Oil slump a blessing to put economy back on track

Low crude prices provide govt fiscal space, allow it to go easy on monetary tightening

KARACHI: It was a chilly morning of October 20, 1973 and Americans were queuing outside gas stations to fill their big luxurious cars with whatever gasoline was left at the outlets.

Oil embargoes and production cuts by the Organisation of Petroleum Exporting Countries (OPEC) sent shock waves through western power corridors during the 1973 oil crisis. The United States, whose oil production declined from 4 million barrels per day (bpd) to 1 million bpd from 1963 to 1970, was hit badly as it was importing around 6 million bpd during 1973.

Fast forward today, the US has become the largest oil producer in the world by pumping more than 11.6 million bpd in November 2018 as per the US Energy Information Administration (EIA) data released recently and is the net exporter of oil for the first time.

The supply glut from the US and less-than-expected inventory drawdown reports scared bulls as they gave up hopes when Brent crude plummeted more than 8% in a single day during early US trading on December 19. Even the recent announcements by OPEC and Russia to slash production by 1.2 million bpd were not enough to calm down the nervous traders.

The epicentre of the recent turmoil in the oil market can be traced to shale revolution in the Permian Basin located in western Texas and southeastern New Mexico. On the one hand, a stronger dollar and trade war between China and the US is imposing a cap on oil prices and on the other hand, the oil production in the Permian Basin has ramped up so fast that it is bumping right up against the region’s current pipeline capacity of 3.5 million bpd.

While these record production levels were enough for sleepless nights for OPEC members, still the new development that may cause further panic is the rapid debottlenecking and pipeline project announced in the Permian Basin and the prominent one will be the Permian Gulf Coast pipeline project undertaken by Magellan at a cost of $2 billion.

The 1,000km-long ambitious pipeline will come on line by 2020 and will help producers in the Permian Basin to further ramp up production on a sustainable basis.

These phenomenal developments along with weak global demand for oil have forced JP Morgan to revise down its 2019 estimate for Brent crude from the previous $83.5 per barrel to $73.

Also, the rise in oil production levels in the US as a result of recently completed or near-completed enhancement projects would offset the effect of the recently announced production cut by OPEC and Russia by 2019. The only ray of hope could be improvement in global demand to pick up pace later in 2019.

However, the weaker currencies in emerging markets against the dollar and the monetary tightening drive around the globe can hamper the growth trajectory going forward and will result in weaker energy prices.

Meanwhile, the desperate efforts by oil producers to “drill quickly and pump fast” will keep on neutralising the effect of every OPEC cut now and then.

The recent rout in oil market could be bad for oil-exporting countries but is a good omen for Pakistani economy which is already suffering from a rising import bill and widening current account deficit. The sharp fall in oil prices will also give some fiscal space to the government and allow it to go easy on the recent monetary tightening spree.

How much of this relief is passed on to the common man is yet to be seen. However, the low oil price scenario fits well into the government vision of providing relief to the poor and stimulating growth-based economic activities to create jobs.

It is now up to the economic managers to use this blessing to turn around the situation and put the economy back on track.

The writer is a financial market enthusiast and attached to Pakistan stock, commodity and debt markets

Published in The Express Tribune, December 24^th, 2018.

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