Page 41 - Linkline Autumn 2016

The Price of Oil and its Impact on Logistics
Khalid Al Falih, Minister of Energy of Saudi Arabia
With plans in the forthcoming December budget to increase the levy on diesel fuel, operators in the transport, supply chain and logistics sector are at a crossroads in regards to hedging their fuel budgets and looking to future profitability.
Many businesses operate a surcharge as a hedge on a variable cost such as fuel – and hence oil prices – seeing as it is becoming more consistently used as a pawn in a global game of geopolitical chess.
A prolonged rally in the price of oil will erode profitability and limit investment as margins are squeezed across the sector. Many smaller operators struggled with the record high oil prices through- out the economic crisis, which savaged their bottom lines, as they struggled to stay operational, and as customers dug their heels in due to increases in surcharges.
In light of the tremendous amount of global economic uncertainty, predicting where the price of oil, and hence the price of fuel, is heading is becoming a very risky endeavour. Various events over the past year have contrived to deflate the price (which is good news) and then increase it gradually. Oil is as much a geopolitical tool as
it is a commodity, with the Organization of the Petroleum Export- ing Countries (OPEC), Russia and the US using it both as means to influence and shape global events by ramping up production and then slowing it down depending on what suits their own economic needs at that particular period.
The low prices over the past couple of years have come about as a result of the OPEC countries maintaining a strong output, thereby increasing supply and depressing prices. This was done to squeeze the shale oil producers of North America, whom they had seen as a threat to their own production. Shale oil operators needed a higher oil price to maintain their operations and make recovery of the oil economically viable.
Added to this is the nuclear arms deal agreed with Iran by the US: with Iran frozen out of the international oil market before this, their massive output suddenly coming on stream has put further pres- sure on the price per barrel of oil.
Not all of the members of OPEC were happy with the strategy of depressing the price, with Russia enduring a bout of economic regres- sion and Venezuela, in particular, suffering a major economic collapse. OPEC members earned $404 billion in net oil export revenue in 2015, according to U.S. Energy Information Administration (EIA) estimates, a 46% decline from $753 billion earned in 2014.
OPEC members’ net oil export revenue has fallen as crude oil prices have declined. The monthly average Brent spot price dropped from $112 per barrel in June 2014 to $38/b in December 2015 - a huge col- lapse. Based on EIA price forecasts, which are subject to a wide range of uncertainty, OPEC revenue is expected to fall to $341 billion in 2016.
OPEC members’ 2015 net oil export revenue was at the lowest level since 2004, with significant implications for the fiscal condition of member countries that rely heavily on oil sales to fund social pro- grams and to import other goods and services. In inflation adjusted terms, OPEC net oil export revenue totaled $606 per person in 2015, down 83% from the 1980 level of $3,500 per person.
The effects of recent declines in net oil export revenue on the econ- omies of each OPEC member state depend on the importance
of oil export revenues and the existence of other financial assets. Petroleum exports by OPEC members accounted for between 5% (Indonesia) to 99% (Iraq) of total export revenues in 2015. Generally, countries with sizeable financial assets, such as the Persian Gulf States (Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates), are affected to a lesser degree than other oilproducing countries, such as Iraq, Nigeria, that do not have large financial reserves.
Although declining crude oil prices have been the main driver behind lower OPEC revenue since mid2014, unplanned production outages among some OPEC members have also contributed to low- er export earnings. A number of OPEC countries have experienced relatively high levels of unplanned outages. Some of these outages are the result of political factors, such as the sanctionsrelated production shutins in Iran between 2011 and early 2016, when roughly 0.8 million barrels per day (b/d) remained off the market. In Venezuela, crude oil production has declined sharply since the end of 2015, as oil service companies have largely stopped work in re- sponse to a lack of payment by stateowned Petroleos de Venezuela S.A., and oil production may continue to decline in the near term. Other unplanned outages have been related to armed conflict and militant activity in countries such as Libya and Nigeria. Libya has struggled to maintain crude oil production and exports since the fall of the Qaddafi regime in 2011, and more recently, opposing factions have clashed for control of the country’s oil export terminals. The re- sulting lack of available oil export outlets has necessitated that most of the country’s production capacity remains shut in. In Nigeria, con- tinuing militant attacks since the start of 2016 have targeted oil and natural gas infrastructure, resulting in more shutin production.
Saudi Arabia’s Flip-Flop on Oil Prices
Just when oil prices were going down earlier this summer, Saudi Arabia’s Energy Minister, Khalid Al Falih, made a comment that his country will do its best to ‘stabilise’ oil prices – which is code for ‘stop production so the price will go up and we make more money’. As expected, oil prices started increasing on hopes that a possible “oil freeze” agreement between OPEC and Russia would limit OPEC’s future oil production. Russia needs this to happen as many of Putin’s domestic financial commitments were based on financial models when oil was much higher.
The CharTered InsTITuTe of LogIsTICs & TransporT 41
PRICE OF OIL