The Trends and Forecasts of the World’s Oil Market and of Inflation in Georgia

FROM THE REDACTION

In May the world’s oil and gas market was characterized by serious volatility. The upper limit of 75 USD/barrel reached in April then again decreased to 68 USD during the month. But it was stubbornly fluctuating around 70 USD, and it seems that it is not going to go down.

The market is clutching at what has remained, since the supply from western Iran and Nigeria was held-up, while in Mexico the season of hurricane is approaching.
By June the price of crude oil at New York Mercantile Exchange will increase by 76 cents and the price per barrel will become 69.45 USD, while the price of gasoline will increase by 4 cents and reach about 2.0151 USD/ gallon.
According to analyst Timothy Evans, the purchase caused no fundamental changes in the demand and supply schedule, it was rater a technical measure taken by traders, which has made the market more susceptible after the recent (May) fall.
“I do not think that we shall have anything to celebrate until Iran and Nigeria, our main suppliers, restore a full-scale supply”, said Evans after closing of the market. Added to this was the data published by Association for the Study of Peak Oil and Gas (ASPO) saying that shortage of black gold will start to take place as early as in 2008. This will still more increase the contradictions between the two big consumers’ camps – American and Japanese-Chinese one. According to the data of BP’s experts (this data is considered as official one all over the world), the Middle East countries, that are mainly OPEC members, possess 61.7% of the reserves. The State Oil Company of Saudi Arabia (it is the largest OPEC member) admitted that productivity of their oil production and reserves is decreasing by 5-12% a year. This process started in northern Europe and America a long time ago. 80 % of “Gazprom’s” reserves, which has become one of the largest corporations in the world, has already been developed. Only Iran has prospects from the viewpoint of natural gas. Venezuela, Ecuador and Bolivia started to force out foreign investors and review the contracts in favor of the state, while, according to experts’ calculations, spending of 30 billions till 2030 is necessary with the purpose of retaining of production in this sphere. BP may be forced out of there as well. It is not known how Mr. Chavez’s informal visit to London will help to settle this problem (in May he enjoys the invitation of London’s mayor). Also such a giant as Royal Dutch Shell may be forced out of Nigeria, or its production there may be mothballed.
It is not accidental that 4 gas and oil companies are among the 7 largest companies of the world. A big role in growing of their capitalization was played by increasing of prices, and moreover, they received unprecedented avails and profits. Proceeding from this, the contradictions between the countries that possess the resources and operating companies is increasing as well. That is why Mr. Putin’s government in fact carried out nationalization of “Gazprom” by means of new methods and made it the world’s fourth largest company. (Russia has a plan of energy expansion in relation to Europe and not only Europe, you can read the article “The Sacred War of the Russians” on this subject). The situation being shaped for Georgia – as energy resources consuming country – on the world market is not very pleasant, and it will become more difficult day by day.
The world gas price is catastrophically decreasing, but it is rising in Georgia
After a warm winter, which caused decreasing of requirements related to heating, according to the US’s data, by spring natural gas reached the record level and it caused a sudden 60% drop after high December prices. Many analysts negatively estimate this phenomena and, according to their data, a 20% drop is expected again.
“It brings benefit to consumers and they save their money”, said Mr. Chris McGill from American Natural Gas Association that supplies gas to 56 million of households.
However, Natural Supply Association warns the population that there is no guarantee that the supply will be also comfortable at the end of summer, let alone in winter when consumption will reach its peak.
If the summer is hot, it will make people turn on air conditioners in houses and, correspondingly, the consumption of natural gas and electric power will increase. Also, if a hurricane that took place in Mexico last year repeats itself, which is expected this year as well, the supply of gas will be stopped. This may be attended by a cold autumn, which will exhaust the reserves before coming of the winter. Traders at New York Mercantile Exchange are very worried about this possibility.
The price of natural gas to be bought in February makes up almost 11 USD/1000 m3, which is 80 % higher than the price of fuel received for June.
If the market were as worried about the balance of oil’s supply and demand, February trading would be about 125 USD/barrel instead of 73 USD.
The latest middle May data of the agency has shown that consumption makes up more than 2 trillion m3, which is 53% more than last 5 years’ average consumption for corresponding period of the year. Nymex natural gas price plunged from 18.9 USD to 5.94 USD/1000 m3. Last time when natural gas price decreased to the level lower than 56 USD was in February 2005.
Dan Lippe declared that the country may not contain the whole reserve that is available.
Ron Denhardt declared that natural gas price may drop to 5 USD if the summer is an ordinary one and the hurricane does not cause a big damage.
Horvath declared that gas reserves may be high in comparison with historical data, but it is normal that gas consumption decreases by summer.
