Original version in Spanish: Energía en 2018: aceleración geopolítica, más OPEP+ y Trump año II
Theme
What were the principal dynamics of the energy sector in 2017? What can be said about 2018?
Summary
The year 2018 points to oil prices above the 2017 average, to a tightening of geopolitical dynamics in the Middle East and to a growing rivalry between OPEC+ and unconventional producers in the US, now supported by the Trump Administration. More positively, the recovery of oil prices could have stabilising effects on those producer countries best prepared to take advantage of it.
Analysis
The year 2017 was intense, as foreseen in our paper of the beginning of last year, oil prices rose more than expected, geopolitical dynamics and pressures accelerated and accumulated in the Middle East, OPEC+ consolidated its credibility and President Trump decisively intervened in the energy field. Meanwhile, the year 2018 points to oil prices above the 2017 average, to the development of geopolitical rivalries stoked during the past year and to the emergence of new ones, including the possibility of new US sanctions against Iran. Consumer countries should begin to adapt to somewhat higher prices. On the other side of the equation, some producer countries have fallen into chaos and have little margin for a turnaround (Venezuela), while others appear better prepared to take advantage of the recovery in prices (Persian Gulf producers and Algeria). The competition between unconventional producers (fracking) in the US and OPEC+ –with a more assertive Russia now integrated nearly completely into this enlarged version of the oil cartel– will continue to deepen during 2018. Finally, European energy policy will continue to articulate the 2016 energy winter package; its evolution is analysed in another document devoted to climate change in 2018.
Prices supported
In the second half of 2017, oil prices rose more than expected, especially after the initial price drop following the OPEC meeting on May 25. Part of this dynamic can be attributed to geopolitical risk, but the prospects for supply and demand also suggest a tighter market (if not quite as much as currently reflected in the price). At the beginning of last year, the US EIA had forecast a price of US$53/barrel; at the same time, Merrill Lynch and Bank of America had forecast US$60. In a Reuters survey of 28 analysts at the beginning of December 2016, the forecasts ranged between US$83 and US$50/barrel, with an average of US$57. According to the most recent data, and despite its rapid ascent, the average price of Brent for all of 2017 was around US$54/barrel, revealing the basic accuracy of the major projections. The same Reuters survey undertaken at the end of December 2017 yielded an average projection of nearly US$60 for 2018, well below the US$70/barrel reached in the market during the first days of the new year (for the first time since 2014).
Although many forecasts for the coming months have recently been raised, there is some consensus that prices will tend downwards over the course of the year. This re-adjustment of the fundamentals could increase the sensitivity and volatility of prices, but it should not be too dramatic. The International Energy Agency (IEA) believes that in 2018 production will grow more than demand, particularly in the first half of the year, and then readjust during the second half. Underlying such projections is an analytical bet on the ‘moderation’ of US producers in search of greater profitability and, therefore, on as small a production increase as possible. The US Energy Information Administration (EIA) forecasts an average price of US$61 in 2018, US$7 higher than the actual average in 2017, but it also projects an excess of supply in 2018 and 2019 due to the production increase unleashed in the US in recent months.
The oil price recovery could be maintained, given that a price floor is supported by other factors like rising geopolitical tensions, a more strategic focus by US producers and/or stronger-than-expected demand. The recent increase in the price of oil is eroding the favourable environment enjoyed by the world (and Spanish) economy in recent years and creates more pressure to implement economic reform in order to continue gaining (or avoid losing) competitiveness. But there are also advantages for oil producers (and, as we shall see, many of them are of great strategic importance): the price recovery relieves financial pressure and allows for more gradual and politically-sustainable economic adjustment measures, in most cases alleviating very complicated domestic situations. It would be sensible for consumers to expect a new price range for Brent somewhere around its recent level; at the same time, producers might moderate their expectations for price to somewhere around US$60/barrel.
