Do not blame OPEC for high energy prices

Policymakers, lawmakers and insufficient oil and gas sector investments are to be blamed for high energy prices, not OPEC told the producer group's new Secretary General Haitham Al Ghais to Reuters on Thursday.

The lack of investment in the oil and gas sector following a price slump sparked by COVID-19 has significantly reduced OPEC's spare production capacity and limited the group's ability to respond quickly to further potential supply disruption.

The price of Brent crude came close to an all-time high of US$147 a barrel in March, after Russia's ordering of troops into Ukraine exacerbated supply concerns. While prices have since declined, these are still painfully high for consumers and businesses globally.

"Don't blame OPEC, blame your own policymakers and lawmakers, because OPEC and the producing countries have been pushing time and again for investing in oil and gas," Al Ghais, who took office on August 01, said in an online interview.

Oil and gas investment is up 10% from last year but remains well below 2019 levels, the International Energy Agency (IEA) said last month, adding that some of the immediate shortfalls in Russian exports needed to be met by production elsewhere.

The OPEC official also pointed the finger at a lack of investment in the downstream sector, adding that OPEC members had increased refining capacity to balance the decline in Europe and the United States.

"We are not saying that the world will live on fossil fuels forever ... but by saying we're not going to invest in fossil fuels ... you have to move from point A to point B overnight," Al Ghais said.

“OPEC exists to ensure the world gets enough oil, but it's going to be very challenging and very difficult if there is no buy-in into the importance of investing," he said, adding that he hopes investors, financial institutions, policymakers as well globally seriously take this matter and take it into their plans for the future."

Oil has tumbled since March and Brent hit a six-month low below $92 a barrel this week. The slide reflects fears of economic slowdown and masks physical market fundamentals, Al Ghais said as he took a relatively optimistic view on the outlook for 2023 as the world tackles rising inflation.

"There is a lot of fear," he said. "There is a lot of speculation and anxiety, and that's what's predominantly driving the drop in prices."

Whereas in the physical market we see things much differently, demand is still robust. We still feel very bullish on demand and very optimistic on demand for the rest of this year."

"The fears about China are really taken out of proportion in my view," said Al Ghais, who worked in China for four years earlier in his career. "China is a phenomenal place of economic growth still."

The Organization of the Petroleum Exporting Countries, plus Russia and other allies, known as OPEC Plus, has unwound record oil output cuts made in 2020 at the height of the pandemic and in September is raising output by 100,000 barrels per day.

Ahead of the next meeting which OPEC Plus holds on September 05, Al Ghais said it was premature to say what it will decide, although he was positive about the outlook for next year.

"I want to be very clear about it - we could cut production if necessary, we could add production if necessary."

"It all depends on how things unfold. But we are still optimistic, as I said. We do see a slowdown in 2023 in demand growth, but it should not be worse than what we've had historically."

"Yes, I am relatively optimistic," he added of the 2023 outlook. "I think the world is dealing with the economic pressures of inflation in a very good way."

OPEC Plus began to restrain supply in 2017 to tackle a supply glut that built up in 2014-2016 and OPEC is keen to ensure Russia remains part of the OPEC Plus oil production deal after 2022, Al Ghais said.

"We would love to extend the deal with Russia and the other non-OPEC producers," he said.

"This is a long-term relationship that encompasses broader and more comprehensive forms of communication and cooperation between 23 countries. It's not just in terms of production adjustment."

 

US Fed minutes hint more rate hikes but at slower pace

US Federal Reserve officials saw little evidence late last month that US inflation pressures were easing and steeled themselves to force the economy to slow down to control an ongoing surge in prices, according to the minutes of their July 26-27 policy meeting.

While not explicitly hinting at a particular pace of coming rate increases, beginning with the September 20-21 meeting, the minutes released on Wednesday showed US central bank policymakers committed to raising rates as high as necessary to tame inflation - even as they began to acknowledge more explicitly the risk they might go too far and curb economic activity too much.

"Participants agreed that there was little evidence to date that inflation pressures were subsiding," the minutes said.

Though some reduction in inflation, which has been running at four-decade highs, might occur through improving global supply chains or drops in the prices of fuel and other commodities, much of the heavy lifting would have to come by imposing such high borrowing costs on businesses and households that they would spend less, the minutes stated.

"Participants emphasized that a slowing in aggregate demand would play an important role in reducing inflation pressures," the minutes said.

