Methods Of Forecasting Long Term Oil Prices

In the early years of the oil industry, prices moved sharply with the discovery of a new, large oil field or the sudden decline of an existing producer. Producers were like farmers, prey to things happening beyond their control and outside of their knowledge. Efforts to control the price (Standard Oil, Texas Railroad Commission, Achnacarry Agreement, and oil import quotas in the U.S.) enabled the industry, or at least the domestic part of it, to take prices as given. Most famously, when the Shultz Commission considered lifting oil import quotas in 1970, it assumed that prices would tend to decline, based on historical experience.

After the shock of the increase in 1973/74, economists tried to predict the price, although early studies usually assumed they would be flat (relative to inflation). But slowly, studies began to examine the impact of price on supply and demand, and estimate the ‘sustainable’ price based on market fundamentals. Obviously, the willingness of OPEC to produce ‘needed’ amounts of oil, increasingly in question in the 1970s, made a huge difference.

Computer modeling of the oil market became more common in the 1970s, and the Energy Modelling Forum at Stanford undertook to compare different types of models, and in 1982, produced a comparison of world oil models (EMF6). Most projected price as a function of OPEC capacity utilization: if OPEC was producing at more than 80% of capacity, prices would rise. Below that, they would fall. Unfortunately, this required predicting OPEC capacity, which was based on political decisions by governments, and was difficult to model. Most thus assumed capacity, and modified the inputs to generate the desired (gradually rising) price forecast.

Subsequently, as it was recognized that this method was imperfect (at best), most groups forecasting oil markets put their efforts into estimating supply and demand under different oil prices. Most specifically describe the prices shown as “scenarios” or assumptions, without the pretense that a particular method is generating these prices. Output related to OPEC is, or should be, the primary driver of prices, with some combination of the trend in demand for OPEC oil, OPEC market share, and/or surplus capacity in OPEC. (The last impossible to predict over the long-term.) And whether or not OPEC is investing in capacity remains crucial, but is a policy decision and thus unpredictable in the long-run. Still, rising demand for OPEC oil is reasonably considered a factor in rising prices, all else being equal.

Most recently, there has been a reliance on marginal costs as indicative of long-term prices, which fits in neatly with economic theory: but. That theory applies to a competitive market, and between John D. Rockefeller, the Texas Railroad Commission and OPEC, among others, such as rarely existed. In a competitive market, Middle Eastern oil would be the marginal barrel, and it is very cheap; other producers would struggle to compete, as in the 1950s (when the U.S. imposed oil import quotas to protect domestic producers).

As an earlier post discussed, the movement of resources into and out of the market changes the supply curve and thus, the cost of the marginal barrel. With Iran, Iraq and Mexico (and possibly soon Venezuela) opening up to upstream investment, the supply curve is expanding in the middle, keeping prices low for some years to come. Also, the reduction in cost for producing oil from shales adds a large amount of medium-cost oil to the supply curve, suggesting that the long-term price will be determined by the cost of the marginal shale oil barrel. The combination of the two form the backbone of my long-term forecast of prices about $50 per barrel.

Algeria After the Arab Spring

Algiers Came Out Ahead—But the Good Times Could Be Over

 in early 2011, most pundits expected that Algeria—plagued by corruption, nepotism, deteriorating socioeconomic conditions, restricted freedoms, housing shortages, and bad governance—would be the next country to face an Arab Spring uprising. And although riots did shake the country, they were contained swiftly (and without bloodshed) by a large, well trained, well equipped, and well paid police force.

To this day, sporadic and localized strikes, protests, and riots are routine. There are sometimes as many as 500 a month. But, generally speaking, the regime has been able to address them through payoffs in the form of higher salaries or housing vouchers. Protests, in other words, are kept localized and opposition groups have little popular support. Besides, many of them have been co-opted by the government, with leaders of most of the opposition parties having participated in one way or another in successive governments.

Algerian President Abdelaziz Bouteflika has been able to succeed in co-opting the public and the opposition where other governments in the region have failed because Algerians still remember the brutal conflict throughout the 1990s, when government forces faced off against various Islamist groups. The Islamic Salvation Front had been poised to win the 1992 legislative elections, which were abruptly cancelled, provoking widespread violence. Likewise, the government still has plenty of cash from oil and gas reserves to buy loyalty. The only question, though, is whether the regime’s resilience will last in the face of new challenges.

North Africa’s New Directions

Unsteady leadership in the Maghreb could lead to new problems, both on a local and regional level.