The geopolitical risk premium is back
While acknowledging the intrinsic unpredictability of geopolitical risks, all the signs continue to suggest that the price rise that began in 2017 will continue to be seen in 2018. Ian Bremmer, head of Eurasia Group, even said recently that if he had to choose ‘one year from the last 20 for predicting a large unexpected crisis –the geopolitical equivalent of the financial crisis of 2008– it would be 2018’. Although this forecast could be seen as extreme, it is certainly the case that a number of tensions have accumulated, darkening the prospects for positive developments in the strategic context of the oil and gas markets. The defeat of Daesh in Iraq and the eradication of its adherents in Libya has been good news, but these events were immediately overshadowed by the Kurdish independence referendum and the continued deterioration in Libya. Without being alarmist, one should recognise that these geopolitical developments are perceived as additional ingredients in the structural deterioration of the liberal order and they are encouraging new strategic visions of international relations to be articulated. Even the quite liberal EU is now banking on a ‘principled pragmatism’, limiting its foreign policy space in the wider Mediterranean neighbourhood just when this region is regaining strategic and energy significance.
With all its nuances, the reality is that the markets have been more inclined to incorporate geopolitical risk than to discount it. The re-adjustment of the oil market in 2017 has amplified the impact of geopolitical tensions on prices and re-focused international attention on the Middle East in anticipation of the major developments which could come in 2018. After the intensification of geopolitical dynamics experienced during the second half of last year, 2018 is expected to be a year of extreme volatility with potentially significant energy implications.
The Qatar crisis broke out in June, sparked by the decision of Saudi Arabia, Egypt, Bahrein and the United Arab Emirates (UAE) to cut diplomatic relations with the country. According to Qatar, information pirates based in the UAE hacked the website of the Qatari news agency and posted false commentaries on Iran and other sensitive regional issues which were attributed to the Emir of Qatar. The diplomatic situation escalated into crisis with a de facto embargo on the country that included the shutdown of two ports in the Emirates which are key for Qatar (Jebel Ali, on which it depends for its commercial supply chain, and Fujairah, the world’s second largest bunkering port) and raised the prospect of dire logistical implications for Qatar’s exports of oil and, to a lesser extent, gas. Oil prices rose for a number of days before it became evident that supplies would not be significantly affected, prompting prices to fall back again. Although this was not the first episode of cyber-geopolitics in the Middle East, it did provide a new example of the potential for cyberthreats in such a sensitive region.
At the end of September the markets were disturbed again by the independence referendum in Iraqi Kurdistan and the taking of the oil fields of Kirkuk (the largest in the north of the country) by the Iraqi Kurds. The markets immediately reflected the geopolitical risk of the new conflict, more than offsetting the impact of industry improvements that had come in the wake of Daesh’s retreat and the recovery of investor interest on the part of international companies. Concerned with containing the aspirations of its own Kurdish population, Turkey announced a blockade on oil exports from Kurdistan (around 500,000 barrels/day). Iran also showed its opposition by paralysing Iranian exports of refined petroleum products to the autonomous Kurdish region and blocking imports of Kurdish crude. When the Iraqi central government recovered control of Kirkuk it confirmed that neither Iraqi nor Kurdish exports had not been very much affected and that no side in the conflict wanted to get further embroiled. With this moderation of tension, prices slipped down again.
The first weekend in November saw three events which tightened prices again in view of the potential destabilisation of Saudi Arabia and the intensification of the confrontation with Iran: (1) the arrest on charges of corruption of various members of the Saudi royal family and the reconfiguration of the Saudi government; (2) the interception of a ballistic missile launched from Yemen by the Houthi rebels; and (3) the resignation, while in Saudi Arabia, of the Lebanese Prime Minister, Saad Hariri, who accused Hezbola and Iran of destabilising his country. The bold move by the Crown Prince, Mohamed Bin Salman, was intended to consolidate his power, although it was interpreted by some as a sign of weakness that might compromise the success of his economic reforms or even threaten the stability of the kingdom. At the same time, the deterioration of the conflict in Yemen and the threat of Hariri’s resignation both pointed towards the further deepening of the rivalry with Iran. As a result, the price of Brent shot above US$62/barrel, driven by fears of an accelerated deterioration of geopolitical stability in the Middle East.
