
as the worlds leading power during the 20th century
coincided with the discovery of oil in America and the
replacement of coal by oil as the main energy source. As the
age of coal gave way to oil, Great Britain, the worlds first
coal superpower, gave way to the United States, the worlds
first oil superpower.
Yet oil has also proved that it can be a blessing for some
and a curse for others. Since its discovery, it has bedevilled
the Middle East and the world at large with conflicts and
wars. Oil was at the very heart of the first post-Cold War
crisis of the 1990s the Gulf War.
Oils Firm Grip on the Global Economy
Those who are already starting prematurely to talk about
the decline of the supremacy of oil should think again.
They should look no further than the adverse impact that
the collapse of oil prices since July 2014 has had on the
global economy.
The global economy has not been able to reconcile
itself with the collapse of oil prices because the main
ingredients that make up the global economy, such as
global investments, the oil industry and the economies of
the oil-producing countries, are all being undermined.
While it is true that low oil prices could reduce the cost
of manufacturing, thus helping the global economy to
grow, it is a short-term benefit as this is vastly offset by a
curtailment of global investment which forces companies
around the world to cut spending, sell assets and make
thousands, if not millions, of people redundant.
There has been a loss of 0.75%-1.00% annually in global
economic growth since 2014.
The seven major oil companies in the world - Royal
Dutch Shell, BP, ExxonMobil, Chevron, Total, ENI and
Statoil need a price of $125-$135/barrel to balance their
books. They also need certainty about the future trend
Table 1

Net Oil Export Revenues of the Arab Gulf Oil Producers

($ billion)

Countries

2013

2014

2015

Iraq

86

74

46

Kuwait

92

72

38

Qatar

42

34

20

Saudi Arabia

274

208

111

UAE

53

42

28

Oman

27

22

11

Total

574

452

254*

Source: U.S. Energy Information Administrations (EIA) 2014 Short-term Energy

40 > QATAR TODAY > OCTOBER 2016

of the oil prices before committing themselves to huge

investment in exploration and production.
As a result of declining oil prices, the oil majors have
already sold many of their production assets and have
cancelled more than $200 billion in oil and gas investments
so far, which will translate in two years time into a smaller
share in the global oil production. Oil production by the
major oil companies: Exxon Mobil, Shell, Total, Chevron
and ENI has declined from 11.5 million barrels a day (mbd)
in 2003 to 9.5 mbd in 2015. This will be reflected in steeper
oil prices in the near future.
At prices much below $75 a barrel, some of the North
Sea reserves might be too expensive to develop. Some of
the UK North Seas remaining economically-recoverable
resources, estimated at 15 and 16.5 billion barrels (bb) of oil
and natural gas, will end up as so-called stranded assets
hydrocarbons that are simply too expensive to develop.
Moreover, global investment in upstream exploration
from 2014 to 2020 will be $1.8 trillion less than previously
assumed, according to leading US consultants IHS.
The Arab Gulf oil producers earned $574 billion in net
oil export revenues in 2013. My calculations show that
they earned an estimated $452 billion in 2014, down 21%
on 2013 earnings. Their earnings in 2015 were estimated at
$254 billion based on an average oil price of $40/barrel. The
Arab Gulf oil producers have lost a total of $320 billion in oil
revenues in 2014 & 2015 (see Table 1).
Outlook(STEO) / Authors projections for earnings in
2014 & 2015.
Some OPEC countries need very high prices to break even
in their budgets and pay for all the government spending
they have racked up in recent years.
Iran, for instance, needs prices at around $130 a barrel
while Saudi Arabia needs an oil price of $106/barrel to
fiscally break even, up from $98 a barrel in 2014, according
to the International Monetary Fund (IMF) (see Figure 1).

Saudi 2015 and 2016 budgets showed deficits amounting

to $140 billion and $134 billion, respectively. This is
equivalent to 20% of Saudi gross domestic product (GDP)
according to the IMF.
In less than 18 months, the Kingdoms Central Banks
reserves dropped $175 billion from $732 billion to $557
billion.
As for the United States, it is doubtful whether the
steep decline in oil prices would provide a boost to the US
economic recovery. While the price decline would certainly
providethe equivalent of a sizable tax cut for US consumers,
it will deliver a major blow to the increasingly important US
oil industry.
At a price of oil less than $60/barrel, the shale oil industry
is no longer profitable. This is already causing major
investment and employment cutbacks in the US oil and gas
industry, which is estimated to employ around 2% of the
US workforce. It is also raising the risk of major defaults
on the $200 billion in loans that have been extended to
the domestic shale oil industry. The cost of servicing that
debt has also increased exponentially after a number of
operators saw their ratings reduced to junk.
The second major downside is that it plunges into
recession major emerging market economies like Brazil,
Russia, and South Africa. This adversely impacts on the US
and global economic recoveries.
According to estimates by the World Bank, a 1% decline in
the growth of the BRICS economies (Brazil, Russia, India,
China, and South Africa) reduces global economic growth
by as much as 0.4%. More serious still, the sharp slowdown
in the economic growth of the emerging market economies
could put into question their corporate sectors ability to
service its $5 trillion debt. That in turn could add to the
stresses already appearing in the global financial system.
The combination of sanctions over the Ukraine crisis
and falling oil prices has adversely affected the Russian
economy by sending it into recession and causing the

