Artificial Intelligence (AI): Is It Good, Bad, or Ugly?

 

Dr. Salman Ghouri

The world is undergoing a transformation driven by the exponential growth of artificial intelligence (AI) - a pace of unprecedented change in human history. Is this truly the case? Yes… or perhaps not entirely.

Throughout history, every major invention has reshaped society and improved human life. Electricity, automobiles, airplanes, refrigerators, washing machines, medical technologies, farming tools, and countless household gadgets have all contributed to greater comfort and efficiency. Did these innovations create mass unemployment? Or did they enhance human productivity and quality of life? The answer is clear: they improved our lives. Should we expect the same from AI?

The purpose of this short article is to explore the potential benefits of AI and its implications for human society.

A Brief Look Back

History shows that technological inventions bring continuous improvements in economic productivity, efficiency, and quality of life. Many innovations that were once considered luxuries eventually became essential parts of everyday living.

Consider the invention of the typewriter in the 18th century, which revolutionized business communication. In the 1960s, pocket-sized electronic calculators emerged, followed by computers and laptops. When we were graduate students in the late 1970s, our professors—trained in the United States—would proudly show regression results generated by computers in seconds, replacing hours of manual calculations. Each time a breakthrough occurred, humanity felt it had reached its peak. Yet progress continued, and it will continue until the end of time.

Modern inventions such as smartphones, the internet, and apps like WhatsApp and Facebook have made communication instantaneous and nearly cost-free. They have even reduced the need for travel, as people can see and speak to loved ones whenever they wish.

However, these conveniences have come with subtle costs. Our memory capacity has weakened. We once remembered phone numbers, spellings, and grammar rules. Today, we rely on devices to correct our mistakes and store our information. Without realizing it, we have become dependent on these tools—sometimes to the point of forgetting our own phone numbers.

The Rise of AI

AI is not new. Its foundations were laid in the 1940s and 1950s, with significant progress in the 1980s. But investment surged in the 2020s, driven by the development of transformer architectures and large language models (LLMs) such as ChatGPT. These models demonstrate human‑like traits—knowledge, reasoning, creativity—and have rapidly integrated into countless sectors.

This exponential growth has sparked both excitement and concern. Many fear that AI will lead to mass unemployment, reducing consumer spending and slowing global GDP growth. Yet history suggests otherwise. Innovations in farming increased yields and shifted labor to other sectors. Industrial automation displaced some jobs but created new ones. Medical advancements improved life expectancy and productivity. Every major revolution has ultimately increased disposable income and improved quality of life.

Unemployment in developing countries today is largely due to poor governance and slow adoption of modern technologies—not technological progress itself.

Will AI Be Different?

Some argue that AI is fundamentally different from past inventions and could indeed cause widespread unemployment. We cannot stop or slow down AI’s exponential progress. Therefore, policymakers, economists, philosophers, and academics must urgently debate how to manage its consequences—economic, social, psychological, and cultural.

AI already performs tasks once handled by receptionists, telephone operators, analysts, and many professionals. Autonomous vehicles, drone deliveries, and robotic automation are advancing rapidly. The impact could be far greater than anything we have seen.

On the other hand, one may argue that AI—like past inventions—will ultimately improve human life. A moderate and balanced pace of AI development would allow society to adapt gradually. But uncontrolled growth could be dangerous, perhaps even catastrophic.

The Real Danger

AI is growing exponentially. At some point, it may exceed human capacity to control it. Science fiction movies have imagined machines destroying civilization. Those were fictional stories—but the underlying concern is real.

More troubling is the subtle erosion of human thinking. We increasingly rely on AI tools for quick answers, analysis, and decision‑making. Over time, unused cognitive abilities weaken. If we depend entirely on AI, we risk becoming slaves to the very systems we created. A single glitch in a supercomputer could trigger catastrophic consequences.

Is this how the world ends? Or will humanity—like it has always done—adapt to new realities and continue striving for a better, more comfortable life for future generations? A harmonious joke this article is also edited by AI!

 

The Implications Of U.S. SPR Withdrawals

 

The Strategic Petroleum Reserve’s (SPR) oil is sold competitively when the President of the United States of America finds, pursuant to the conditions set forth in the Energy Policy and Conservation Act (EPCA), that a sale is required. In the past, oil resources were withdrawn from the SPR to meet domestic oil requirements – such as Emergency Drawdowns, Non-Emergency Sales, SPR Modernization Sales, and Mandated Sales.  In March 2022, such orders were issued by the President of the United States, Joe Biden. President Biden has decided to open the SPR to mitigate the consequences of the Russia-Ukraine conflict that led the United States and its allies to put harsh economic sanctions on Russia. Consequently, these sanctions, and not unexpectedly, tight oil and gas supply in the international market has raised international energy prices. 