At the end of 2017 such fears were stoked by the outbreak of the largest popular protests in Iran since 2009. The risk of destabilisation in Iran pushed up the oil price, even though there was no appreciable impact on the Iranian oil supply chain. In fact, Iran’s oil installations (both production fields and export terminals) are located far from the major population centres and are tightly controlled by the regime’s security services and reasonably well-defended against sabotage. Only the –now receding– fear that a continuation of the social protests and their prompting of a general strike might affect the energy sector would seem to entail any risk of perturbing the supply of Iranian oil. But the feeling that the regime has become more fragile has generated new doubts with respect to its foreign policy strategy for 2018. In addition to maintaining the confrontation with Saudi Arabia and Israel via regional proxies, and dealing with President Trump’s decision on new sanctions, the regime must also now face a complicated domestic front and search for ways to improve the economic situation.
Saudi Arabia also faces many open fronts –too many according to Crown Prince critics– including a literal battlefront in Yemen. The year 2018 should see, furthermore, the implementation of the key reforms of the Vision 2030 Strategy –including the market sale of 5% of Saudi Aramco and the reduction of politically sensitive subsidies (particularly energy subsidies)–. Although the Crown Prince’s economic reforms could cause some sacrifice, the kingdom seems to be compensating for this with other social reforms (timid from a Western perspective but very much appreciated by the Saudi population). As in other mono-producer petrostates, the recovery of oil prices will allow a more gradual and measured reform process without undermining the Crown Prince’s narrative. It is now clear that Saudi Arabia has proved capable of managing the oil countershock relatively effectively; each day the country moves farther away from the economic and financial instability predicted by some analysts when the price of oil was at its lows.
Today the major source of instability in the region continues to derive from the rivalry between Saudi Arabia and Iran, intensified by the delicate internal equilibriums in each of the two countries. The probability of geopolitical accidents between the two rivals will continue to increase over the coming months, but it does not seem that this will generate any problems for supply. Long before that would happen, cooperation would come to the fore in OPEC+, where the presence of Russia has continued to act as geopolitical insurance (as suggested in our paper last year). What does seem to be clear is that 2018 has begun very differently to 2017: now we are no longer in the low-price environment of an oversupplied market in which geopolitical crises barely impact upon the markets. In the current context of adjusting supply and demand, the acceleration of geopolitical dynamics described above is injecting a risk premium into the markets, indicating a change in expectations which further intensifies the pass-through to prices. It seems reasonable to expect that the geopolitical risk premium has returned to accompany (and raise) the oil price during 2018.
OPEC+, moving forward
The impact of these geopolitical crises on the supply of oil should not obscure from view the underlying tendency of a market undergoing readjustment in the wake of concerted action on the part of OPEC, Russia and other countries (OPEC+) to reduce production. The participants of OPEC+ have agreed to maintain their production cuts of 1.8 million barrels/day (mbd) –1.2mbd within OPEC and another 0.6mbd from the rest of the producers– for the duration of 2018. Although both the markets and a legion of analysts had been sceptical of the effectiveness of the agreement reached in November 2016 and doubted that it could be sustained even in the short run (to say nothing of its effective compliance through to the end of 2018), OPEC+ has maintained both discipline and a reasonably consistent policy through all of 2017. Instead of giving way to the collapse of an obsolete OPEC incapable of influencing the global markets, the agreement has propelled forward an enlarged OPEC now co-led by Saudi Arabia and Russia. Even in the face of all the questions raised by such an ‘unlikely alliance’, in 2018 the new OPEC+ could easily continue along this course, fundamentally altering one of the principal axes of global oil and energy governance.