Yet despite that arch tone on inflation as their top concern, the minutes also flagged what will be an important dimension of the Fed's debate in coming months - when to slow down the pace of rate increases, and how to know if rate hikes have gone past the point needed to beat rising prices.

While judged as generally dovish by traders who increased their bets the Fed would approve just a half-percentage-point hike at the September meeting, Bob Miller, Head of Americas Fundamental Fixed Income at BlackRock, said the minutes seemed to be giving the Fed more scope to react as data flowed in.

"The intended message was much more nuanced and reflected a need to optionality by a central bank trying to assess conflicting economic data and shocks”, he said. "Staking out some conditionality going forward seems sensible given the unprecedented nature of this particular cycle."

The pace of rate increases indeed could ease as soon as next month, with the minutes stating that, given the need for time to evaluate how tighter policy is affecting the economy, it would become appropriate at some point to move from the large, 75-basis-point increases approved at the Fed's June and July meetings, to half-percentage-point and eventually quarter-percentage-point hikes.

Some participants said they felt rates would have to reach a sufficiently restrictive level and remain there for some time in order to control inflation that was proving far more persistent than anticipated.

Many, on the other hand, noted the risk that the Fed could tighten the stance of policy by more than necessary to restore price stability, particularly given the length of time it takes for monetary policy to change economic behavior.

Referring to the rate increases already telegraphed by the Fed, participants generally judged that the bulk of the effects on real activity had yet to be felt, the minutes stated.

As of the July meeting, Fed officials noted that while some parts of the economy, notably housing, had begun to slow under the weight of tighter credit conditions, the labor market remained strong and unemployment was at a near-record low.

The Fed has lifted its benchmark overnight interest rate by 225 points this year to a target range of 2.25% to 2.50%. The central bank is widely expected to hike rates next month by either 50 or 75 basis points.

For the Fed to scale back its rate hikes, inflation reports due to be released before the next meeting would likely need to confirm that the pace of price increases was declining. Inflation by the Fed's preferred measure is more than three times the central bank's 2% target.

Data since the Fed's July policy meeting showed annual consumer inflation eased that month to 8.5% from 9.1% in June, a fact that would argue for the smaller 50-basis-point rate increase next month.

But other data released on Wednesday showed why that remains an open question.

Core US retail sales, which correspond most closely with the consumer spending component of gross domestic product, were stronger than expected in July. That data, along with the shock-value headline that inflation had passed the 10% mark in the United Kingdom, seemed to prompt investors in futures tied to the Fed's target policy interest rate to shift bets in favor of a 75-basis-point rate hike next month.

Meanwhile, a Chicago Fed index of credit, leverage and risk metrics shows continued easing. That poses a dilemma for policymakers who feel that tighter financial conditions are needed to curb inflation.

Job and wage growth in July exceeded expectations, and a recent stock market rally may show an economy still too hot for the Fed's comfort.

 

 

Britain: Felixstowe port workers’ strike set to begin on August 21

According to a Seatrade Maritime News, a planned strike by dockworkers at the Britain’s largest container port – Felixstowe – could disrupt US$800 million in trade. Some 1,900 members of the Unite Union are set to go strike from 21 to 28 August at the Port of Felixstowe after talks between employers and the union broke down a week ago.

Felixstowe, Northeast of London, is a key hub for imports as well as some exports from Britain, and accounts for nearly half the country’s container trade. The strikes will have a huge effect on supply chains and cause severe disruption to international maritime trade, according to the union, which is vowing a full shutdown of the port.

In late July 92% of union members voted for strike action over Felixstowe Dock and Railway Company offering a 5% pay increase to its workers.

With workers now set to walk out of the Britain’s largest port on 21 August, Russell Group has used its ALPS Marine analysis to calculate the value of goods that will be impacted by the strike action.

The total impact was put at US$800 million in trade, with clothing accounting for some US$82.8 million of that figure, and electronic components a further US$32.3 million. The figures are based on analysis of previous August trade flows at the Port of Felixstowe.

Suki Basi, Russell Group Managing Director said, "The disruption at Felixstowe spells more uncertainty for businesses, consumers and governments alike. Ports across the globe are facing congestion, due to a large backlog caused by the pandemic.

“As our analysis has shown, these strikes could increase the backlog and in doing so, create even more delays, and the effects of this will only be registered in the coming weeks and months."

Disruption has dogged the global supply chain since the onset of the Covid pandemic over two years ago and this year in Europe has been exacerbated by port worker strikes in major ports such as Hamburg.

