Financial markets saluted Prime Minister Imran Khan’s move to secure yet another bailout package from Saudi Arabia - that is, after all, what it is - as the stock market gapped up at the opening and rose throughout the day and the rupee also broke its relentless fall and even though it opened with a gap down, it still managed to rise 1.63pc in a few short hours; till the time of writing. The deal includes $3 billion in safe deposits and $1.2-1.5 billion worth of oil on deferred payments.
The market clearly isn’t immediately worried that we were extended a similar, actually better, deal in 2018 only for Riyadh to pull the plug on it half-way; leaving us to scramble to return the money, which had to be borrowed at a much higher interest rate from China. For now, its biggest concern is that more money in the bank will give us a fighting chance to salvage the IMF package, and there can be nothing dearer than the oil facility considering that Brent crude is racing to the $90 dollar/barrel mark and threatening to bloat the current account to unmanageable proportions.
But it’s not as if expensive oil, or the many problems it causes countries like Pakistan, is going to go away anytime soon. The main problem is that while oil production is peaking, oil demand is not. In fact, global demand has already defied expectations that it would never again touch pre-pandemic levels. Analysts now put it just a few months away from “hitting and exceeding those levels” even though the pandemic is still far from over. OPEC expects it to continue into the mid-2030s to 108bpd before plateauing some time around 2045.
The production crunch owes to chronic under-investment in new oil supply ever since the 2015 crisis amid pressure on oil and gas companies to curb emissions; effectively “keep the oil in the ground” as much as possible. That’s very good news for green energy crusaders, the net-zero debate, even the health of the planet, but it’s very unrealistic considering that aggregate oil demand is roaring quite unexpectedly.
“On current trends, global oil supply is likely to peak even earlier than demand,” Morgan Stanley’s research department said recently. That leaves the oil market vulnerable to a supply-demand gap that guarantees volatility and price shocks at least till something is done to manage supply. That’s not very good news for countries counting on price rationalisation to cut down on their import bill because new investment in supply slumped to a 15-year low of $350 billion last year according to estimates by Wood Mackenzie, a global energy research and consulting group. And so far there’s nothing to suggest that investment is going to pick up this year or even early next year.
OPEC believes this under-investment will continue for a few more years, causing major pricing problems in the medium and long term. It calculates that the oil sector is going to need cumulative upstream, midstream and downstream oil-related investments of $11.8 trillion by 2045; which is going to be a very hard bargain considering how the world has made up its mind about eventually moving away from traditional, extracted oil.
“If we stop investing in (oil supply in) 2020, we will leave all these resources in the ground…and then the price will rocket to the roof. And even in developed countries, it will be a big issue,” said Patrick Pouyanne, chief executive at France’s TotalEnergies, to clients not long ago.
All this raises the chilling spectre of $100 oil in the not-too-distant future. Till recently analysts were giving Black Gold till September 2022 to breach this psychological barrier, earlier if this winter is colder than expected, but given the rush in demand and subsequent bid in oil price, everybody is going back to their tables and charts to make sense of what is really happening.
“We are moving into a straightjacket for energy, we don’t want to use coal, we want to use less and less gas, (and) we want to move away from oil,” Bank of America’s head of commodities and derivatives research told Bloomberg recently.
Even if oil does not stay at the level of $100/barrel for very long, which it isn’t expected to so far, supply problems will still leave prices elevated for quite a while. Therefore, while climate activists score a victory, oil demand shows that a majority of the world is not ready to abandon oil just yet; with the result that everybody will have to pay a lot more for the commodity.
That’s very bad for countries like Pakistan. The Saudi oil facility is no doubt a godsend, but it will eventually run out and the oil will have to be paid for. Also, you can bet that the al Saud would’ve extracted something substantial in return, especially given the recent past and the outcome of the last facility, since riyal politik has been and continues to be number-one on Riyadh’s priority list.
So, while Pakistan has got itself some breathing space, it’s not out of the woods just yet. But that’s not very likely to worry the ruling party since its vision only extends to the next election right now. Regardless, expensive oil is here to stay, which confirms long-term high inflation in Pakistan.
Copyright Business Recorder, 2021
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