Especially noteworthy is the resilience of the agreement in the face of the geopolitical convulsions analysed in the previous section, many of which involve confrontations (even in operational theatres) between some of the principal actors of the cartel. Indeed, the commitment of the parties to the agreement has not been weakened even by the blockade of Qatar, the intensification of the Saudi-Iranian rivalry, the confrontation in Syria pitting many Arab country members of OPEC against Russia or the recent protests in Iran. Actors whose political and diplomatic behaviour is often considered irrational (and therefore leaving others little room for negotiation), rapidly become rational as soon as they sit down at OPEC+ meetings. It is likely that this encapsulated immunity to the geopolitical crises of 2017 will continue through 2018. To the extent that a shared interest continues to exist, it seems reasonable to assume the continued survival of OPEC+, at least in the short term. Under certain favourable scenarios, compatible with some gradual exit and compensation strategies, OPEC+ could even obtain a certain level of informal institutionalisation upon the foundation of its collaborative work to date.
Russia, and its role, will prove key. Although its commitment might be nuanced, for the first time in history Russia has cut its oil production in concert with OPEC, establishing what has been called an ‘improbable’ and ‘uncomfortable’ alliance between Saudi Arabia and Russia. OPEC and Russia had begun conversations exploring such coordinated action –as a response to oil price declines– on three previous occasions: in 1997-98, 2001-02 and 2008-09. However, not only did Russia not fulfil its promised production cuts on any of these occasions, but it raised production –much to the exasperation of OPEC–. Although Russian and Saudi preferences are now aligned in the short term, they run counter to the commercial interests of Russian oil companies that wish to continue increasing their production, especially as prices recover: the more oil prices rise, the greater the pressure upon the Kremlin to begin to seek an exit strategy from the agreement.
The course of 2018 will tell us whether the new OPEC+ led by Saudi Arabia and Russia will be capable of consolidating itself as an axis of the emerging global petroleum order, making reality the worst geopolitical nightmare imagined by Mackinder or Brzezinski: the Middle East, Central Asia and Russia all aligned via their oil policy. Although Putin can take advantage of this strategy, it became clear last year that this has also meant transforming Russia from a member of the G-8 into a participant sui generis of the oil cartel, affecting an unusually rapid downgrade of Russia’s role in global governance (but one which also is in line with the economic reality of the country).
In contrast, given the divergence of foreign policy preferences between Russia and Saudi Arabia, the ‘improbable alliance’ in the realm of oil cooperation will remain encapsulated from other areas of policy and action. To maintain the oil production agreement effectively will be difficult enough; therefore, we should not expect Saudi-Russian cooperation in foreign policy. To manage the agreement successfully, and to prepare for the eventual exit from the agreement by some producers during the second half of the year, will likely be the top priority for OPEC+. Given the credibility gained by a decent compliance record in 2017, and despite geopolitical uncertainties, its prospects seem favourable. OPEC+ is one of the most notable geopolitical irruptions from the year 2017 and it promises to also be a protagonist in 2018.
The Trump Presidency, year II
President Trump has been yet another geopolitical irruption on the international energy scene. During the first year of his presidency, Trump delivered on many of his electoral pledges. Most notably, his ‘America First Energy Plan’ involves a 180-degree turn in the direction of US energy policy under President Obama. At the core of this plan is the goal to secure ‘American energy dominance’, which could be defined as a kind of ‘fossil fuel supremacy’ demanding the revocation of all of the environmentally-oriented measures of the previous Administration. Although the use of slogans is quite typical of US energy policy, ‘energy dominance’ mainly seems to consist in producing more energy at a lower cost by eliminating regulations and taking advantage of export opportunities.
Trump began by politically unblocking the Keystone XL and the Dakota Access (DAPL) pipelines, reversing the offshore drilling bans in the Arctic and the Atlantic, and manoeuvring all through 2017 to allow exploration in the Arctic National Wildlife Refuge (ANWR). In March of 2017, the President signed an executive order for the Environmental Protection Agency (EPA) to begin dismantling the Clean Power Plan, established by Obama and requiring the states to reduce their CO2 emissions from gas- and coal-fired power plants by 32% in 2030. During 2018 the EPA is supposed to replace the regulations approved by the Obama Administration and set new emissions standards. On 8 January 2018 the Federal Energy Regulatory Commission (FERC) rejected the petition of the Department of Energy for a plan to compensate nuclear and coal plants for their contribution to storage capacity on the grounds that such compensation constituted a covert subsidy to both technologies.