Felixstowe not only handles large volumes of British imports but also exports with US$108 million moved to Rotterdam and US$138 million to Hamburg. Smaller ports in Britain are seen as potentially benefitting from the strike with volumes and services diverted to other terminals in the country

 

Pakistan: What will be SBP decision regarding policy rate?

Monetary Policy Committee (MPC) of State Bank of Pakistan (SBP) is scheduled to meet on August 22, 2022. It has three options: 1) increase, 2) decrease and 3) let unchanged at 15%.

May I request you to first read two of my blogs: Central banks around the world raising interest rates to tame inflation and Get ready for another interest rate hike and then the brief prepared by one of Pakistan’s leading brokerage houses.

Topline Securities says, signs of a slowdown have begun to emerge, with several high frequency growth indicators recording a sharp drop on MoM readings – although some of the same can be attributed to the ongoing monsoon season in the country too.

Nevertheless, sectors posting decline are Cement (61%MoM), Automobile (58%MoM), POL products (26%MoM) have all posted significant drop in sales as per latest data, along with 23%MoM drop in exports during July 2022 as well.

Moreover, the industrial sector has been struggling due to: 1) restrictions on imports including plant & machinery; 2) higher interest rates amid record inflation; 3) soaring fuel and power cost; 4) squeeze on margins; 5) volatile Rupee and 6) flattish or falling demand for their products as purchasing power diminishes due to higher taxes and record surge in headline inflation.

The brokerage house believes hiking interest rates would have limited effect on curbing headline inflation, which is being largely driven by supply-side factors including higher fuel and energy prices, with lagged effect on core inflation.

The pressure on Rupee has subsided significantly with Pakistan inching closer to the next IMF disbursement  as well as enhanced monitoring of exchange operations by the SBP.

The SBP and the Ministry of Finance have also assured that Pakistan’s gross financing needs will be more than fully met for FY23. Support from friendly countries: 1) China—roll over of US$4.3 billion in deposits and commercial loans; and 2) Saudi Arabia—renewal of US$3 billion deposit, with the possibility of extending KSA’s SDR’s to Pakistan, have also boosted confidence in the Rupee.

The yields in the primary market have remained almost unchanged since the last MPC was announcement in July 2022. However, secondary market yields have increased in line with the movement in the policy rate since the last MPC announcement, and do not seem to reflect expectations of another rate hike for now.   

 

United States assaults in MENA on the rise

Further to my previous blog, US wages almost 400 military interventions one of the most interesting revelation is that a quarter of these assaults have been in the Middle East and Africa. It also appears that the end of Cold War has unchained the global military ambitions of the United States and the region is being targeted increasingly.

The first major study of its kind also found the post-9/11 era resulted in higher hostility levels, with US military adventures becoming overwhelmingly commonplace. Given the current landscape of interventions, and inertia, experts expect to see a continuing upward trend in US interventions in both MENA and Sub-Saharan Africa.

"The cumulative impact of what we discovered from our data collection effort was indeed surprising," said Sidita Kushi, an Assistant Professor at Bridgewater State University in Massachusetts, and one of the study's authors. "We hadn't expected both the quantity and quality of US military interventions to be as large as revealed in the data," Kushi told Middle East Eye.

Following the break-up of the Soviet Union in 1991, the United States emerged as the dominant military power globally. However, this did not translate into a decrease in military interventions.

"The post-Cold War era has produced fewer great power conflicts and instances in which to defend vital US interests, yet US military interventions continue at high rates and higher hostilities," the report concluded. "This militaristic pattern persists during a time of relative peace, one of arguably fewer direct threats to the US homeland and security."

Following the end of the Cold War, US humanitarian military interventions were increasingly justified under the banner of human rights.

During the post-9/11 US "Global War on Terror" Washington chose to use military force to solve its problems, said Monica Duffy Toft, Professor of International Politics at the Fletcher School of Tufts University, also in Massachusetts.

The study found that the end of the Cold War unchained US military global ambitions. Even as US rivals reduced their military intervention, Washington began to escalate its hostilities, resulting in a widening gap between US actions relative to its opponents.

The Stockholm International Peace Research Institute puts the cost of the US military at more than US$800 billion annually, accounting for almost 40% of global military spending.

"The US continues to dramatically prioritize funding of its Department of Defense while limiting funding and roles for its Department of State," said Toft, adding that currently, the United States has US Special Forces deployed in more countries than it does Ambassadors".

