The English language daily, Iran Daily, in an opinion piece published on Saturday, throws light on the issue of globalizing the oil industry and its benefits.
Full excerpt follows:
Close to $5 trillion of the forex reserves of oil producing and exporting states were transferred to oil consumer countries during January 2013-December 2015. This is, perhaps, the largest volume of monetary transactions in the 21st century.
The figure, in fact, represents the purchasing power which has been transferred from producers to consumers.
Nevertheless, oil producers have made up for the drop in purchasing power. According to International Energy Agency, Saudi Arabian foreign exchange reserves will be depleted in five years. The continuation of this trend can help improve the economic conditions in oil consumer countries and, thus, after a while, stimulate their energy demand again.
It is crystal clear that the continuation of the downward trend in oil prices will lead to a decline in oil industry investments. The drop in investments will be more significant in funding the development of costly oilfields, particularly those for non-conventional oil. Consequently, global oil market will witness a gradual increase in demand and a fall in investments in upstream industries concurrently. During this process, the vulnerability of oil producing countries will be different.
In case Iran manages to globalize its oil and gas industry and enters international market and stock exchanges, it will be able to boost exports and bring in more revenues. Although Malaysia’s PETRONAS has not exported oil for 20 years, in 2014, it generated revenues to the tune of $475 billion from its international operations. Likewise, revenues of Brazil’s Petrobras have exceeded $320 billion by employing the same approach and method.
Leading national Iranian oil and gas companies, which have a broad and strong experience in oil operations and activities, have a great potential to ensure a more effective and revenue-generating presence in upstream, downstream and service activities of oil and gas industry, independently or in cooperation with other domestic crude firms.
Iran’s GDP currently stands at $420 billion per year. The country is required to swiftly and strongly join the club of states with an annual GDP of more than $1-trillion and thus become a member of BRICS, the acronym for an association of five major emerging national economies: Brazil, Russia, India, China and South Africa.
In addition to economic problems, such as budget deficit, on oil producers, particularly those which are highly dependant on oil earnings, persistence of the downward trend in oil prices will entail adverse political and security impacts. The fall in prices will cause the governments in oil-reliant economies to reduce development costs and channel the fund towards current expenditures due to the inflexibility in the latter, a major portion of which pertains to wages and salaries of staff in state-owned companies and organizations.
Therefore, a bunch of incomplete development projects in these states will be the first visible victims of reduced oil prices. This, in turn, will lead to deeper recession and higher unemployment, particularly, in sectors using unskilled workforce. The economic instability will spill over to social and political fields and exert adverse impacts on forex reserves, payments and state budgets. All these will eventually lead to higher inflation and consequently slow economic growth.
Falling prices can have diverse impacts on oil rich countries. This holds true for crude consuming states. Oil importing countries can manage their energy consumption optimally by accelerating and raising the generation of renewable energies. A number of European states, such as Scandinavian countries and Austria, have drawn up strategic plans for this in a bid to minimize negative impacts of fluctuations in global oil price on their financial systems.
Since a few years ago, the targeted subsidy plan has thrust energy generation and consumption challenges in Iran into the limelight. Boosting and promoting production and consumption of renewable energies can help the government effectively manage its energy reserves. Iran has all the prerequisites for generating renewables including favorable wind pressure and speed, adequate water resources and strong sunlight. Long term planning can help the government cut domestic consumption of oil and gas, and allow for increased overseas sales of hydrocarbon reserves. This will speed up the country’s development.
Nevertheless, the reformed subsidy plan cannot solely guarantee the optimization of energy consumption in Iran and employment of modern technologies in oil and gas sector. Domestic consumers will be brought under tremendous pressure in case the government fails to import or develop modern technologies concurrent with reducing consumption of hydrocarbon reserves.
According to the World Bank figures, a 10-percent drop in oil prices can lead to an economic growth of up to 0.5-percent in crude importing countries.
Therefore, lower crude prices will lead to a drop in investments in oil projects and force domestic companies and organization to downsize their workforce. Moreover, domestic foreign currency, stock exchange and housing markets may suffer serious losses as a result of the declining trend.
By: Fereydoun Barkashli