Geopolitics of Energy - September 2009 (2)

8/4/2019 Geopolitics of Energy - September 2009 (2)

1/16GEOPOLITICS OF ENERGY/ SEPTEMBER 2009 1It is the policy ofGeopolitics of Energyto publish views by different authorities. The articles reflect the opinions of the authors

which are not necessarily those of the Editors-in-Chief, the Editorial Board, nor the Publisher (Canadian Energy Research Institute).

Volume 31, Number 9September 2009

Editor-in-ChiefSulayman Al-Qudsi

Associate EditorJon Rozhon

Editorial CommitteeAlberto Cisneros LavallerNapier CollynsJulian LeeMichael Lynch

Editorial BoardPeter AdamPreety BhandariFatih Birol

Ged DavisRobert EbelGeorge EynonFereidun FesharakiHerman Franssen

Antoine HalffPaul HorsnellWenran JiangTatsu Kambara

Alex KempWalid KhadduriDavid KnappMichal MooreEdward Morse

Francisco ParraRobert PriddleJohn Roberts

Adnan Shihab-EldinRobert SkinnerSubrotoPaul TempestR. James WoolseyWu Lei

Geopolitics of Energy was founded by the lateMelvin A. Conant of Washington, DC in 1979. Since 1993,

it has been published under the auspices of theCanadian Energy Research Institute.

Inside Geopolitics of Energy

Geopolitics

ofEnergy

Impacts of the Global Oil Crisis: A Latin American ConundrumBy Alberto Cisneros-Lavaller

Geopolitics of Energy Editorial Committee member Alberto Cisneros-Lavaller discusseswithin this paper how the oil price boom and bust of 2008/09 has affected majorLatin American nations. He examines oil price history to understand the root causesof the present crisis and postulates that certain traditional economic and geopoliticaindicators of price behaviour are behaving erratically; they cannot be relied on toindicate future price trends. Dr. Cisneros-Lavaller provides his own close reading othe geopolitical and economic tea leaves, analyzing four major hydrocarbon producingeconomies Mexico, Brazil, Venezuela, and Bolivia and providing arguments forthe prospects of each to emerge from recession.


2/162 SEPTEMBER 2009/ GEOPOLITICS OF ENERGY

Much has been made of the role played by the US mortgage bubble in plungingthe world into economic recession. However, a far larger oil bubble also burst last year

one that saw rampant prices reach $147/bbl before crashing to under $40/bbl. Farfewer people were outspoken about this bubble, not the NOCs, IOCS, or anyone else.

Now with the dust clearing, it would be useful to know how the price crash may affectoil demand destruction and, in turn, price behavior. Will oil prices recoup their strength,and if so, to what extent will they strengthen over the short-term and the mid-termfuture?

The basic economic law that governs the relationship between prices andsupply stresses that prices go up when supply goes down. And conversely, whensupply goes up, prices plummet. At the oil market, supply almost constantly equatesdemand; small differences work in balance, either to build-up or shrink oil inventories(stocks).

It would be revealing to contrast historical demand destruction which theglobal economy has experienced over recent decades with the pattern and impactof the most recent demand destruction that has resulted from the global financialcrisis of 2007-2009. Also, comparing certain cycles of behavior and/or strategies thatOPEC articulated in the past could shed some light forward into the future.

Traditionally, spare capacity of supply (basically OPECs) was strongly correlatedto prices (as assessed by CGES, among others). When idle capacity was high, priceswere down and vice versa. In reviewing another indicator, stocks, when they werebuilt-up, prices were feeble, and when there were inventory withdrawals, prices becamemore robust (EIA-DOE, Stockwatch and others).

Going beyond economic fundamentals, geopolitical factors have turned from avariable into a reliable constant and appear to be here to stay. If thats the case, thenthe surprise impact that geopolitics have on prices may be largely diminished or notextant any longer (Cisneros, 2009, ICEED, Boulder, Colorado). On the other hand,paper market influence on prices in reinforcing trends, either in contango orbackwardation, seems to be diluted or is fading away (cfm. Ed Morse, Geopolitics ofEnergy, Jan. 2009).

