Greed and fear driving crude oil prices

It is becoming more evident that both the U.S. and OPEC members are falling prey to greed and fear.  All the producers want to pump more oil to retain their respective market share. While it seems almost impossible to boost demand, production at faster rate is creating glut. In the past hedge funds were prompt in enhancing their stake in oil but this time they seem least interested.

Does this mean they are also victim of fear and don’t see prices rebounding in the near future. It may not be wrong to say that many of the reports being published by the western media are opinion not the news. These reports suggest that the glut is because OPEC members are not willing to curtail production. However, there has been no suggestion that the U.S. should curtail production.

Having reach a point that OPEC may not be keen in reducing output and also read news that even geopolitics is not working, it was feared that oil countries suffering from turmoil would be the first to stop production. The fears came true as dispatches from Libya and Nigeria are almost halted.

Oil prices have already declined by almost 45 percent this year to a five-year low after OPEC producers including Saudi Arabia, Kuwait and Iraq reduced prices and the International Energy Agency cut its estimate for global demand for the fourth time in five months.

People like Michael Lynch, President of Strategic Energy and Economic Research in Winchester, Massachusetts believe that prices are close to the bottom. Many readers consider this ‘disinformation’ because other still believe price could slip below US$40/barrel. This is a level which is certainly not liked by Shale oil producers, who have also started propagating that higher production is helping in bringing down cost of production.

 “This shows that there’s a lot of skepticism about the selloff and a feeling that prices should soon rebound,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, informed and continued, “We’re seeing bargain hunting by investors of all stripes.”

OPEC will stand by its decision not to cut output even if oil drops to as low as US$40 a barrel and will wait at least three months before considering an emergency meeting, United Arab Emirates Energy Minister Suhail Al-Mazrouei said at a conference in Dubai. The 12-member group maintained its collective target of 30 million barrels a day at a Nov. 27 meeting in Vienna.

The slump in benchmark U.S. crude futures, is driving producers to move drill rigs to lower-cost fields. While there’s evidence of some rebalancing starting to occur in the market, many believe it isn’t sufficient.

There is growing impression that costs are falling nearly as fast as the price, which means oil producers can spend less to get the same or potentially even more in terms of production. While reductions in capex are coming faster than expected, it is unlikely to translate into less supply, despite that number of drill-rig has dropped as much as 20 percent.

 

Pak China Free Trade Agreement

Creation of WTO and arriving at the agreement to give all countries equal opportunities ushered a new era in international trade. Simultaneously, different trade groups emerged to ensure collective well-being. NAFTA was the first to emerge, that was followed by European Union (EU) and the story continued. From Pakistan’s perspective it is member of ECO and SAARC but both these blocs have remained muted.

RCD was broadened and given ECO name but remained of no consequence because of Iran facing economic sanctions for more than three decade. Turkey paid more attention to acquiring membership of EU than reviving ECO. Pakistan was engrossed in Afghan war and its internal conflicts due to the war going on in the backyard. SAARC remained ineffective due to Indian hegemony. Under the prevailing scenario Pakistan had no option but to enter into bilateral preferential trade and free trade agreements. Out of these the most important is Pak-China Free Trade Agreement.

Let one point be kept in mind that China is the second largest economy of the world that has attracted huge investment from United States and also emerged as one of its main trading partners, as against this Pakistan was often labeled ‘failed state’ with nineties being called ‘lost decade’. Pakistan’s economy has virtually collapsed due to influx of Afghan refugees due to USSR attack on Afghanistan in late seventies, war going in the country for nearly four decades and country emerging as the worst victim of terrorism/militancy/extremism.

As foreign investment dried, Pakistan had to look for a friend who could help in strengthening the local infrastructure as well as manufacturing base. China, a time tested friend extended the support in building infrastructure and power plants. China also tried to revive trade through ‘all season’ KK highway, previously known as ‘Silk Route’, the oldest trade corridor.  There was substantial increase in bilateral trade between the two countries even prior to the signing of FTA, which has removed barriers to further smoothen the trade.

Pakistan and China signed FTA in 2006 and its scope was to broaden with the passage of time. Reviewing the ground realities after almost 8 years leaves a strange feeling. Certain groups having vested interest are making Pakistanis scared rather than preparing them for exploiting the opportunities. One needs to look at the discussions going on with a different perspective.

Some quarters are certainly unhappy with the time test cordial relationship between the two countries and wish to create hurdles. Be it the growing militancy in Chinese areas adjoining Pakistan or unrest in Baluchistan these are not isolated but planned moves to create disturbances in economic cooperation between the two countries. The much talked about hue and cry created by the businessmen having vested interest also needs to be seen in the same perspective.

Since early days Pakistan and China have enjoyed most cordial relationship. With the passage of time friendship has been further consolidated with China first building the silk route, establishing heavy mechanical and electrical complexes in Pakistan. The economic cooperation further consolidated with construction of Gwadar port and two nuclear power plants.

While some cynics term Chinese presence in Pakistan as a security threat, others very strongly believe that  economic cooperation between the two countries will usher new era based on ages old premise ‘Pakistan is a natural trade and energy corridor’.  The latest move to achieve this dream is construction of Gwadar to Kashgar road and rail links.

Over the years China remained a major buyer of textile intermediate goods and lately embarked upon acquiring stake in Pakistani textiles and clothing industry. The move was also seen with great suspicion but very few were able to accept it as part of the strategy followed by the developed countries. With manpower becoming scarce and expensive developed countries shift their labor-intensive manufacturing facilities to developing/least developed countries which continue to enjoy abundant cheap manpower.