There are two factors that simultaneously occurred and accelerated the withdrawals from the SPR from March 21 to July 2022. During this period, inflation remained above the target rate of 2%. The real problem is mainly associated with the aftermath of COVID-19. The supply chain issues, stimulus over an extended period, and low-interest rates have helped to reinvigorate the U.S.  economy, but have led to a prolonged period of high inflation. Economic stimulus and rising oil and gas prices have further aggravated domestic inflation causing hardship to domestic consumers. In fact, it gradually increased from 2.6% in March 2021 to 9.1% in June 2022. At the same time, WTI was also trending upward, rising from around $60/bbl in March 2021 to over $100/bbl most of the year 2022 (see Figure-1 & 2). To provide some relief to domestic consumers, the United States withdrew 169.768 million barrels from the SPR during this period. As a result, the SPR reached the low level of 468 million barrels at the end of July 2022. More recently, there were reports that there were only 427.2 million barrels of fuel left in the reserve fuel stocks of the United States that could cater to about 50 days of the U.S’ daily oil consumption.

This year’s SPR withdrawal constitutes the largest-ever withdrawal on record. An argument can be made here that the U.S. government has taken proactive measures of economic sanctions on Russia and was quite aware of the consequences. 

Whatever the argument, the message is clear to OPEC and Russia that if they try to manipulate oil production for higher oil prices, the U.S. will counter it by releasing crude from its SPR. The only danger is how much SPR can be released risk-free, from a strategic perspective, and how long will it take to replenish SPR reserves.

Surely, it will take many years or decades to refill the SPR to roughly 700 million barrels. The speed of replenishment depends on many factors. However, the biggest factors are oil prices and the development of domestic inflation. Excessive withdrawals could be risky, as Russia could intentionally prolong the conflict with Ukraine. This strategy provides more leverage to OPEC to manipulate oil production to push oil prices even higher. Such a strategy by OPEC and Russia may create further oil and gas shortages in Europe in particular. As expected, OPEC and non-OPEC allies, also referred to as OPEC+, announced on October 5, 2022 that they will cut oil production by 2 million barrels a day (mmbd) starting in November. With the rise in oil prices, global natural gas and electricity prices will also rise. If the upcoming winter in Europe is harsh, consumers suffering from fuel shortages will be test cases for their respective governments. Furthermore, at some point, the U.S. will not have the luxury of additional SPR releases to keep oil prices in check and to provide relief to domestic consumers. Prolonging such a strategy may backfire. Therefore, the U.S. should adopt a strategy of increasing domestic oil production to reduce oil import dependency and have more flexible strategic options.     

Figure-1: Historical relationship between SPR (thousand barrels) and WTI $/bbl on y-2 axis) (Source: EIA).

Figure-2: Historical relationship between SPR (thousand barrels) and US inflation (inflation y-2 axis) (Source: EIA).

Fundamental Problem

The question is how long can the U.S. government continue to rely on SPR releases? Is it sustainable? 

Figure-3 depicts the historical monthly average trends of United States oil consumption, total oil production, shale oil production, and WTI. Since January 2010, U.S. oil import dependency has been on the decline, due to a substantial increase in U.S. shale oil production, as well as stable oil consumption which mostly remains around 19 to 21 million bpd.

Since 2014, the U.S. shale industry has developed into a more mature industry which currently produces around 8.7 million bpd out of a total of 11.79 million bpd. While considerably lower than its production peak of 13.3 million bpd in January 2022, the U.S. oil import dependency declined to 42% at the end of July 2022, as compared to 71% in January 2010. As such, the solution is not forcing the oil companies to curtail product exports or forcing them to stockpile more fuels in U.S. storage tanks but rather to address the fundamental problem. 

