Back to the complete issue
Monday, 28 November 2016

The global economy needs high oil prices, but Saudi is signalling we may not get them

The global economy really needs high oil prices. “Forget the stagflation of the 1970s. Higher oil prices would be a boon for the global economy,” Bloomberg writes, covering a research note from Goldman Sachs. The report’s authors suggest that “The difference between today and the 1970s is that oil creates global liquidity through a far more sophisticated financial system. More sophisticated financial markets in the 2000s were able to transform this excess savings into greater global liquidity that increased asset values, lowered interest rates, and improved credit conditions that spanned the globe.”

That’s great, because OPEC is going to cut production — right? Well, maybe not. The theory back in September was that the cartel would reach a pact with non-OPEC members to support prices with a production cut of about 1 mn barrels a day, to total output of 32.5 mn barrels. The catch now: Saudi brinksmanship.

What’s Riyadh up to? Saudi Oil Minister Khalid Al-Falih — also known as “he who now refuses to honor his contracts with Egypt — was quoted yesterday as saying, “We expect demand to recover in 2017, then prices will stabilize, and this will happen without an intervention from OPEC. We don’t have a single path which is to cut production at the OPEC meeting, we can also depend on recovery in consumption, especially from the U.S.”

Would failure to reach a production cut be catastrophic? The Financial Times may be overplaying its hand a bit, but it certainly thinks so: “Some of the world’s biggest oil traders have delivered a stark warning to the Opec cartel, saying a failure to sign-off on a production cut this week will trigger another dramatic drop in crude prices,” the newspaper says, quoting the CEO of one of the world’s largest oil traders as saying that, “if they walk away without a deal the market will punish that result possibly [by] USD 10 a barrel or more.”

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2022 Enterprise Ventures LLC.

Enterprise is available without charge thanks to the generous support of HSBC Egypt (tax ID: 204-901-715), the leading corporate and retail lender in Egypt; EFG Hermes (tax ID: 200-178-385), the leading financial services corporation in frontier emerging markets; SODIC (tax ID: 212-168-002), a leading Egyptian real estate developer; SomaBay (tax ID: 204-903-300), our Red Sea holiday partner; Infinity (tax ID: 474-939-359), the ultimate way to power cities, industries, and homes directly from nature right here in Egypt; CIRA (tax ID: 200-069-608), the leading providers of K-12 and higher level education in Egypt; Orascom Construction (tax ID: 229-988-806), the leading construction and engineering company building infrastructure in Egypt and abroad; Moharram & Partners (tax ID: 616-112-459), the leading public policy and government affairs partner; Palm Hills Developments (tax ID: 432-737-014), a leading developer of commercial and residential properties; Mashreq (tax ID: 204-898-862), the MENA region’s leading homegrown personal and digital bank; Industrial Development Group (IDG) (tax ID:266-965-253), the leading builder of industrial parks in Egypt; Hassan Allam Properties (tax ID:  553-096-567), one of Egypt’s most prominent and leading builders; and Saleh, Barsoum & Abdel Aziz (tax ID: 220-002-827), the leading audit, tax and accounting firm in Egypt.