Thus, all these factors that traditionally have explained price behavior and oildemand (related to economic growth among other explanations) are either changingor behaving erratically. It is essential, we are persuaded, to research this interplaywith a vision into the future to better understand the behavior of prices and demand.

This article therefore encompasses an analysis of the current oil crisis and itsimpact on selected Latin American actors. It intends to unveil the roots of the crisis,linking it to the interaction of declining demand and plummeting prices. Finally, it

Im pacts of the Global Oil Crisis:A Latin American Conundrum

by Alberto Cisneros-Lavaller, Ph.D*

*Alberto Cisneros-Lavaller is CEO, Global Business Consultants and a member of the EditorialCommittee ofGeopolitics of Energy. He can be reached at [email protected].

Global OilMarket

Behavior: TheInterplay of

Prices andDemand


3/16GEOPOLITICS OF ENERGY/ SEPTEMBER 2009 3

reviews significant geopolitical aspects and how they may play out in the future,closing with implications for some Latin American countries.

As mentioned above, the current oil crisis stems from two different sets ofproblems: one is the widely recognized bubble stemming from massive mortgagedefault in the US; the other is an un-confessed oil bubble derived from unprecedentedhigh oil prices. These twin dilemmas were essentially responsible for grinding the USeconomy to a halt. The ensuing recession affected economies beyond Americasshores, so the American economic crisis became the worlds problem. Nevertheless

in the first half of 2008 most oil experts were reluctant to admit the possibility of animminent price decline.

Since the mid-1990s, the world has seen a number of economic and financiacrises. Of the eight identifiable crises that were felt globally The Tequila crisis ofMexico (1994-5); The Asian Financial Crisis (1997-8); The Brazilian Real Crisis (1998-9); The Russian Ruble Crisis (1998-9); The Turkish Crisis (2000); The Argentine Crisis(2001-2); the renewed attack on the Brazilian Real (2002) and the Uruguayan Collapse(2002) five started off in Latin America.

In historically reviewing international oil demand behavior, which is heavilyinfluenced by global economic growth, we see that during the last eight years it grew

most rapidly from 2002 to 2007. From 78 Mb/d it grew up to 86 Mb/d. During the lasttwo years, however, demand declined steeply from 86 Mb/d (2007) to 84 Mb/d(2009 estimated). This assessment is shared by two of the most importantOrganizations: OPEC and its counterpart, the IEA (see figure below).

In revisiting the history of global oil demand behavior, we identify that from1978 to 1983, a major drop in demand took place, possibly the most significant incontemporary times. One of the reasons for that significant fall was a glutted world oimarket. Supply growth was so strong that inventory levels grew and prices started todrop for the very first time since the sixties. If one compares that demand fall withthe current plunge, one finds certain similarities, as shown in the graph below.

Recessions,Demand

Destruction andOil Prices



-2

1,5

-2

0,9

-1

- 0,2

-1

-1,9

1980-19811979-1980 1981-1982 1982-1983

2006-20072005-2006 2007-2008 2008-2009

World Oil Demand:Early 80s vs. Last 5 Years Span Differentials

Source: OPEC, IEA

MBD

Comparing in absolute terms the differentials for the drops of these two periods,there appears a similar span differential: the 1979-80 and 1980-81 differentials were

almost identical to the 2008-09 drop; i.e., about 2 Mb/d, year-on-year. Note thefollowing graph:

Thus, it is interesting to compare now how demand and prices (both variables)

behaved during that five-year span versus the most current trend. While we saw thatprices came down from $37/bbl to $29/bbl from 1980 to 1983; the contemporarytrend shows us that since 2008 prices tumbled from an average of $93/bbl to $34/bbl(early 2009 average). All this is exhibited in the graph below.



Consider now the behavior of the US economy over the same two time-periods; one sees a significant resemblance. During the 1981-82 recession the USshowed a yearly average -2 percent growth. Since the third quarter of 2008, the US

economy reached a bottom of -6 percent growth and seems to be rebounding(though rampant unemployment and other factors send mixed signals).