I think relying too much on SPR may only solve the short-term problems at hand. Instead, the underlying problem needs to be addressed. There’s a need to develop a two-pronged long-term strategy to reduce oil import dependency and reduce reliance on the SPR in the future. First, the oil industry needs to invest in upstream operations, and focus on finding and developing more reserves. To do this, the government needs to open new acreage in federally controlled areas as well as provide some incentives to oil and gas companies to invest in exploration, development and production activities. Secondly, the U.S. needs to develop a strategy of accelerating the use of electric vehicles (EVs). The government should provide incentives for electric vehicle buyers as well as for companies that install EV infrastructure. A speedy penetration of EVs will surely displace a considerable amount of oil in the transportation sector. However, both parts of this strategy take a considerable amount of time to be implemented, and lower crude prices may lead to both slower adoption of EVs and a lower upstream oil and gas capex.   

Figure-3: Historical monthly trends of USA total oil production, consumption, Shale oil production (mmbd) and oil import dependency (%) (Source: EIA).

Figure-4: USA Shale monthly trends – mmbd relationship to WTI (Source: EIA).

Implications of OPEC-+ Production Cut

I think OPEC has not learned from its past mistakes, as it is not a good time to cut oil production by 2 million bpd in November 2022, especially at a time when global economies are under pressure. While higher oil prices at this juncture may bring much needed oil revenues to (national) oil companies and OPEC members, this will come at the cost of accelerating a global recession, bringing more misery to consumers. Consequently, it will weaken global oil demand and oil prices. Oil prices in the range of $70-$80/bbls at this difficult time could be a win-win situation for both producers and consumers, and shield global economies from collapsing. Consequently, the U.S. should take its own measures to enhance its domestic oil production, encourage EVs and halt further releases of the SPR. Running down the SPR will allow OPEC+ more flexibility to play around with production.

  

This article was published in Oil Price in October 10, 2022

The Implications Of U.S. SPR Withdrawals | OilPrice.com

Has OPEC learned from past mistakes?

The recent partially post covid-19 global recovery witnessed sudden spike in oil demand. The lack of past investments in oil and gas industry and supply chain constraints led to surge in oil prices. This was expected to happen. The sudden oil demand exceeded supply, leading to higher oil prices. Consequently, this led to debate and seasonal analysts, particularly investment bankers and other consultants, who are forecasting oil prices may reach $100/bbl. The recent tussle between United Arab Emirates (UAE) and Saudi Arabia on production quota no doubt further strengthens their arguments.

This is quite possible, as oil revenues is the major contributor in economic development of most oil producing countries, particularly OPEC members. To balance their budgetary requirements, some countries look $100/bbl oil or even more. The higher oil prices surely facilitate in achieving this goal. However, the global economy is still vulnerable and not fully recovered from Covid-19 and following different variants. The question one needs to ask is whether OPEC will repeat their past mistakes to achieve such level of oil prices by manipulating oil production?  If yes, then do we expect revival of US shale oil industry and subsequently collapsing of oil prices? Or OPEC might have lessons learned and may not allow oil prices to surpass over $70/bbl for considerable months.

Both the scenarios are possible, it requires a number of months for US shale oil industry revival and number of years for new oil discoveries and development and production.

Possible Rebound of US Shale Oil Industry

Persistently lower oil prices from 2014 to 2016 and eta of covid-19 led to underinvestment in upstream and fewer Final Investment Decisions for oil projects. Investments in upstream, for example, plunged from $1079 billion in 2014 to $900 billion in 2015 and then further down to $583 billion in 2016. This is because lower oil prices severely affect the revenues, cashflows, and profitability of oil and gas companies. That leads to fewer resources being available for future investment in exploration and production activities. The question now, is what will happen to the oil and gas industry post-COVID-19? Should we expect the regime of higher oil prices to linger or will oil prices slump back into $60/bbl or below? 

Figure-1 & 2 clearly demonstrates that US shale oil production in the past has increased/decreased with number of months lags in response to increase/decrease in oil prices. My assessment is that OPEC members have already learned from their past mistakes and surely will not allow oil prices to surge beyond $70/bbl for considerable months. The reason is that they know global economies are still vulnerable and weak. The combined impact of higher oil prices and covid-19 may adversely impact the revival of global economies. They are quite aware of the fact that sustained higher oil prices will allow US shale oil industry to rekindle its lost glory.  In addition, speedy penetration of electric vehicles (EVs) and significant increase in the role of renewables could eventually impact the global oil demand. 