There is mounting speculation that the Western European countries with or without NATO are—yet again—thinking of intervening militarily in Libya. In this case the purpose of what is claimed would be a “limited” engagement would be to prevent the “Islamic State” (also known as ISIS) from consolidating its base on the Libyan coast in Sirte.

So many armed interventions in the broader Middle East and Central Asia since 2001 have come unstuck that a measure of skepticism is only to be expected. Others argue that Europe can hardly let an ISIS base consolidate just across the sea from southern Italy. They have a point: if successful, such an operation could help stabilize a region which is beset by many conflicts that play out both domestically and regionally and, beyond the immediate neighbors of Libya and the European Union, draw in actors from afar—the United States, Russia, and Saudi Arabia. It could however backfire spectacularly, as indeed it did in 2011-12 when the state of Mali came close to collapse thus prompting a French military intervention.

Were Libya to be stabilized—a huge “if”—Tunisia will head the list of beneficiaries. Libya has lost $68 billion in oil revenues since 2011. North Africa’s smallest country already hosts an estimated one million Libyan refugees and stands to gain from a more stable southeastern neighbor. This would help contain the growing free trade no-man’s land that Tunisia’s southern province Ben Gardane has become, a region through which any number of weapons, drugs, and Asian-made manufactured goods are smuggled into the country while avoiding any tax. Tunisia would be able to step up its security cooperation with Libya where many of the more than five thousand Tunisian jihadi fighters who have spread out beyond the borders of their homeland have been trained. A more stable Libya could return the country to the position held for centuries, that of being a close economic partner with Tunisia, to the mutual benefit of both. Were such an operation to fail, however, the blowback effect on Tunisia would be very destabilizing. A flat economy and many difficult social and economic problems are already taxing Tunisia’s young democracy to the limit—an even more chaotic Libya would only make matters worse.

Factors that attract outside interest include the control of oil and gas resources, social and economic rents, political posturing and security issues which have become ever more difficult to define as the lines between terrorism and smuggling become more blurred. Domestic factors, however, outweigh regional ones. Despite two free general elections and one free presidential one, the Tunisian government seems unwilling or incapable of launching a policy of bold economic reform, one which would share wealth with greater equity and, through a policy of rehabilitating the periphery, heal the growing economic and social chasm between the far more developed coastal areas and the poorer hinterland.

The attack against the presidential guard in Tunis last November allowed the president, Beji Caid Essebsi, to move back into senior posts at the interior ministry people who were disgraced after Zine El-Abidine Ben Ali’s fall. The new director general of security is none other than Abderrahmane Belhadj Ali, the head of the former dictator’s security guard. The ministry’s budget has increased by 7.6 percent in 2016 at a time of stringent economic austerity. The country’s economy is reeling from the collapse of two of its key export sectors, tourism and phosphates. The latter reflects the continuing and bitter labor conflict in the phosphates mines of Metlaoui, in the country’s poor southwestern region bordering Algeria. The revolt of the phosphate mines was repressed with great harshness by Ben Ali in 2008—it was in fact the forerunner of the revolt which unseated him in 2011.

The government led by Prime Minister Habib Essid lacks authority and dares not promote public investment, which is the only way the country’s economy could grow. His weakness in turn detracts private investors, Tunisian or foreign, from putting money into manufacturing and creating desperately needed jobs. The foreign debt is rising inexorably and a rescheduling next year can no longer be ruled out. As the economy sheds jobs and unemployment rises, younger Tunisians—who abstained massively in the last elections—have lost whatever hope they entertained five years ago of a better future.

Neighboring Algeria, meanwhile, is going through an interminable succession crisis. President Abdelaziz Bouteflika is essentially out of commission and this has allowed his brother, Saïd Bouteflika, to gain ever more influence. Some of Algeria’s war of independence heroes claim that a “soft coup” has taken place which will usher in a louche republican monarchy—a sobering thought in a country which was once a leader of Third Worldism and the keen supporter of the cause of the Palestine Liberation Organization and the African National Congress. The dismissal of the head of security who held his job for twenty-five years, General Toufik Mediene, and the public exchange of insults between the presidential clan and senior officers thtat followed is unprecedented in the history of modern Algeria. Never have senior officers been arrested, put on trial and condemned to prison sentences—infighting at the top can, if taken too far, spill over into the streets. There is plenty of inflammable material around.