Many have argued that this shift in energy policy is more rhetorical than real, and that it will have only a limited impact upon the future of the US energy sector. It remains to be seen which parts of the regulatory rollback will survive judicial review and independent agency oversight (given what recently occurred with the FERC decision); but, in any case, US oil and gas production will rise still further as productivity continues to improve. The regulatory rollback could produce excesses which damage the very industry the Administration wishes to protect by eroding the confidence of the citizens in their own energy sector. We would then find ourselves with a lesser evil: the shift in US energy policy in 2017 might slow down the decarbonisation of the electricity sector (the principal vector of emissions reductions in recent years) but it will not stop or reverse it –in part, at least, as a consequence of US domestic opposition to the President’s energy policy and the ultimately refusal of the financial sector to invest in coal-fired generation–.
It is true that business interests, together with the regulatory powers of the states (especially those where voters support renewable energies for economic reasons –as in Texas– or environmental preferences –as in California–), represent important countervailing powers. But it is obvious that Trump’s policies will make their decarbonisation efforts more difficult, and more expensive and time-consuming to achieve. For example, Trump has announced that he wants to relax the next round of fuel economy standards for 2022-25. This would increase oil demand by some 200,000 barrels a day by the end of that period, benefiting oil producers and creating a disincentive for efficiency gains and for competition from the electric vehicle (along with the inevitable loss of competitiveness to Chinese EV producers).
From a business perspective, the most important measure for 2018 arrived at the end of last year when the US Congress passed a fiscal reform bill that reduced the top marginal corporate tax rate from 35% to 21%. Energy companies are among those that most benefit from this change since the new law also allows capital deductions to be taken in the same year that the investment is made, significantly reducing the tax burden on the energy sector and stimulating investment and business profits. In 2017 one of the greatest fears was that the tax incentives for renewable energies would be repealed; in the end, however, they have been maintained, reducing much uncertainty with respect to their future.
Finally, as it has done in other areas, the Trump Administration has tended to detach itself from multilateral energy forums. Although this unilateralist policy culminated with the US withdrawal from the Paris Agreement, it has also impacted other mechanisms of global energy governance. Among his election promises was the unilateral sale of half of the US strategic petroleum reserve, irrespective of the rules of the International Energy Agency, and he threatened again to do it after OPEC+ made its agreement to cut production. The administration has also tended to ignore its financial commitments to the UN’s Sustainable Development Objectives. And in its battle against regulation, the administration has dismantled the rule which obliges US extractive industries to declare all foreign payments (Section 1504 of the Dodd-Frank legislation designed to fight corruption in the exploitation of natural resources in producer countries).
Tensions over multilateralism and trade will also be apparent in 2018. The White House began the year imposing a special tariff on the imports of solar cells and panels (mainly of Chinese origin) of 30% (during the first year, although it will fall to 25%, 20% and 15% in each of the following years, respectively). Other promises also remain on the agenda, like trade measures against imports of steel for oil and gas pipelines, or those pertaining to the energy and commercial aspects of the renegotiation of NAFTA. The US has moved from being the ‘indispensable power’ in the provision of global public goods (including leadership in the fight against climate change, on sustainable development, in good governance of energy resources and with respect to market opening) to becoming a ‘dispensable power’ within the realm of global energy governance: it appears that the latter can only move forward without the former. In terms of global energy governance, then, 2018 promises to prolong the ‘American parenthesis’ of the first year of the Trump Presidency.