World Oil Demand:Early 80s vs. Last 5 Years Span & Price Comparison

Source: OPEC - IEA

58

61

64

67

81

84

87

90

1979

1980

1981

1982

1983

2005

2006

20072008

2009

OILDEMAND

2 9 ,5 5

3 2 ,9 7

3 1 ,6 1

3 6 ,8 3

3 5 ,9 3

5 0 ,6 4

9 4 ,4 5

6 1 ,0 8

6 9 ,0 8

5 4 ,3 4

2 5

3 0

3 5

4 0

4 0

6 0

8 0

1 0 0

PRICEPATH

US GDP Growth Compared

-2

-1

0

1

2

3

4

5

80-81 81-82 82-83

GDP Annual Growth

Turning our attention to OPEC cycles of behavior during the early eighties andcomparing them to current trends, we unveil further similar patterns. As a cycle ofdeclining prices took over the 1983-85 period (first graph below), it seems that since2004 prices are falling in a comparable way (second graph below). One can easilydraw the conclusion that we will be facing years of moderate to low prices. Thereasons are several and will be discussed in the following section, an analysis of pricebehavior and its relationship with market share, idle capacity, and inventoriesperformance.

The USEconomy andOPEC Cycles


6/16



Source: US Department of Energy / OPEC

Bullish or Bearish Market Prices?

0

20

40

60

80

100

120

140

160

Jan2,1998

Apr10,1998

Jul17,1998

Oct23,1998

Jan29,1999

May7,1999

Aug13,1999

Nov19,1999

Mar3,2000

Jun9,2000

Sep22,2000

Dec29,2000

Apr6,2001

Jul13,2001

Oct19,2001

Jan25,2002

May3,2002

Aug9,2002

Nov15,2002

Feb21,2003

May30,2003

Sep5,2003

Dec12,2003

Mar19,2004

Jun25,2004

Oct01,2004

Jan7,2005

Nov-05

Jan-07

Mar

May

OPEC BASKET

WTI

$/b

Source: US Department of Energy / OPEC

Dwindling OPEC Share

10

15

20

25

30

35

40

45

50

55

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

MBD

27

30

33

36

39

42

45

48

51

54

%

OPEC Non-OPEC Mkt ShareSource: EIA-DOE.

The new forthcoming range could move slightly higher to, say, a $40/b-70/bband (Morse, 2009). But even this new range remains within historical price trendsThere are a number of factors converging to support the idea of moderate prices forthe forthcoming future.

First, consider market share. Since the 1970s, the world has witnessed adwindling OPEC market share. That pattern has experienced ebbs and flows, with themid-1980s representing its deepest valley and the early 70s its peak. Currently, OPECholds approximately a 40 percent share of the world oil market, as the following graphillustrates.

Above and beyond this trend, it is important to realize that under thesecircumstances, OPEC retains neither the ability nor the capacity to become a pricesetter for oil; it is now a price follower.



When we consider spare capacity, it lies almost entirely within OPEC becausealmost all non-OPEC producers operate at nearly 100 percent capacity. All indicationsare that OPEC spare capacity will grow even further. That fact should influence pricestowards a moderate level since prices tend to rise whenever there is not enough idlecapacity in the market.

Furthermore, key global producers, those with the largest reserves, would liketo see moderate prices. That would ensure the realization of their undergroundwealth through a larger and incremental demand. Needless to say, moderate to low

price levels ensure significant demand growth. Provided that investment is secured toenlarge OPEC spare capacity, prices will remain at moderate to low levels. That iswhat can be seen in the graphs below from a historical to a projected perspective.

The relationship between prices and spare capacity is accounted for by thehistorical trend shown below, with a significant correlation (r = - 63 ) over the last two

decades.

0

1

2

3

4

5

6

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Mb d

Note: Shaded area r epresents 1997-2007 average (2,5 mil lion b arr els per day)

OPEC Surplus Crude Oil Production Capacity

Source: EIA-DOE

0

1

2

3

4

5

6

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0

20

40

60

80

100

120

Average Spare WTI Lineal (W TI) Lineal (Spare)

Mbd $/b

Spare Capacity & Prices

Source: EIA-DOE r = -0,62150079

SpareCapacityTrendline

WTI

Trendline

Behavior ofSpare Capacity



According to official figures, OPEC idle capacity is deemed to grow tremendouslyin the near future, almost reaching 40 Mb/d by 2010.

