Question

Crude futures in New York were lower on Wednesday, following a record decline in the first quarter

Oil held near $20 a barrel as Saudi Aramco’s output surged above 12 million barrels a day, but Russia said it would refrain from further production hikes.

Crude futures in New York were lower on Wednesday, following a record decline in the first quarter.

While state-run Aramco’s oil supply has surpassed 12 million barrels a day and is ticking higher, Russia said it won’t lift output as it’s not profitable to do so, according to a government official familiar with the country’s plans.

President Trump has said the US will meet with Saudi Arabia and Russia in an attempt to bolster prices.

The market is grappling with a bumper oversupply, while demand is set to fall by as much as 30 million barrels a day in April, according to an executive at the world’s largest independent oil trader.

Any agreement to cut output would likely be too late and would fall short of the loss in consumption, according to Goldman Sachs Group Inc.

Industry data signaled that US oil stockpiles are set for their biggest weekly increase since 2017.

“I don’t think they’re going to come to the table for talks just yet, because for both sides, it would require a significant step-down,” Amrita Sen, chief oil analyst at Energy Aspects said in a Bloomberg TV interview. “I do think both Russia and Saudi Arabia will be forced to cut back production, not because there’s a deal or they’re talking, but because of market forces.”

Prices:
West Texas Intermediate lost 21 cents to $20.27 a barrel as of 10.35am in London
Brent crude for June settlement fell 4.8 per cent to $25.09
Dated Brent, the benchmark for two-thirds of the world’s real oil supply, was assessed at $17.675 on Tuesday, down 11.5 cents from Monday when it was already the lowest price since 2002

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Required Question

Question 01: What are the major threat in the fall of Oil Price in the OPEC?

Question 02: What are the entrepreneurial skills needed in order to draw different businesses in the Gulf countries?

Question 03: Discuss the major drawbacks in the Gulf Countries economy?

Answer 1

Question 1

Oil Prices is the world have always been driven by a combination of strong demand in developed countries like US, Western Europe etc. and emerging markets like Brazil, China, India etc. India for example is amongst the highest importers of Crude Oil in the world at about 230 million tonnes amounting to nearly USD 120 Billion - the sourcing is from OPEC and non-OPEC nations. Demand in emerging markets like India is heavily driven by mobility - passenger and commercial vehicles. In the long run better and more fuel-efficient vehicles always moderate increases in demand. The world is consistently moving towards more stringent fuel efficient standards such as Euro Stage 3 and beyond. In addition we have also witnessed a heavy disruption due to the growth of the sharing economy led by companies like Uber, Grab, Ola etc. and this is a phenomenon catching up worldwide. This is increasing leading to more efficient usage of passenger and commercial vehicles and hence less consumption of petroleum based fuel in this space.

Another hit to the long term demand of Oil through mobility is the emergence of electric and hybrid technologies in vehicles. Brands like Tesla Motors have shown the way and now every major Automaker in the world is concentrating on heavily investing in R&D Efforts around building vehicles with clean energy as sustainable ventures for the future. These factors have had a strong impact on the Oil Prices from a demand scenario.

From the supply side the US Shale Oil phenomenon has now made US one of the largest exporters of OIl and this has added to the supply glut. Till date the Oil producing nations have coordinated well in terms of a sustainable pricing for crude oil so that everyone benefits. All of this has, however, taken a sudden turn in the immediate short run due to the Coronavirus pandemic which has hit all economies operationally in the immediate term as a major worldwide Black Swan event. It has probably triggerred what would have otherwise taken years to happen as countries and poties react in a knee-jerk pattern to protect their own interests at all costs, sacrificing long term understanding with other nations.

Question 2

Gulf Countries have traditionally been dependent on Crude Oil and its associated businesses as the primary drivers of growth in their economies and have concentrated on little else. A long term approach to derisking their economies by diversifying into other sectors is very important and in fact, long overdue. Considering the fact that most of the big Gulf Economies are fairly high per capita income nations and can spare resources in terms of learning, training and development they should be looking at services as the driver for growth by investing in people - whether indigenous or by encouraging migration. This can be done by being more open and culturally appealing the way Western Europe has managed to be over the last couple of centuries. Tourism and liberal Education have played a great role in this regard and could be a model that the Gulf Nations could follow. It will require fundamental change in ways of thinking and administration, also a relaxed approach to religious beliefs and dogma.

Question 3

The biggest drawback in the Gulf economies is clearly the dependence on Crude Oil and the lack of derisking initiatives taken by all of these economies over a period of time. There has been no effort to look at other sectors and take steps to mitigate this risk. Also a lot of economic decisions are dependent on relationships with the US - especially for countries like Saudi Arabia. There is also a significant dependance on migrant labour population from other parts of Asia which adds variability to small but rich economies like UAE, Dubai etc. Limited natural resources beyond Oil add to the drawbacks as it limits industrial activity as well.