Figure-1: Us Shale oil production trends by basins

Figure-2: Historical relationship between WTI and US shale oil production

In the past, the US shale oil industry response to higher oil prices as illustrated in Figure-1. Figure-2 depicts US Shale oil production did increase with 6-8 month lags (though lags vary from basins to basins) in response to higher oil prices. The question is can we expect US shale oil industry enhance their investments in response to higher oil prices? Well, it depends on companies’ financial health (for more details). Generally, most suffered heavy losses and in the process of consolidating their cash flows and clearing off their debts. They might be cautious in sudden increasing their investments in drilling of new wells. Nevertheless, their first priority would be to target drilled and uncompleted wells (DUCs). If the expectations are that oil prices to remain over $65/bbl for considerable period, one could expect increase in drilling activities and higher U.S. oil production. In fact, in response to recently higher oil prices Permian basins production is already showing signs of recovery.  In addition, the number of oil and gas rigs in the United States is up to 5 this week, according to Baker Hughes. This is just a meager increase, but total rig counts up to 484, as compared to 231same time last year (Figure-3).

 

The U.S shale oil production peaked in January 2020 to 9.15 mmbd and then declined to 6.55 mmbd in February 2021 in response to plunging oil prices. However, since than shale is on the upsurge. By June 2021, it already hit 7.77 mmbd. The EIA’s estimate U.S. total oil production for the week ending July 7 was 100,000 bpd higher than the previous week at 11.4 mmbd. A sign of recovery as oil production by the end of May 2021 was dropped to 10.8 mmbd. Since then, it is on the rise.    

  

Figure-3: Historical relationship between WTI and total rig counts

If OPEC hasn’t learned from their past mistakes and failed to resolve dispute on quota amicably, they are adding uncertainty to oil market. The element of uncertainty at this juncture when global economies are in the process of reviving may hinder this recovery process. The covid delta variant is already a sign of hazard.  They may gain out of this strategy short-term., eventually they may have set themselves up for failure. Not only from expected increase in US oil production but this time damage could be deep due to other factors. The world is already witnessing higher inflation. Even developed countries like USA is not spared. For example, the annual inflation rate for the United States is 5.4% for the 12 months ended June 2021 after rising 5.0% previously, according to U.S. Labor Department data published July 13 2021.  The higher oil prices, delta variant and constraints on supply chain will further push the inflation. This will eventually create weak global oil demand and in turn subject to downward pressure on oil prices.

Now its up to OPEC members to look for short term gains or long-term losses!

 

 

 

 

 

Dynamics of Oil & Gas Industry - A New Cycle Awaits Oil Price Revival

Dr. Salman Ghouri


The world would soon bounce back from this pandemic, albeit the recovery would be rough and painful. The current regime of lower oil prices may not last forever. In fact, it may rebound due to the dynamic nature of oil and gas industry.

The exploration and production activities are mainly driven by the current and future expectations of oil prices, availability of resources and other important drivers. History informs us that higher oil prices led to phenomenal investments in upstream operations and vice versa. Going back to the recent past, persistently lower oil prices during 2014/2016 led to underinvestment in upstream and less FIDs finalized in exploration and development activities. Investments in upstream for example, plunged from $1079 billion in 2014 to $900 billion in 2015 and then further down to $583 billion in 2016. Why? Lower oil prices severely affected oil and gas companies’ revenues, cashflows, and profitability. Therefore, less resources were available for future investment in exploration and production activities.

The question is what will happen to the oil and gas industry post-COVID-19? Should we expect the regime of lower oil prices linger or the revival of oil prices? 

No doubt COVID-19 has devastated the global economies. The economic, social, and mental damage caused by COVID across the world may take years to bring us back to pre-COVID environment.

The partial and complete shut-down for months not only severely impacted the small, medium to large scale businesses but also resulted in high unemployment with many more at risk of losing jobs. For example, U.S Labor Department reported that total nonfarm payroll employment fell by 20.5 million in April, and the unemployment rate increased by 10.3 percentage points to 14.7 percent. This is the highest rate and the largest over-the-month increase since January 1948. The changes in these measures reflect the effects of the COVID-19 and efforts to contain it. Employment fell sharply in all major industry sectors, with particularly heavy job losses in leisure and hospitality.

While at a global level, the International Labor Organization (ILO), reported that some 1.6 billion workers in the informal economy, representing nearly half of the global labor force are in immediate danger of losing their livelihoods due to the COVID pandemic. Aviation industry is however, one of the worst-hit. World air traffic suffered a massive drop of more than half in March 2020, compared with the same period last year. The stories of other industries are no different, all having suffered. It is too early to determine the extent of damages that so far has occurred on the remaining industries.