Figure 1

OPEC Median Budgetary Breakeven Price

140
120

US$ per barrel

100
80
60
40
20
0
Qatar

Kuwait

Angola

UAE

Saudi
Arabia

Venezuela

Libya

Iraq

Algeria

Nigeria

Ecuador

Iran

41 > QATAR TODAY > OCTOBER 2016

Source: www.TRADINGECONOMICS.COM
FEDERAL STATE STATISTICS SERVICE

COVER STORY

4.8
Figure 2
4.3

Impact of Low Oil Prices on Russias GDP

2.1

0.8

1.3

0.9

0.8

0.7

0
2012

2012

2013

Russian currency to lose 40% of its value against the dollar.

Russian GDP grew by only 0.7% in the third quarter
of 2014 and was forecast by the World Bank, based on
an oil price of $78/barrel, to contract by 1.7% in 2015
(see Figure 2).
Still, Russia was able to withstand the onslaught of
sanctions, declining oil prices and currency depreciation
by increasing its oil production from 10 mbd to 11 mbd
thus mitigating the adverse impact of low oil prices on its
economy and also by having a trump card in Chinas energy
needs and financial support.
In the energy sphere, the two countries are an almost
perfect match: the worlds largest net energy exporter and
its largest net energy importer with a long land border.
Bringing oil and gas via pipelines from Russia would
strengthen Chinas energy security. It would cut the
amount of oil and gas that must arrive along vulnerable
transit routes.
And while the steep decline in crude oil prices has
adversely impacted on the global economy, global
investments, the world oil industry and the economies of
the oil producers around the world, the worlds biggest oil
importer, China, is benefiting from the low prices.
However, this benefit cant be sustained since low oil
prices hurt the global economy of which China is a major
part. If low oil prices continue, any benefits will eventually
be offset by a further slowdown in the global economy
which will, ultimately, affect Chinese economic growth and
Chinese exports. A continuation of low oil prices leaves no
winners only losers.
Are We on the Verge of a Post-Oil Era?
A few experts have been projecting the advent of the post-oil
era within the next fifty years. The underlying assumption
is that alternatives to oil would have been fully and cheaply
developed by then thus ushering the post-oil era.
There is no doubt that global energys future is in
renewables. Solar power along with other alternative
energy sources will ultimately provide all the electricity we
need, will power water desalination plants and will drive
our transport.

42 > QATAR TODAY > OCTOBER 2016

2013

2014

2014

And while renewable energy sources have made great

strides in the last 25 years, it will take their enabling
technologies probably 50 years more before renewable
energy sources start to have a decisive impact on electricity
generation and transport. In 2015, renewable energy
accounted for only 2.8% of the global primary energy
consumption.
And although electric cars have already made their
appearance on our roads, it will take many decades before
they make an impact on the global demand for oil for
transportation let alone replacing oil in the transport
sector. Therefore talking about the advent of the post-oil
era within the next fifty years is premature to say the least.
However, for the Gulf Cooperation Council (GCC)
countries Saudi Arabia, UAE, Kuwait, Qatar, Bahrain and
Oman there would be no post-oil era ever.
Contrary to widely accepted wisdom,oil will remain an
integral part of the Middle East economies throughout the
21st century and far beyond. Even if cheap alternatives to oil
in transport, water desalination and electricity generation
were to become readily available in the future, oil will not
be left underground because the Arab Gulf oil producers
will use it to power thousands of water desalination plants
to generate enough water not only for drinking but also for
irrigation, thus making the desert bloom again. They will
also use it to dominate the global petrochemical industries
and any industries in which oil is a feedstock.
Conclusions
Whilst renewable energy has made great strides in recent
years in electricity generation, its impact on the transport
sector is still negligible. It will take more than five decades
before electric cars could start to make an impression on
the global demand for oil for transport.
And while experts around the world sit in their ivory
towers and project the advent of the post-oil era within
the next 50 years, the realities of the situation cast doubt
on their projections. So to the question as to whether oil
supremacy is on the wane, my answer is an emphatic no.
Oil will continue to reign supreme through the 21st century
and maybe beyond