It is being alleged that Pakistan has become a dumping ground for cheap and inferior quality Chinese products. This perception gets some credence when one visits Pakistani markets. However, no one can deny the fact that China is known for producing superior quality products which are bought by United States and European countries. Therefore, it may be said that Pakistani importers are deliberately buying cheap goods, which are mostly brought into the country through land route.

The fear that Chinese textiles and clothing industry would cause material injury to Pakistani manufacturers is partly true and partly a myth. Pakistani manufacturers of textiles and clothing compete in the global market with many countries including China. Those manufacturers have been able to compete which go for value addition and produce superior quality products. However, even the most efficient ones face eroding competitiveness because of some structural weaknesses i.e. higher electricity and gas tariffs, prolonged outages, poor law and order situation and above all negative perception about Pakistan.

It goes without saying that whenever two countries sign preferential or free trade agreements in the initial period negative list are prepared comprising of products that are sensitive for both the countries. Therefore, presence of negative lists should not of any surprise for Pakistanis. If Pakistani were not able to identify sensitive products the blame should not go to China.

The beauty of PCFTA agreement is that Pakistan should be buying more of machinery, raw materials and chemicals from China and supplying it goods in which it enjoys comparative advantage i.e. textiles and clothing, sports goods, surgical instruments and seafood (China is the biggest buyer of fish and other species which are not consumed in Pakistan).

China can become the biggest source for textile machinery and Pakistan by converting the entire cotton produced in the country into value added products become a major source of textiles and clothing for China. A fact must be kept in mind that Chinese manufacturers are shifting their manufacturing facilities or establishing manufacturing units in other countries. Pakistan enjoys the competitive advantage and energy shortage will also be overcome with Chinese investment in power plants in Pakistan.

China is the second largest crude oil consuming country after United States. It buys oil from Iran and other countries which is taken by ships through long route. Pakistan has attained self sufficiency in some POL products and output can be further enhanced by operating refineries at optimum capacity utilization. Two pipelines (one for black oil and other for white oil) and mid country refinery, PARCO, can become a major source of POL products for those parts of China which enjoy common border with Pakistan.

Bilateral trade between China and Pakistan is only a fraction of trade between China and India. Exports from India have increased because of supporting policies of the government. As against this Pakistani exporters look for the crutches like textile quota, GSP and cotton at below international prices but are hardly ready to bring efficiency, economy of scale, synergy through BMR/expansion.

In Pakistan many of spinning mills have 14,400 or even lesser spindles, which don’t make economically viable units. Bulk of cloth is produced on power looms and processed in obsolete plants; the result is inferior quality and high cost of production.

Analysis of ginning factories also shows that cotton staple is damaged due to use of outdated/obsolete machinery. The result is that cotton that is capable of producing 30 and above counts of yarn ends up in producing coarse counts of yarn, this is waste of resource.

The purpose of mentioning a few examples is that if the country is serious in attracting foreign invest, be it from China or any other country the required steps are: 1) creating enabling environment, 2) encouraging local investment, 3) promoting joint ventures and above all changing the existing negative perception about the country.

It is encouraging that China has shown keen interest in investing in Pakistan. Signing of MoUs may be the first step, but executing the projects is most crucial. The response to the recent IPO of Engro Powergen, enjoying Chinese support  is just the tip of iceberg. Chinese investment in infrastructure will certainly help in the creation of enabling environment but Pakistan has to be developed as trade and energy corridor.

 

Declining oil prices: Boon or bane

After having posted a blog titled ‘Winners and losers of oil war’ on November 22, 2014, I kept on searching my soul. I felt embarrassed for talking about the oil producers only and ignoring the consumers altogether. It also dawned that both United States and Saudi Arabia have kept oil prices high to achieve their own selfish motives. It may also be said that Saudi Arabia are an accomplice in this crime against humanity because common men were the worst hit.

Saudi Arabia has nurtured its own worst enemy in oil trade. The largest oil producing country failed in realizing that prices were kept high to enable shale oil and gas production economically viable in the United States. Saudis were looking on one side of the coin, extra petro dollars to finance their lavish spending and never thought that one day United States would become their worst competitors, may be, because many in this world fail to look beyond their nose and Arabs were no exception.

As all and sundry know that media is controlled by west, particularly the Zionists, it is trying to create an impression that Saudi Arabia has initiated oil war against United States. While all the report suggests that OPEC should curtail production none has pointed out that United States should curtail its output.

Global media has also not being honest as it talks very little about the benefits of nearly 40% decline in oil prices. Many non-oil producing countries that were victim of high oil prices have witnessed signs of improvement in their economies. Industries like airlines and shipping have wiped-out huge accumulated losses and inflation around the world has come down.

Reduction in oil prices has also opened the Pandora Box that many of the governments have been keeping POL prices high to earn extra revenue. One of the reports has exposed that in United Kingdom retail price of motor gasoline include one-third tax. Such countries may also feel upset with the decline in crude oil price. The British government may not be alone; dozens of other countries may also be doing the same.

The time has come to decide if the interest of a few monarchs and oil tycoons is important or the millions of people deserve a better life. Oil politics has led to wars in many countries the most naked examples being Iraq, Sudan, Nigeria, Iran and Libya. One point has to be kept in mind that higher oil prices have made lives of millions of people miserable.

May be, the time has come to establish a global regulatory authority to oversee, monitor and control crude oil production and prices. No country should be allowed to protect the interest of a few oil producing companies only. If some of the shale oil producers could sell oil below US$50 a barrel and make profit why should inefficient companies be allowed to thrive by ripping off millions of people around the world.