The oil industry is yet another front-line sector that is severely affected. The lower oil and gas prices over the past few months not only resulted in high unemployment (the U.S. Labor Department reported that unemployment in mining, quarrying, and oil and gas extraction rose from 1.9% in January to 10.2% in April 2020.) but also significantly reduced companies’ revenues, profit, and cashflows. As such, most of major, independent as well as NOCs already incurred huge losses. For example, Occidental Petroleum Corp. reported a net loss of $2.2 billion, BP  reported $4.4-billion net loss in the 1^st quarter, ExxonMobil reported estimated first quarter loss of $610 million and also announced 30% cut in its capex for 2020 to $23 billion, compared to $33 billion earlier announced. Italian oil and gas company Eni SpA (E) reported its first-quarter net loss was 2.93 billion euros, compared to net profit of 1.09 billion euros a year ago.

While many will go out of businesses as they cannot withstand losses due to significantly lower prices – that falls below their break-even level.

A research conducted by Rystad Energy, estimated that E&P companies’ revenues are set to plunge by around $1 trillion in 2020, as compared to $2.47 trillion last year. They were also of the view that 2020 might be the year marked by the lowest project sanctioning activity since 1950s in terms of total sanctioned investments, which stands at $110 billion – only 33% compared to 2019. As such, many companies have already abandoned or deferred their major projects.

What does it all mean? It simply means that less resources are available for future investments in exploration and production (E&P) - hindering companies’ future investment’s ability. That is, subsequently inadequate resources would affect the supply side which is now in surplus.

The world in post-COVID-19 recovery phase would be needing enormous financial and energy resources to rectify the damages caused by COVID-19. During this recovery process, global oil demand slowly moves towards normalcy and may over-shoot supplies. As less resources at oil industry disposal to enhance production (at least in the short run). Furthermore, there is always a lag involved, i.e., there is no magic switch to turn on and off. It takes number of years in developing prospects, acquiring lease, seismic data acquisition & processing and drilling exploratory wells. In addition, shale oil wells that were forced to shut-down may not be able to produce the pre-shut-in level. In fact, less production but with an additional cost. COVID-19 may have also disrupted the manufacturing sites (where plants & equipment for future delivery are under construction) that might delay the project’s completion date. The list goes on and all of these surely would impact the supply side.

The world has witnessed various cycles in the past. Yet the current cycle is deep and rough as it is accompanied with COVID and excess supplies. The oil and gas industry faced with double dip dilemma. COVID on one hand, impaired global oil demand while excess supplies caused by OPEC’s strategy further exacerbated the problem – causing oil prices to plunge below $20/bbl. The time-scale of oil price recovery depends how quickly global economy revives; how fast surplus oil is consumed due to increase in demand and strict compliance of OPEC- plus to agreed production quota.

Whatever the time-scale may be, a new cycle awaits and the world would soon witness increasing trends in oil prices till a new equilibrium is restored, albeit at a higher price.

Three Scenarios That Could Push Oil Back Above $30

Dr. Salman Ghouri

Asia is home to 60 percent of the global population and is the largest consumer of total primary energy, oil, coal, and renewables. It is also the third-largest natural gas consumer behind Europe and North America. As more natural gas becomes available in the form of LNG and piped gas, the region will soon become the world’s largest consumer of natural gas as well. Despite being the world's largest consumer of oil, the Asia Pacific region only holds 2.8 percent of global oil reserves and only produces 7.63 million barrels per day (mmbd) compared to its oil consumption of 35.8 mmbd. That is an enormous amount of oil it has to import on a daily basis.

Asia’s High Oil Import Dependency and the Strait of Hormuz

In 2018, over 78 percent of Asia-Pacific oil demand - 28.17 mmbd - was imported. Of those imports 20.7 mmbd, or over 73 percent of regional oil demand, transited through the Strait of Hormuz - a very narrow ally connecting the Persian Gulf with the Arabian Sea and a critical route for global energy security and international trade (Figure-1). This small ally is about 21 miles wide at its narrowest point and due to depth restrictions is only about two miles wide in each direction for tankers. This supply chain is the backbone of Asia’s economic prosperity - China, Japan, India, South Korea, Singapore and Taiwan are just a few of the countries that rely heavily on this strait. It is also the major supply route for oil and gas exports to Asia from the Gulf. Any disruption in the Strait of Hormuz, a major chokepoint for oil and trade, can lead to substantial supply delays would shift market sentiment dramatically. While there are alternative routes, they are significantly longer and more expensive. A disruption in this area could also expose oil tankers to theft from pirates, terrorist attacks, political unrest (in the form of wars or hostilities), and shipping accidents that can lead to oil spills.