This political uncertainty needs to be set against the backdrop of an economy that has been hit hard by the decline in the country’s foreign oil and gas income from $63 billion in 2013 to $33 billion last year—something that the rudderless government led by Abdelhamid Sellal has quite failed to anticipate. Projects are being cut right, left and center with no logic and without any warning to the regions, which suddenly see one of their pet investment projects airbrushed out of the budget. Price rises have so far met with a muted social response, but bearing in mind that direct and indirect subsidies accounted for a staggering 29 percent of Gross Domestic Product (GDP) in 2013, price rises in petrol, foodstuffs, and electricity are inevitable. Although the average income reached $5,000 in 2011, it is very unevenly distributed. Unemployment among young people meanwhile runs at an estimated 30 percent—the state offers few incentives to those who wish to train or set up their own business.

During the years of fat cows, Algeria witnessed huge expenditure on overpriced infrastructure. Now, corruption is worse than it ever has been and the economy has not diversified. Forty years ago, 30 percent of GDP was invested in the industrial sector, a figure which has fallen to 10 percent in the past decade. That is less than one third of many middle-ranking countries. This explains why Algerian diplomacy, despite the talent the ministry of foreign affairs can claim, boxes below its weight internationally. True Algeria plays an active role in regional diplomacy but that is nothing as to what it could do were its economy on a sounder footing and its future political course less uncertain.

The Algerian army is working hand in hand with its Tunisian counterpart to contain small but well dug in terrorist cells in the border region between the two countries. Since 2013, the Algerians have redeployed massively from the Moroccan to the Tunisia-Libyan border. That followed the unprecedented terrorist attack against the gas field of In Amenas, which speeded up an already massive retooling of the Algerian army. Germany has been the favourite arms provider, along with Russia, followed by Italy and the United States. Algeria knows all to well what the cost of terrorism is. Its political leaders badly mishandled its local version of the Arab Spring in 1988-92 and the resulting civil war cost the country dearly in destroyed infrastructure, capital flight, and hundreds of thousands of qualified people fleeing abroad.

Algeria’s relations with neighboring Morocco, however, remain frozen because of the unresolved status, in international terms, of the Western Sahara. Morocco has continued to modernize its economy, at it own steady pace, but its incapacity to find an imaginative solution to the Western Sahara issue prevents from acting together in a very troubled region the only two countries in northwest Africa which boast a functioning state, a well trained army and an active diplomacy.

Although the borders of the two countries remained closed, billions of dollars worth of smuggled goods flow from Morocco to Algeria and vice versa with the tacit complicity of the security forces. The situation would be funny were it not so sad—a comment on the incapacity of North African leaders more broadly to take the initiative, offer a vision of the future to their countrymen, and give North Africa a bigger voice in world affairs. As things stand, everybody buries their head in the sand—there is plenty of the stuff in the region. North African leaders and the media may be prone to conspiracy theories, but foreign actors are bound to play their own interests in a region where the local ones are incapable of doing so.

Letter From Algiers

Strategic Europe continues its Capitals Series exploring how EU foreign policy is viewed by ten countries in Europe’s Southern neighborhood. We have asked our contributors from each capital to give a candid assessment of the EU’s approach toward their country, with a ranking on a scale from “irrelevant” to “helpful.” This week, the spotlight is on Algeria.

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Historically, Algeria has had a special relationship with Europe, particularly France, due to Algeria’s long history of colonization. Since its independence in 1962, Algeria has shared economic, political, and cultural ties with some European countries. According to the Migration Policy Center, 91.2 percent of Algerian emigrants in 2012 were located in the European Union; of these, 75.0 percent were in France, 6.3 percent in Spain, and 2.4 percent in Italy.

The EU-Algerian relationship dates back to 1976, when a broadCooperation Agreement covering trade and finance was signed. Throughout the 1980s and 1990s, numerous economic projects were implemented, but it was only in 1995 that a political dimension was introduced with the Barcelona Declaration and the Euro-Mediterranean Partnership. In 2002, EU-Algerian relations witnessed a real advancement with the signing of the Association Agreement, which entered into force in 2005. The accord was designed to consolidate economic, political, and cultural ties by establishing relations based on reciprocity, respect for democratic principles, and the rule of law.

According to a recent opinion polling and research project based on 80 interviews with Algerian opinion leaders and a poll of 400 members of the public, 83 percent of opinion leaders and no less than 87 percent of the general public think that their country has good relations with the EU and recognize the union’s capacity to finance development projects. As for EU policies toward Algeria, both opinion leaders and the public want the EU to be more involved in the country in terms of democracy promotion, freedom of the press, and migration.