Algeria is not Venezuela
Algeria and Venezuela have been on the radar of analysts since the beginning of the oil price fall in 2014. The lack of economic diversification during the years of high oil prices and the absence of reform in the face of the oil countershock of recent years have made both countries candidates for economic –even political– collapse. The comparison of these two mono-producers has long been a classic in the literature on petro-economies. Nevertheless, entering 2018 the two countries present increasingly divergent perspectives. Not without difficulties or latent risks, Algeria has managed to navigate the years of low prices and, against all expectations, Bouteflika faces the year with his eyes on the presidential elections of 2019. On the other hand, Maduro has driven Venezuela into a humanitarian (and energy) crisis and effectively dismantled the petroleum industry, leaving the country with nearly no margin or foundation for taking advantage of the recovery in prices.
Clearly, the situation in Algeria presents some relatively high levels of political and economic uncertainty. However, the most catastrophist prophecies –a repeat of the civil war that followed the petroleum countershock of the second half of the 1980s, possible Egyptian coup d’etat scenarios or of the potential spread of conflicts in neighbouring countries– have not materialised. On the contrary, a kind of continuity has taken hold, even if it has been weakened by low crude prices and is now girded by the recent price recovery.1 During the last years, Algerian macroeconomic fundamentals have deteriorated significantly, but the government has been capable so far of avoiding an insolvency crisis like the one the country experienced in 1986-1988. This has come at the cost of exhausting its petroleum fund and a large part of its foreign exchange reserves, with negative effects on economic growth. But the country still enjoys a financial cushion, accumulated during the bonanza years, and up to the current moment it has been able to avoid large scale recourse to external borrowing.
The 2016 and 2017 budgets stretched the limits of orthodoxy and the recourse to protectionism repressed the external disequilibrium and contained the drain on foreign exchange reserves. These budgets prepared the way for the change in the political-fiscal cycle foreseen in the budget approved for 2018, necessarily expansive to secure a favourable result in the presidential elections of 2019 and, in this case, to justify Bouteflika’s decision to seek a fifth term despite the state of his health. This change in strategy has its risks: the fiscal expansion expected in 2018 is likely to be financed through so-called ‘unconventional finance’ (by printing money), which even under the supervision of the central bank and the government will probably lead to an increase in inflation and the financing of low-profitability projects.
The reversal of some of the (timid) austerity measures comes at a relatively more favourable moment for the Algerian economy than did previous budgets. The rise in the price of oil especially benefits Algeria because, in contrast with Venezuela, its oil is of high quality, sweet and light, and in the most recent months has benefited from a considerably premium above the price of Brent, the benchmark crude. Still, the lack of investment in exploration and production has led to a slight decline in oil production and impedes an acceleration of the slow recovery of gas production; at the same time, domestic demand is growing rapidly, placing pressure upon available oil and gas exports. Therefore, together with the macroeconomic management to be expected in a pre-election year, a new hydrocarbons law should also be anticipated. Algeria needs to attract investment in the development of its hydrocarbon resource, but the opening and modernization of the sector faces much resistance. The Algerian government could easily slip into the delusion that the recovery in oil prices frees the country of the need for economic reform (and above all energy reform), which would prolong the currently stationary situation the country is in.
In contrast with the deteriorated continuity of the Algerian case, the degradation of the political and social situation in Venezuela and the country’s decline in oil production hardly has any precedents. After reaching a peak of 3.5mbd in 1998, one year before the arrival of Hugo Chavez to power, the oil production of Venezuela plummeted, falling to barely 1.8mbd in November 2017, a minimum level not experienced since 1985 and which does not even allow Venezuela to reach its full OPEC quota (1.97mbd). This collapse of Venezuelan oil production has accelerated in recent months, forcing the national oil company, PdVSA, to import diluents and light petroleum to process its heavy crude for export and for further refining for domestic consumption. In response, Maduro has named a loyal General without any experience in the sector to head the Petroleum Ministry and PdVSA, and he has appealed to China and Russia for financial assistance. China has resisted such appeals and has opted instead to cut its losses and reduce its exposure. On the contrary, in November 2017 Russia agreed to restructure part of Venezuela’s debt, but the deal excluded the US$ 6 billion that PdVSA owes to Rosneft, which in turn has opted to take-over PdVSA assets at bargain prices.