The US global military footprints might be surprising to its citizens; unfortunately, these are hardly surprising to the rest of the world. The legitimacy of US assaults has been marred largely as a result of its now decades-long hyper-interventionist stance.

Violence tends to beget violence, and even a smart return toward a multi-factor foreign policy - a foreign policy which relies on allies' wisdom, which engages diplomacy, trade and aid first, and force last - can take years to bear fruit

 

 

 

European plan to shield households from soaring energy costs

The European countries have been lured by United States to supply more and more lethal arms to Ukraine and forced to stop buying oil and gas from Russia. Reportedly at present citizens of these countries are facing a sharp rise in power bills driven by sky-rocketing gas prices.

According to a Reuters report, an effort is being made to understand what Britain and other European Union member states are doing to protect the consumers.

Britain

Britain has a price cap on the most widely used household energy contracts. A new cap applicable from October will be announced on August 26. The forecasting group Cornwall Insight estimates that average British annual bills for gas and electricity will jump to 3,582 pounds in October and 4,266 pounds in January. Earlier this year, the price cap was 1,277 pounds.

The government is facing growing pressure to provide more support to households struggling with energy bills. The major fiscal decisions will be made by the new prime minister. The Conservative Party leadership contest between Foreign Secretary Liz Truss and former finance minister Rishi Sunak runs until September 05, 2022.

Truss has said she would apply a temporary moratorium on environmental and social levies added to consumers' electricity bills.

Sunak has said more support would be needed to help households through the winter, and he would act as soon as it is confirmed how much bills would be increasing by. 

In May, when Sunak was finance minister, the government set out a 15 billion pound (US$18.17 billion) support package to help households. Every household will receive a 400 pound credit to their energy bills from October.

More than 8 million low-income households in receipt of state benefits are also being given a further one-off payment of 650 pounds. Pensioners and disabled people will also received additional help.

Bulgaria

Bulgaria in May approved a 2 billion levs ($1.1 billion) package aimed at shielding companies and low-income consumers from the surge in energy and food prices caused by the Ukraine conflict.

The government decided to offer a discount of 0.25 levs per litre of petrol, diesel and liquefied petroleum gas and methane from July until the end of the year and scrap excise duties on natural gas, electricity and methane.

Denmark

In June, Danish lawmakers agreed a cash handout to the elderly and other measures totaling 3.1 billion Danish crowns ($439 million) to cushion the impact of soaring inflation and high energy prices. The measures also included a cut to a levy on power prices. Danish lawmakers have previously agreed to offer subsidies worth 2 billion Danish crowns ($288 million) to some 419,000 of the households hard hit by rising energy bills.

European Commission

European Union (EU) countries are largely responsible for their national energy policies, and EU rules allow them to take emergency measures to protect consumers from higher costs.

The EU in July asked its member states to reduce gas demand voluntarily by 15% this winter with the possible introduction of mandatory cuts.

The bloc also aims at refilling storage to 80% of capacity by November 01 to provide a buffer for peak demand winter months.

France

France has committed to capping an increase on regulated electricity costs at 4%. To achieve this government has ordered utility EDF, which is 80% state owned, to sell cheaper nuclear power to rivals.

New measures announced include helping companies with the cost of higher gas and power bills - bring the total cost of the government package to around 26 billion euros ($27 billion) Finance Minister.

French energy regulator CRE said last month it was proposing a 3.89% increase in regulated electricity sales tariffs (TRVE). The government has the ability to oppose the regulator's proposed rate hike and set new tariffs at a lower level or reject them outright.

Germany

German workers and families will receive extra cash, cheaper petrol and cut-price public transport tickets to help them shoulder soaring power and heating costs. Workers who pay income tax will receive a one-off energy price allowance of 300 euros as a supplement to their salaries. In addition, families will receive a one-time bonus of 100 euros per child, which doubles for low-income families.

Over the next few years, up to 13 billion euros per year will be allocated to subsidize renovations to old buildings and installing more energy-efficient windows, doors and heaters.

However, German households will have to pay almost 500 euros more a year for gas after a levy was set to help utilities cover the cost of replacing Russian supplies.

The levy, introduced by Germany in a bid to help Uniper and other importers cope with soaring prices, will be imposed from October 2022 will remain in place until April 2024.

Greece

Greece has spent about 7 billion euros in power subsidies and other measures since September last year to help households, businesses and farmers pay their electricity and gas bills.

Subsidies, which will be incorporated into power bills, will come in at about 1.136 billion euros in August and absorb up to 90% of the rise in monthly power bills for households and 80% of the rise for small and medium-sized firms.