Figure-1: Crude oil, condensate and petroleum products transported through Strait of Hormuz. Source EIA

Three scenarios that could send oil prices higher

Out of the many possible scenarios that market observers must consider, the three listed below are the most likely to send oil prices higher. The first is based on market fundamentals, the second on natural disaster, and the third on human intervention.

Market fundamentals

It is now obvious that global oil demand is significantly lower than supply. Even the OPEC+ agreement to cut 10 mmbd wasn’t enough to balance markets. As long as supply remains significantly higher than demand, prices will remain in the twenties or even lower. In order to bring the market back into equilibrium – oil production has to fall substantially, or demand must begin to bounce back. If OPEC+ and other non-OPEC actors including US shale oil producers decide to cut oil production in the range of 20-25 mmbd for a couple of months or until the surplus is exhausted, then oil prices should recover. These sweeping production cuts would be good for the entire oil industry. A cut of this size would see prices move back into the $30 to $50/bbl range in a relatively short period of time.

If, however, other oil producers are hesitant to take part in a second OPEC+ cut, we will likely see the cartel remain with its existing strategy of a 10 mmbd production cut. The world will continue to experience a surplus of oil supply and low prices will persist until the market finds its new equilibrium. As global storage reaches capacity we will see unplanned shut-downs which will hurt the oil industry at large and shale producers in particular. Many smaller producers will be forced to shut down temporarily while others will go out of business. Oil prices will remain low for an extended period of time as the world waits for global oil demand to return and the impact of the COVID-19 pandemic to fade.

Natural disaster

The second possible scenario is that COVID-19 hits the supply chain directly – namely at an oil production site or refinery – partially halting production and refining operations. This kind of dramatic event would instantly increase oil prices into the thirties. If this outbreak persists for weeks, it will eventually send oil prices to over $40/bbl irrespective of surplus. Nevertheless, such an increase will only be short-lived as demand would remain depressed and eventually production would come back online.

Human intervention

Back in September 2019, Saudi Aramco oil facilities were attacked – disrupting a significant amount of oil. These attacks led to relatively large daily price change and lots of intra-day trading volatility. In light of this attack and many similar ones in the past, the third possible scenario is human intervention. If Iran overreacts to recent tension in the Gulf and closes the Strait of Hormuz to hurt Gulf oil exporters, for example, the impact on the oil market would be very noticeable. Iran is unlikely to escalate tensions to the point where it closes of the Strait of Hormuz as it would severely damages its own economy with such a move. In the extreme scenario that this does happen however, it will be considered a direct challenge to the U.S. This may lead to further escalation in the Gulf and could even lead to a proxy conflict. In this scenario, oil prices would bounce back above the thirties and could even reach above $50 per barrel.

All three of the above scenarios will lead to an increase in oil prices as the market is forced to quickly adapt to a new supply-demand dynamic. The time scale of each scenario varies depending first upon the sentimental impact and then upon how quickly it can bring global supply back into balance with demand. Scenarios 2 and 3 will be short-lived as they fail to solve the fundamental problem of a surplus in supply. The option of a coordinated effort between all oil producers appears to be the optimum solution for those looking to increase oil prices to $30 and beyond. Such coordinated efforts would also save the oil industry from further demolition.

By Salman Ghouri for Oilprice.com - published on April 27, 2020
https://oilprice.com/Energy/Energy-General/Three-Scenarios-That-Could-Push-Oil-Back-Above-30.html

Post COVID – A Difficult and Painful Journey Ahead!

Dr. Salman Ghouri

The year 2020, started with different kind of challenges. Challenges that most of us have never experienced in our life. The invisible enemy that spread the havoc around the world – sparing no one irrespective of religion, caste, where you live - it globally. As of April 29, more than 3.2 million people have been infected and over 220 thousand deaths across the globe have occurred. Though in Europe and some other countries, there has been a decline in recording of new cases and deaths as well. While for others, it is just the beginning particularly in Asian and African countries where covid started spreading late.

