Robin Mills, in his column of August 4, takes exception to the thesis, proposed by the University of California at San Diego economist James Hamilton and me, that oil prices are likely to stay high. This is part of a larger debate, not only about the prospects for oil supply growth and oil prices, but for strategic options for countries such as the UAE and major oil companies such as Exxon and Chevron.
The oil price debate can be boiled down to three schools of thought.
Two of the three analytical approaches are demand-driven and can be respectively associated with Citi Commodities Research, on the one hand, and BP and the OECD’s International Energy Agency (IEA), on the other.
Citi takes the view that oil demand is thin, that there is potential upside in the liquids supply, and that fuel substitution will soon begin to siphon demand from oil-based fuels. Thus, oil prices are likely to collapse, with Ed Morse, the head of commodities research at Citi, typically forecasting oil prices in the US$65 to $90 a barrel range, Brent basis.
These numbers have not been realised to date. Nevertheless, if one took this view, then investing in upstream capacity hardly makes sense. Thus, the UAE or the oil majors should take an essentially defensive position in the market.
BP and the IEA have another version of this argument, in which supply outpaces demand, but high prices remain. BP, in its Energy Outlook 2035 (January 2014), elaborates on this perspective, stating: “The market requirement for Opec crude is not expected to reach today’s levels for another decade before rebounding. While we believe that Opec members will be able to maintain discipline despite high levels of spare capacity, cohesion of the group is a key oil market uncertainty.”
BP, like Citi, sees demand as thin and vulnerable to increased supply. Prices do not collapse, however, due to Opec's long-term willingness to hold high levels of spare capacity.
Thus, if the UAE accepted the BP point of view, prices remain high, but alas UAE production volumes will fall. Again, this is a bearish signal and would lead the UAE to take an essentially defensive position with respect to upstream investments.
What is the reality? Is the UAE’s strategy aligned with BP or Citi’s analysis? Not to appearances. UAE oil and liquids production are both at record highs. Oil production has increased modestly, but total liquids production is up 21 per cent in the last decade, and up 4.6 per cent in just the last two years.
Will this trend be reversed? Does the UAE plan to be more defensive in the future? In fact, no. Production capacity in the Emirates is slated to increase by 23 per cent to 3.5 million barrels per day (bpd) by 2017. Thus, UAE production and capacity plans suggest that decision-makers there assume prices and volumes demanded will continue to be robust. This implies that either UAE decision-makers do not believe Citi and BP, or they are making bad decisions.
On the other hand, using a supply-constrained approach UAE strategy makes sense. This school of thought argues that supply continues to lag demand, leading oil prices to rise to the full level that the global economy will bear (the “carrying capacity” price). From this point, prices will be difficult to increase. But exploration and production costs will continue to rise, and this will limit supply, particularly from the oil majors and conventional sources.
In this interpretation, there is plenty of demand, but the potential for only modest oil price appreciation. The oil system in this view is price-stable and volume-insensitive, and the UAE is correctly responding to market pressures by raising capacity and production. Indeed, it may have latitude to increase production above current targets.
The supply-constrained model is seeing a test right now. Shale oil growth in the US is simply astounding, with US supply up 1.5 million bpd in the last year. Add Canada, and North American production is up a phenomenal 1.8 million bpd last month compared to a year ago, even as the Libyans have re-entered the market in a modest way.
According to industry sources, the rest of Opec has yet to respond with production adjustments. Meanwhile, European and Japanese economic data continue to disappoint. Brent has been weak, but is holding above $100 a barrel, even in the face of a supply onslaught and feeble demand from advanced countries.
If the supply-constrained theory is right, Brent oil prices should tend to hold near recent levels. A bigger supply surge might depress oil prices for a time, but latent demand should quickly soak up any excess supply, returning prices to the level of the past three years. If that’s the case, the UAE will have made the right call to increase its production capacity. The world remains short on oil, and the UAE is stepping up to provide it.
Steven Kopits is the managing director of Princeton Energy Advisors and can be reached at steven.kopits@prienga.com. He is writing a book on supply-constrained oil markets analysis.
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Company name: Klipit
Started: 2022
Founders: Venkat Reddy, Mohammed Al Bulooki, Bilal Merchant, Asif Ahmed, Ovais Merchant
Based: Dubai, UAE
Industry: Digital receipts, finance, blockchain
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Director: Hayao Miyazaki
Starring: Soma Santoki, Masaki Suda, Ko Shibasaki
Rating: 5/5
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In 2013, The National's History Project went beyond the walls to see what life was like living in Abu Dhabi's fabled fort:
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Director:+Lee+Isaac+Chung
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Equestrian
Abdullah Humaid Al Muhairi, Abdullah Al Marri, Omar Al Marzooqi, Salem Al Suwaidi, and Ali Al Karbi (four to be selected).
Judo
Men: Narmandakh Bayanmunkh (66kg), Nugzari Tatalashvili (81kg), Aram Grigorian (90kg), Dzhafar Kostoev (100kg), Magomedomar Magomedomarov (+100kg); women's Khorloodoi Bishrelt (52kg).
Cycling
Safia Al Sayegh (women's road race).
Swimming
Men: Yousef Rashid Al Matroushi (100m freestyle); women: Maha Abdullah Al Shehi (200m freestyle).
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Maryam Mohammed Al Farsi (women's 100 metres).
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Age: 23
How she spends spare time: Playing with cats at the clinic and feeding them
Inspiration: My father. He’s a hard working man who has been through a lot to provide us with everything we need
Favourite book: Attitude, emotions and the psychology of cats by Dr Nicholes Dodman
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Word of advice: By being patient, good things will come and by staying positive you’ll have the will to continue to love what you're doing
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Men: Narmandakh Bayanmunkh (66kg), Nugzari Tatalashvili (81kg), Aram Grigorian (90kg), Dzhafar Kostoev (100kg), Magomedomar Magomedomarov (+100kg); women's Khorloodoi Bishrelt (52kg).
Cycling
Safia Al Sayegh (women's road race).
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Men: Yousef Rashid Al Matroushi (100m freestyle); women: Maha Abdullah Al Shehi (200m freestyle).
Athletics
Maryam Mohammed Al Farsi (women's 100 metres).
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Dislikes: Sunlight. Being a nocturnal animal, the slow loris wakes around sunset and is active throughout the night
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Tax authority targets shisha levy evasion
The Federal Tax Authority will track shisha imports with electronic markers to protect customers and ensure levies have been paid.
Khalid Ali Al Bustani, director of the tax authority, on Sunday said the move is to "prevent tax evasion and support the authority’s tax collection efforts".
The scheme’s first phase, which came into effect on 1st January, 2019, covers all types of imported and domestically produced and distributed cigarettes. As of May 1, importing any type of cigarettes without the digital marks will be prohibited.
He said the latest phase will see imported and locally produced shisha tobacco tracked by the final quarter of this year.
"The FTA also maintains ongoing communication with concerned companies, to help them adapt their systems to meet our requirements and coordinate between all parties involved," he said.
As with cigarettes, shisha was hit with a 100 per cent tax in October 2017, though manufacturers and cafes absorbed some of the costs to prevent prices doubling.