A more conservative estimation is that spare capacity reaches 5 Mb/d by2010, as shown in graph below. But one way or the other, idle capacity is likely togrow, putting downward pressure on prices.

OPEC Surplus Capacity

Source: OPEC

0

1

2

3

4

5

6

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Average Spare Polinmica (Spare )

Mbd

Note: Shaded area represents 1997-2007 average (2,5 mil li on barr els per day)

Source: EIA-DOE

OPEC Oil Production Capacity Forecast



The third variable often associated with prices is oil inventory, or stocks.There is typically an inverse relationship between prices and stocks. That is, wheninventories grow, prices tend to fall and, conversely, when stocks are low prices rise.

During the 1990s inventories were built and prices tumbled. But in the lastthree years inventories stagnated while prices skyrocketed, as is shown in the followinggraph.

Thus, all these factors support the idea that prices will run at a moderate pacein years to come.

After analyzing the economic fundamentals accounting for the price of oil now,

it is natural and perhaps traditional to turn to geopolitics to gauge the direction theymight be heading. Geopolitics have for years been considered a surprise factor thatput upward pressure on prices. Nevertheless, I have claimed elsewhere (ICEED,2008) and maintain here that geopolitics should no longer be considered a variable butrather a constant. Geopolitics present few, if any, real surprises anymore and theirpotential to influence prices has diminished. This is illustrated in the graph below.

19,3

41,5

56,6

24,5

34,6

16,0

19,2

15,1

38,6

30,6

17,222,1

14,4

30,4

26,0

31,1

99,7

72,3

66,1

3,408

4,006

3,255

3,494

3,643

3,588

3,706

3,718

3,875

3,762

4,067

3,733

3,912

3,811

4,084

4,127

0

15

30

45

60

75

90

105

120

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20082,7

3,0

3,2

3,5

3,8

4,0

4,3

4,5

4,8

WTI OECD Total Stocks Polinmica (OECD Total Stocks) Polinmica (WTI)

$/b MB

Global Stocks & WTI1983-2008

Sources: EIA-DOE

Factoring in

Geopolit ics



Traditional vs. Surprise Free Scenario (Geopolitics asvariable vs. a constant) & Oil Market Alternatives (Heated

Economy vs. Steady Growth)

1 2 3 4 5 6 7 8 9 10

All these global trends have implications for Latin America. Basically, theimplications are felt most directly in economic growth, the import-export relationship,and in the revenues that pay for imports. That is what is under review in this, the lastsection of the paper.

With regard to economic grow th, most Latin American countries have seentheir GDP plummet in 2008 and 2009. This steep decline is attributable to the globaeconomic crisis. As can be seen in the graph below, several economies have falleninto recession (negative growth). Although it is possible these nations will rebound by2010, according to reputable IMF sources, it remains to be seen the extent andduration of the crisis as well as the degree of recovery (strength and pace).

GDP:AnnualPercentageChange

-1.3

3.3

1.3

-3.7

1

8.4

4.8

-2.2

-0.5

5.7 5.1

2.2

4.6

5.9

2.2

2.9

-6

-4

-2

0

2

4

6

8

10

2007 2008 2009 2010

Mexico Venezuela Brasi l Bol ivia

%

The LatinAmerican

Perspect ive



VENVENExportsExports &&ImportsImports

26

55,7

35

65,2

49

69,1

51

93,5

38,2

48,8

0

10

20

30

40

50

60

70

80

90

100

2005 2006 2007 2008 2009

Imports Exports

US $B

Source: BCV

Differentiating between economies largely dependent on hydrocarbon resourcesand those economies that are more diversified, we can see that the more resilient(i.e., those that rebound quicker and more strongly) are those which are not heavilydependent on one primary resource. That has been the case with Brazil and Mexico,while the more dependent Venezuela and Bolivia have a tougher time (see the followinggraph).