Despite the world being geared up with the latest state-of-the-art technology, thousands of nukes, supersonic aircrafts, missiles, chemical weapons etc. Yet all of those are worthless against invisible enemy. A tiny virus that is hard to detect under powerful microscope had a havoc and did not spare any nation – forcing most of the countries to partial or be on a complete lock-down for months. The hardest hit has been in Europe and North America. Initially majority of nations did not take this pandemic seriously. Even though after over 3.2 million effected and 220 thousand deaths, some are still thinking that it is nothing but a conspiracy! 

The world is helpless as thousands of people are dying every day around the world. In the absence of vaccine, different medications have been tested – like chloroquine and antibiotics. In some patients it has worked but generally in most it has not. The only way to deal with this havoc is to lockdown the cities entirely – leading to social distancing until a development of vaccine. This has helped to improve the spread of virus but at the economic cost that now is estimated to be well into tens of trillions of dollars.

The rapid spreading of COVID-19 around the world led to global recession as well as plunging oil demand – as fewer cars are on the road, only handful of flights taking off, partial or full shut-down of factories/industries. The world is at a stand-still. It has affected the livelihood of small to large scale business such as: restaurants, aviation, hotels and tourism industries, doctors’ private clinics, retail shops, daily wage earners, and the list goes on.

According to the International Labor Organization (ILO), some 1.6 billion workers in the informal economy, representing nearly half of the global labor force, are in immediate danger of losing their livelihoods due to the covid pandemic. Aviation industry however, is one the worst-hit. World air traffic suffered a massive drop of more than half in March 2020, compared with the same period last year. The stories of other industries are no different, all having suffered. It is too early to determine the extent of damages so far occurred.

The question is what will happen if one fine morning we get up and find ourselves in a world of COVID free environment.  

The physical, mental, economic and financial distress created by this short episode may remain with us for many years. The world would be needing tens of trillions of dollars to clean up this mess and bring back all the industries, including all other directly and indirectly associated business to pre-COVID environment. The economic and financial destruction caused by COVID in few months, may requires years to repair. Yet physical and mental agony may require countless years. The recovery from the aftermaths of COVID would not be possible without each other support. It is not that simple. It may require financial support of donor agencies (IMF, the World Bank, IBRD, ADB, IDB etc) in the form of write-offs, debt relief and further financial assistance, particularly the developing countries. Moreover, developed countries support is also needed in painful journey of recovery.

Due to the lockdown global oil demand far exceeded its supplies, which was further exacerbated by OPEC strategy of over production. In this painful journey of lower oil prices many US shale oil producers and small producers are forced to shut down while many will go out of business.  As the world storage nearing capacity oil prices slipped down hill and once declined to negative $37.63/bbl May contract.   

The world is in catch-22 situation. On one hand, if oil prices remain softer – post COVID, it will be a blessing for the global economic recovery from the aftershocks of COVID. Savings out of reduced oil import bill would be spent to fix the devastation caused by COVID that requires significant amount of resources.

While on the other hand, lower oil prices over extended period of time has already severely affected the oil industry. The lower oil and gas prices with global weak oil and gas demand has significantly reduced companies’ revenues, profit, cashflows, which would be poorly reflected on companies’ profit & loss and balance sheet. 

They already incurred huge losses and therefore less resources are available for future investments in exploration and production (E&P). A research conducted by Rystad Energy, estimated that E&P companies’ revenues are set to plunge by around $1 trillion in 2020, as compared to $2.47 trillion last year. They were also of the view that 2020 might be the year marked by the lowest project sanctioning activity since 1950s in terms of total sanctioned investments, which stands at $110 billion – only 33% compared to 2019. Many companies have already abandoned or deferred their major projects as well as reduced dividend payments. Shell, for example, is among the first major oil and gas company slashing its dividend by 66%, from $0.47 to $0.16 per ordinary and B ordinary share. On May 1, 2020, ExxonMobil reported estimated first quarter loss of $610 million and also announced 30% cut in its capex for 2020 to $23 billion, compared to $33 billion earlier announced.  While other companies to follow soon.

What does all this mean? Subsequently, inadequate resources would affect the supply side which is now in surplus.

If this happens, dynamics of natural cycle would be repeated – mismatch in demand/supply. During this cycle, oil demand in the post-covid recovery period will exceed supplies. As less resources at oil industry disposal to enhance production (at least in the short run). The world would soon witness increasing trends in oil prices till new equilibrium is restored, albeit at a higher price. The world has witnessed various cycles in the past. Yet the current cycle is more deep and painful as it is accompanied with invisible enemy (covid) that impaired oil demand while sitting on the lap of excess oil supplies.