But so far, the EU’s approach toward Algeria has been confused. The union has not properly addressed the issues of democracy, fundamental freedoms, human rights, migrants’ rights, and reforms but rather avoids these types of considerations. For instance, the Association Agreement contains only three articles on political dialogue, while there are ten articles on cooperation in the judicial area. This emphasis on the judiciary demonstrates a lack of European interest in fostering political reforms. Similarly, EU funding focuses on economic growth and jobs, improvement of public services, and reform of the judicial system.

Moreover, EU policy not only excludes nonstate actors such as civil society but also leaves the management of funds to the ruling political elite, which chooses what it deems to be legitimate (in reality, co-opted) civil society representatives. The hodgepodge of local civil society associations (92,627 such bodies existed in 2014) and a restrictive 2012 law on these associations have discouraged the consolidation of civil society.

The EU’s Southern countries in particular—France, Italy, and Spain—prefer to keep the status quo in Algeria and promote economic cooperation than to encourage democratization, so they can safeguard their economic interests.

This feeling of vulnerability among EU member states has endured since the 2006 Ukrainian gas dispute with Russia. That episode made some EU countries that were highly dependent on Russian energy imports acknowledge Algeria’s strategic position as an energy trading partner. As it is, 72 percent of Algerian oil exports went to Europe in 2013. Around 90 percent of the country’s natural gas exports were to Europe, which made Algeria Europe’s second-largest natural gas supplier. And 90 percent of Algeria’s exported liquefied natural gas was also sent to Europe, principally to Spain, Italy, and France.

France’s priority in Algeria—modernization of the public sector—reflects French fears of the fallout of an uncertain democratization process that might lead to a radical Islamist regime, another refugee crisis, and the spillover of terrorism into Europe. For these reasons, France and by extension Europe favor a policy of economic and political stability over democracy. In light of the latest jihadist attacks on European soil, notably in France, it is likely that EU pressure (if any exists) and assistance to Algeria in terms of democratization will shrink considerably. The EU’s prioritization of security over democracy makes EU policy illegitimate and easily dismissible by the regime in Algiers.

The complex and tumultuous love-hate relationship that France has with its former colony greatly shapes Algeria’s relationship with the EU. There is inherent skepticism in Algeria toward EU policy, especially when initiated by France. The Union for the Mediterranean, launched in 2008 as a new phase of the Euro-Mediterranean Partnership, is case in point. Algeria rejected the initiative for several reasons, among them the perception that it was yet another indication of French paternalism.

In the broader EU context, Algeria often sees EU policy as too interventionist and based on a one-size-fits-all approach incapable of understanding Algerian specificities. As a result, the country embarked on non-European partnerships with countries such as Brazil, China, Japan, and Russia.

Nonetheless, Algeria has been very active and committed, although selective, in its partnership with Europe since the end of the so-called black decade—the bitter 1991–2002 civil war between the state and an Islamist insurgency that caused up to150,000 casualties. Due to its relative political stability and financial ease, with the world’s eighth-largest foreign currency reserve, Algeria has been able to rebalance its relationship with Europe and shift to a more ambitious and assertive foreign policy.

On the political level, Algiers’s constant insistence on sovereign democracy and its rejection of the European Neighborhood Policy because it does not meet the country’s strategic ambitions is proof of Algeria’s selective relationship with Europe. On the economic level, Algeria capitalizes on oil and gas and uses them as leverage, as shown by Algeria’s 2007 increase in gas prices in response to Spain’s support for aMoroccan plan for the autonomy of Western Sahara.

Overall, for Algerians, Europe is capricious. While the EU advocates the transfer to Algeria of values and principles such as democracy, individual freedoms, human rights, and the free movement of people, it totally dismisses the human dimension of the relationship. Indeed, EU rhetoric encourages Algerians to be like Europeans but not to come and live alongside them in Europe.

The word “neighbor,” which the EU constantly uses in its relations with nearby countries, is very enlightening in that regard, because it draws a sharp line between the European homeland and the neighboring Other. As the former secretary general of the Arab-Maghreb Union Habib Boularès once said, “Maghreb countries will only ever be neighbors [for Europe], a tough suburb of a prosperous metropolis.”

Dalia Ghanem-Yazbeck is a research analyst at the Carnegie Middle East Center. She is a political scientist with expertise in jihadism, political violence, extremist violence, and terrorism, with a focus on Algeria.