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At the recent 2016 Singapore International Energy Conference (SIEW), representatives from the IEA highlighted the potential for an oil price shock in the not-too-distant future, as the oil price bust has hammered investment in future supply, Neil Atkinson, head of the IEA’s Oil Industry and Markets Division, noted that ~$300 billion is needed to sustain the current level of global oil production. However, nations including the U.S., Canada, Brazil, and Mexico are facing difficulty in keeping up investments. Notably, companies from ConocoPhillips to Chevron Corp. and BP Plc have now canceled more than $100 billion in oil investments. Looking forward, the IEA expects that supply and demand will move closer to balance in the second half of 2016. However, if investment doesn’t resume in 2017 and 2018, we could see a significant spike in oil prices as oil supply can’t meet demand. Further, geopolitical events in countries such as Iraq, Nigeria and Venezuela could further exacerbate the supply shortage. The IEA's analysis ultimately shows just how tightly balanced the oil markets are, as a year or two of under investment in a highly capital intensive business, can drastically swing the market. Should oil investments remain muted through 2017, we could potentially be looking at $100 Bbl once again in the next 2-3 years.
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The new, younger Saudi regime lead by 30-year-old Prince Mohammed and the economy minister Adel Fakeih, continue to make big changes in the world’s largest oil exporting country. The mandate of the new Saudi government is to essentially overhaul one of the world’s most generous welfare systems through measures that were unthinkable a decade ago. Notably, the Saudi ministry has gone on a hiring spree as of late, wooing current and former employees of Deutsche Bank, Banque Saudi Fransi and National Commercial Bank as advisers. By plucking officials from private companies, the Saudi government is implicitly acknowledging that the old ways of doing things is not good enough. To combat the global oil crash, which has significantly reduced government coffers, the Saudi ministry plans to increase foreign investment, privatize government assets, improve accountability and introduce new sources of revenue (including a value-added tax). It would seem that with a transitional program in place, Saudi Arabia is finally embracing change. Interestingly, as bad as the oil crash has been for so many countries (including Saudi Arabia), it would seem that the new Saudi government has the vision and political will to create real positive change. A transformation where anybody in Saudi Arabia can grow a business and generate strong revenue on the basis of their real output, rather than the ability of the company to get a slice of the government pie.
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Jason SawatzkyA Canadian Energy expert Archives
October 2020
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