Finally, analyzing the impact on imports and exports, we see an estimationof declines on their trade pattern for 2009.

In the case of Venezuela, trade (imports and exports) will decrease significantlywhen compared to 2008 (largest dependence on hydrocarbon exports). This is also

the case with Bolivia. Brazil appears to be impacted to a lesser degree, while Mexicoalso exhibits a real decline in her imports and exports by 2009. This is illustrated in thegraphs below.

GDP:Annual

Percentage

Change

8,4

4,8

-2,2

-0,5

4,6

5,9

2,2

2,9

-4

-2

0

2

4

6

8

10

2007 2008 2009 2010

Venezuela Boliv ia

%

Source: FMI

1

-3,7

1,3

3,3

-1,3

2,2

5,15,7

-6

-4

-2

0

2

4

6

8

10

2007 2008 2009 2010

Mexico Brasi l

%



BOLBOLImportsImports &&ExportsExports

2,7

2,3

3,8

2,8

4,4

3,4

6,4

4,9

4,6 4,5

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

2005 2006 2007 2008 2009

Exports Imports

US $B

Fuente: BCB

BRABRAImportsImports &&ExportsExports

119

73,6

137,8

91,3

160,6

120,6

197,9

173,1151,9

121,5

0

20

40

60

80

100

120

140

160

180

200

220

2005 2006 2007 2008 2009

Exports Imports

US $B

Fuente: BCB

MEXMEXImportsImports &&ExportsExports

214 222

250 256

272282 291

308

204215

0

50

100

150

200

250

300

350

2005 2006 2007 2008 2009

Exports Imports

US $B

Fuente: BdM



VENXVENXRevenuesRevenues vs.vs.ImportsImports

47,939,4

89,1

43,651,6

5149

352638,2

0

20

40

60

80

100

2005 2006 2007 2008 2009

Oil Revenues Exp. Revenues Imports

US $ B

Source: BCV

73,1% 74,7% 93,6% 89,3%70,7%

55,755,7

65,565,56969

95,195,1

48,848,8

BOLXBOLXRevenuesRevenues vs.vs.ImportsImports

21,4

3,4

2,32,2

4,9

3,4

2,8

2,3

4,5

0

1

2

3

4

5

6

7

2005 2006 2007 2008 2009

Hydrocarbon Sales Exp. Revenues Imports

US$ B

Fuente: BCB

51,8%51,8% 52,6%52,6% 50%50% 53,1%53,1% 50%50%

2,72,7

3,83,8

4,44,4

6,46,4

4,64,6

Our last impact to be analyzed is export revenues v s. oil revenues, becauseit is important to see if these monies would be able to foot the import bill. The graphsbelow reveal an early estimation of behavior we may expect for 2009.



Venezuela will see their export revenues reduced and thus her imports would

eat up a large percentage of those revenues. Bolivian export revenues would barelybe able to meet 2009 import requirements. While Brazil (with very low oil dependence

about 5 percent) sees export revenues to foot the import bill relatively comfortablyMexico (with a larger dependence from oil revenues about 15 percent) would notbe able to foot her import bill to a much larger extent than in previous years.

By way ofconcluding remarks it seems that more diversified Latin Americancountries are more resilient and able to spring out of crisis sooner and better (morerebound). However, further research is needed encompassing a much larger comparisonand a longer longitudinal analysis. These findings, though, may serve as preliminaryconclusions that are hinting towards the need to implement healthier policies to diversifydomestic economies. A rentier approach (enlargement of hydrocarbon revenues

dependence) could be the reason for Hollandaise disease, not to mention all sorts ofother maladies.

BRAXBRAXRevenuesRevenues vs.vs.ImportsImports

8,96,713,54,1 6,8

121,5

73,6

91,3

120,6

173,1

0

20

40

60

80

100

120

140

160

180

200

220

2005 2006 2007 2008 2009

O il R ev en ue s Ex p. R ev en ue s I mp or ts

US $ B

118,5

137,3

160,6

197,9

Fuente: BCB

3,4% 4,9% 5,5%6,8% 4,4%

151,9151,9


16/16

Publication Date: October 5, 2009

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