Greece has imposed a cap on payments to power producers to reflect their real production costs, effectively scrapping a surcharge on electricity bills, with proceeds earmarked to help it finance power subsidies.

Hungry

Hungary has capped retail fuel prices at 480 forints ($1.23) per litre since last November, well below current market prices, to shield households from surging fuel prices. The measure led to such an increase in demand, which subsequently forced the government to curb eligibility for the scheme.

The sharp rises in European gas and electricity prices have also forced Hungary's government to curtail a years-long cap on retail utility bills, setting the limit of capped prices at national average consumption levels, with market prices applying above that.

Hungary has also imposed an export ban on fuels to ensure domestic supply needs and recently loosened logging regulations to meet increased demand for solid fuels, such as firewood.

Italy

Italy approved in early August a new aid package worth around 17 billion euros to help shield firms and families from surging energy costs and rising consumer prices.

The scheme, one of the last major acts by outgoing Prime Minister Mario Draghi before a national election next month, comes on top of some 35 billion euros budgeted since January to soften the impact of sky-high electricity, gas and petrol costs.

The government also intends to extend a 200 euro bonus paid in July to low and middle-income Italians who did not previously receive it.

A cut in excise duties on fuel at the pump scheduled to expire on August 21 is set to be extended to September 20.

Italy is also promoting a cap on gas prices at a European level to help contain price spikes.

The Netherlands

The Netherlands has cut energy taxes for its 8 million households.

Norway

Norway has been subsidizing household electricity bills since December last year and currently covers 80% of the portion of power bills above a certain rate. This is planned to go up to 90% from September, with the scheme to remain in place until at least March 2023.

Poland

Poland has announced tax cuts on energy, petrol and basic food items, as well as cash handouts for households. It has also extended regulated gas prices for households and institutions like schools and hospitals until 2027. The government agreed in July on a one-off payment of 3,000 zlotys to households to help them cover the rising cost of coal. Prime Minister Mateusz Morawiecki has said the total cost of curbing energy prices in Poland will amount to around 50 billion zlotys.

Romania

Romania's coalition government has implemented a scheme capping gas and electricity bills for households and other users up to certain monthly consumption levels and compensating energy suppliers for the difference. The scheme is supposed to be in place until end March 2023.

Romanian Prime Minister Nicolae Ciuca has estimated in February the support scheme will cost around 14.5 billion lei ($3.27 billion), but analysts now expect it to exceed 10 billion euros.

The leftist Social Democrats, parliament's biggest party and a part of the governing coalition, supports replacing the cap-and-subsidy scheme with regulated prices.

Spain

Spain has started to temporarily subsidize fossil fuel plants' power costs in a bid to bring down high prices in the short term while keeping a longer-term focus on building renewable capacity. The system is due to be in place until May 31, 2023. Spain also cut several taxes to reduce consumer bills.

Spain announced 16 billion euros in direct aid and soft loans to help companies and households weather sky-high energy prices.

Sweden

Sweden will compensate households worst hit by the surge in electricity prices, with the government setting aside 6 billion Swedish crowns ($605 million) for the measures.

Chinese ship allowed to dock in Sri Lanka port

Reportedly, Chinese research ship, The Yuan Wang 5 has been given permission to dock on the condition it would not carry out research while in Sri Lankan waters. The ship has been allowed to remain in the Chinese-run port until August 22. 

India had previously voiced concerns that the ship would be used to spy on its activities, said media reports.

Foreign security analysts quoted by Reuters describe the Yuan Wang 5 as one of China's latest generation space-tracking ships, used to monitor satellite, rocket and intercontinental ballistic missile launches.

Several Indian media reports described it as a dual-use spy ship. Shipping analytics websites call it a research and survey vessel.

One report by Indian news site NDTV said the government in Delhi was concerned about the possibility of the ship's tracking systems attempting to snoop on Indian installations while on its way to Sri Lanka.

Earlier in July, an Indian foreign ministry spokesman said the government was monitoring the ship's planned visit, adding that Delhi would protect its security and economic interests.

According to a Reuters report, India had lodged a verbal protest with the Sri Lankan government against the ship's visit.

Earlier this month, Sri Lanka's foreign ministry had asked China to defer the ship's port call, saying it needed to take further consultations.

China responded, saying it was completely unjustified for certain countries to cite so-called 'security concerns' to pressure Sri Lanka - though it did not name any specific country. Sri Lanka later announced that the vessel would be given permission to dock.