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The East African : Dec 1st 2014
46 The EastAfrican BUSINESS NOVEMBER 29 - DECEMBER 5, 2014 With p≥oduction f≥om non-Opec bloc climbing, is the ‘golden age’ ove≥? COMMENTARY STEVEN MUFSON “Saudi Arabia will have to bear the brunt of any cut, but Opec still needs to come to a collective agreement to avoid another steep price drop.” F or most of the past four years, Opec has had an easy time. The Organisation of the Petroleum Exporting Countries has not had to do much to keep oil prices over $100 a barrel. Disruptions in supply — most notably the Libyan civil war — and rising demand have kept the cartel’s coffers full. It has been, say Barclays’ commodities analysts, the culmination of Opec’s “golden age.” Is that golden age ending? High prices are often the seeds of their own destruction, providing incentives for new developments and alternatives. Now, over the past three months, global oil production has been outrunning consumption. The price of Opec’s mix of crude oil has tumbled $32, or 30 per cent, to the lowest level since 2012. And suddenly the 12-member group is bickering over who should cut oil output, and by how much, in order to prop up prices. That made Thursday’s Opec meeting in Vienna the group’s most closely watched session in years, with far-reaching implications from the local petrol pump to the oil-dependent budgets of Russia and Iran. Opec took no action to ease a global oil-supply glut, resisting calls from Venezuela that the group needs to stem the rout in prices. Futures slumped to the lowest level since 2010. Saudi Arabia, which has played the role of swing producer balancing the market, has not trimmed its output as it often has in the past, instead cutting prices to hang onto market share while waiting for other countries to volunteer to share the burden. Meanwhile, prices have continued to slide to about $75 a barrel for the US benchmark grade of West Texas Intermediate. “I think they’re worried about a collapse in prices,” said Jon Alterman, director of the Middle East programme at the Centre for Strategic and International Studies. “They are worried about pushing people toward alternative fuels and worried about the cost of maintaining their spare capacity. They are intrigued by the possibility that low prices put their enemies in tighter positions. But I think the way the Saudis think about global oil markets is more about threats than opportunities.” In an unusual move, Venezue- la arranged a meeting in Vienna with Russian officials to persuade Russia, a non-Opec producer that exports about 4 million barrels a day, to cut its production to prop up prices. Russia has not co-ordinated output with Opec in the past, but its stake in the outcome of Thursday’s meeting is huge. At a conference in Moscow, Russian Finance Minister Anton Siluanov said the country would lose between $90 billion and $100 billion in revenue as a result of lower oil prices, more than twice as much as it stands to lose as a result of sanctions, according to a Bloomberg News report. But oil and commodity analysts doubt that Opec can come to any agreement at all, or to one that would include production cuts large enough to stabilise prices. There have been two main rea- sons for the recent surplus of crude oil: The economic stagnation in Europe and Japan has sapped demand and the steady increase in US production of shale oil, up 4 million barrels a day over the past six years, has bolstered supply. That new incremental US production is greater than the entire production of any Opec country except Saudi Arabia. “The reality of the shale revolu- tion in the US, long scoffed at from within Opec as high-cost folly, is now hitting the producer group where it hurts, while oil demand growth has underperformed significantly,” Citigroup commodities analysts said in a note to investors. Over the past four years world- wide, oil companies have invested $2.5 trillion to bring new supplies online, according to Leonardo Magueri, an associate on the geopolitics of energy at the Harvard Kennedy School’s Belfer Centre for Science and International Affairs. Many analysts have said that Saudi Arabia, by maintaining a A Saudi Arabian oil refinery. Saudi Arabia, which has gained market share over the past three years, will have to bear the brunt of any cut. Pic: AFP Tanzania set to upg≥ade ≥oads to boost ≥egional t≥ade By ROSEMARY MIRONDO Special Correspondent THE TANZANIAN government plans to spend Tsh1.9 trillion ($1.1 billion) to upgrade four of its highways in a bid to boost trade within the country and with the other East African countries. Transport Permanent Secretary Shaaban Mwinjaka said The targeted roads will ease transport between Dar es Salaam and upcountry destinations and neighbouring Kenya, Uganda, Malawi, Rwanda, Burundi, DR Congo and Zambia through Tanzam highway and the Central Corridor. Key among the roads is the 100km Dar es Salaam-Chalinze expressway to be upgraded under a privatepublic partnership. He said users of the expressway that will cost Tsh881 billion ($519 million) will pay toll fees. Transportation of cargo The other major road is the 105km Arusha -Moshi-Himo Junction dual carriageway, estimated to cost Tsh679 billion ($400 million). “This road will also facilitate the high level of oil output and driving prices down, has been trying to slow the US shale oil boom by making drilling less profitable. Yet the consulting firm IHS has estimated that 80 per cent of potential shale oil drilling in the US is still profitable at $70 a barrel and that the growth in shale oil output would slow down at that price, but output would still be growing. World crude oil production has also received a boost from Libya, where production has recovered somewhat, and Iraq, which is producing 300,000 barrels a day more than it was a year ago, in part thanks to a new pipeline from Kurdistan to the Turkish port of Ceyhan. A deal struck recently between the Kurdish regional government and Baghdad — in which Baghdad released $500 million for the Kurds, who in return agreed to send 150,000 barrels a day to a federal government storage in Ceyhan — will smooth the way for more exports through that route. Lower oil prices could revive glo- bal demand. Lower motor fuel prices act like a tax cut for consumers, and could help boost growth in the major economies. But crude oil is priced in dollars, 30.5m The barrels Opec produced a day in the third quarter, 1.5 million to 2 million barrels a day more than the world needs. and the lower dollar price has been blunted by weak European currencies. Moreover, some countries have recently cut fuel subsidies, offsetting lower crude prices. Iran is in a special position. Its exports are limited by interna- tional sanctions while talks drag on about safeguarding its nuclear programme. Low prices make it more pressing for Tehran to make a deal that would end sanctions, but an end to sanctions would also end up putting even more oil onto the market. “Saudi Arabia, which has gained market share over the past three years, will have to bear the brunt of any cut,” said an editorial piece in the Argus Global Monitor. “But Opec still needs to come to a collective agreement to avoid another steep price drop few of its members can avoid.” Most analysts are expecting some Opec production cuts, perhaps half a million barrels a day, but most of them also doubt at this point that the cuts will be big enough to increase, or even maintain, current prices. Opec produced about 30.5 million barrels a day in the third quarter, the International Energy Agency says, 1.5 million to 2 million barrels a day more than the world needs to buy from the cartel in the coming months. And if the cartel fails to reach an agreement, prices could continue to slide. Barclays suggested that the recent drop in prices might signal the end of Opec’s golden age. With non-Opec production climbing, demand for Opec oil is ebbing. And Opec’s control of prices, never disciplined, may get even weaker. Washington Post-Bloomberg A road upgrade project. Picture: File transportation of cargo from Arusha and Moshi and to the border posts and the Dar es Salaam and Tanga ports, and enhance regional and inter-regional economic integration,” he said. The 188km Kidahwe-Ilunde- Malagarasi-Kaliua road is also earmarked for upgrade estimated at Tsh254.6 billion ($150 million). The road links the Kigoma port with Tabora municipality and passes through areas rich in agriculture, tourism, forestry and fisheries. The government has also earmarked the Manyoni-ItigiTabora for rehabilitation at a cost of Tsh 96.7 billion ($57 million) to ease transportation of agricultural produce from Tabora to Dar es Salaam and Tanga ports for export. The road links Tabora with the Central Corridor.
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Dec 8th 2014