The projections for 2018 anticipate further production losses of between 100,000 and 300,000 barrels/day. In a scenario of political and social collapse, nearly double that quantity could be taken off the market. Oil exports to the US are already in free fall in the wake of sanctions, PdVSA is paralysed by financial asphyxia and government dirigisme, and the technical bankruptcy of the country makes it impossible to reverse the production decline. On the other hand, nor does it seem likely that Russia represents a lasting solution to the decline in production. Although the worst scenarios of production decline can be avoided, to increase oil production would require investing simultaneously in the costly resources of the super-heavy oil of the Orinoco belt and in advanced recovery techniques in the more mature conventional oil fields. At today’s oil prices, with the current management and human capital deficiencies at PdVSA, and in a context of political instability reigning in Venezuela, both tasks seem complicated.
Conclusions
With respect to prices, the projections for 2017 were in line with the year-end average price for Brent of US$54/barrel (in our document last year we adopted the US EIA projection of US$53). As was also to be expected, the extension of the OPEC+ agreement supported the price rise during the last part of the year to the upper range of the band of price expectations and, as had been speculated, it provoked a response from US production. With respect to the Trump factor, it was also easy to bank on his distorting role on energy policy and his 180-degree turn with respect to the policies of the Obama Presidency. On a more positive note, the price recovery has alleviated the economic situation of some mono-producers, like Algeria and the countries of the Persian Gulf, and improved their situation with respect to reforms, although the border between allowing a more gradual pace and simply delaying such reforms can be difficult to determine. In contrast, in Venezuela the oil industry has been effectively dismantled to the point where the country cannot even benefit from higher prices. On the European scene, the awkward but unstoppable machinery which is EC energy policy has continued to develop the 2016 winter package, as was foreseen. Therefore, it has not been analysed this year in this 2018 energy document but rather in a related annual document devoted to climate change.
Indeed, 2017 developed more or less as had been foreseen at the beginning of last year. All of these developments seem set to remain on course in 2018: a higher oil price environment than in 2017 (the 2018 projection of the US EIA for Brent is US$61/barrel); a market readjustment, although according to the IEA and the US. EIA some excess supply will remain; a not so ‘moderate’ expansion of US production; new energy policy moves by the Trump Administration (although perhaps some new regulatory defeats as well); a gradual recovery of the economic policy space for producers like Saudi Arabia, Algeria and Russia (but not for Venezuela, which now appears fated to see the prostration of its oil industry culminate in the collapse of the country); and, finally, the consolidation of OPEC+ and the growing protagonist’s role of Russia.
By contrast, while our 2017 document discounted a contained geopolitical volatility, the second half of 2017 has brought with it an unexpected intensification of existing geopolitical tensions that makes 2018 a year of large and accumulated uncertainties. The endogenous deterioration of the situation in the Middle East, together with the actions of the Trump Administration in the region (recognition of Jerusalem as the capital of Israel, new sanctions on Iran) and the growing presence of Russia (in OPEC+ and in the Eastern Mediterranean) raise new focal points of tension. The possibility of geopolitical accidents with an impact on the regional energy sector is increasing, and with it the geopolitical risk premium contained within the price of oil. Although the markets are readjusting in response, and the interests of the various actors are realigning to achieve a new equilibrium (a kind of ‘geopolitical break-even’ point around the current price that seems to be acceptable for everyone), it could easily be destabilised again by any change in the relation of forces in the Middle East.
The consensus on 2018 is that geopolitical volatility will remain at maximum level, concentrating a large part of the attention of energy actors. But this does not necessarily imply that some inevitable catastrophe will occur that cannot be absorbed in the form of rising prices.
Gonzalo Escribano
Director of the Energy and Climate Change Programme of the Real Instituto Elcano | @g_escribano
1 Gonzalo Escribano (2017), ‘Algeria: global challenges, regional threats and missed opportunities’, in K. Westphal & D.R. Jalilband (Eds.), The Political and Economic Challenges of Energy in the MENA Region, Routledge, Oxford.