Lerry Nichola declared that the current natural gas supply is a short-term phenomena, behind which there is a long-term trend. For many years North American natural gas producers have been struggling for increasing of the demand. However, in spite of it, it is not expected that the industry will increase the supply.
Now natural gas consumers of many big industries take more gas than it is necessary, and it is expected that the prices are temporary ones. Industries has come to an agreement to urgently use Mexican fields that are inaccessible. Nicholas declared that “but for the last year’s damage caused by hurricane, the volume of natural gas reserves will have increased.” He also pointed out that traders should not give way to emotions and should think sensibly. The market discusses whether this year’s hurricane will be similar to the last year’s one. A hurricane and a tropical storm occur in Mexico every year, but not every year our production and transportation facilities become damaged so much.
While this year weather forecasters are expecting another season of Atlantic hurricane, a researcher at Colorado University – William Gray, who has been forecasting hurricanes’ activity for 22 years, said last month that the hurricane of 2006-2007 will not be so active as in 2004-2005. His team forecasts that there is a 81% possibility that the main hurricane will strike a blow on the US coastline and a 47% possibility that it will strike a blow on the territory of between Florida and Brownsville, that is Texas, in which there is a lot of natural gas platforms and pipelines.
Electric power analyst Victor Shum from Purvin & Gertz, which is located in Singapore, said that now it is too early to say that the demand will considerably decrease because of high price, which is still 40% higher than it was last year.
“We cannot exactly say about the situation with demand for fuel in the US till the summer season begins, during which the demand for fuel particularly increases”, said Shum. The demand particularly increases starting from the Memorial Day which this year will be marked on May 29.
The US government’s data showed on Monday that internal fuel supply had increased by a third after a week’s stagnation of the demand. The Energy Department stated in its weekly report that internal fuel supply had increased from 1.3 million barrels to 206.4 million barrels. This is 3.5% less in comparison with the previous years. At the same time the demand for fuel stopped in view of high prices.
The Department stated that over the past four weeks the demand for fuel in the US had made up 9.2 million barrels a day, that is almost the same amount as last year.
Other data has shown that crude oil increased from 100.000 million barrels to 346.9 million per barrel, which is 4.7% more than last year, trading on the exchange also increased from 100.000 barrels to 114.6 million barrels, that is by 7% higher than last year.
According to the data of Organization of Petroleum Exporting Countries, the demand has insignificantly decreased, but by the end of 2006 the price of crude oil will considerably increase and reach 85-90 USD/barrel. It is also expected that a possible war against in Iran will hamper supplies to the market and become a multiplier of price increasing.
According to Nymex trading, falling of natural gas price from 13.2 to 5.997 USD/m3 has caused increasing of gas consumption to the level of more than 2 trillion m3, which is 50% more in comparison with the average indicator of the last 5 years. Last time when natural gas price was lower than 6 USD was on February 18, 2005.
According to annalists, interesting tendencies have been observed lately, which is essential for Georgia as well – increasing of fuel prices does not have a directly proportional effect on production drop and price rising in the importing countries. Rising of oil prices has not had such a destructive effect on the economy as in 1970s. This was considered as a new economic theory that was called “Great Moderation”. In the authors’ opinion, in 2003-2005 the world economic growth decreased by 1.5%, that is by 750 billion. According to the same appraisal, this effect will be retained in 2006 as well and the recession trend will remain strong. However, this is not a shock which, in case of recurrence of that time’s effect, would cause a 3 fold increase of oil prices the way it took place in 1970. Experts explain this by stability of macroeconomic indicators and efficacy of the monetary policy. One of creators of this theory – a professor of Harvard University Kenneth Pogof maintains that the main thing is increasing of independence of central banks, retaining of the inflation rate and increasing of globalization that intensified competition and made the market a transformable and elastic one. In spite of it, the main concern of all governments is the effect of oil prices on the economy. Proceeding from this, Georgia will have to elaborate a special strategy. It does not have reserves and will not have any in the in the short run. It will not be able to issue public securities for distribution on the world market with the purpose of covering the deficit, it does not have its own fuel production. Proceeding from this, the only way that is left – reduction of the tax burden on oil products and giving up of its share for the sake of well-being of the economy, business and population with the purpose of retaining of the economic growth. The same applies to gas, in this sphere the world prices decreased in May and the consumption rose. A 23% growth of tariffs in Georgia put the population and business in a difficult situation, but finally “Tbilgazi” was sold to the Kazakhs and they manage it. Attracting of Kazakhs and Russians as investors has one unpleasant feature – they do not invest serious capitals in anything and do not carry out serious reequipment and renovation of businesses. This is the case with “Telasi” and “Azoti” or buying of the United Georgian Bank by “Vneshtorg”. They put in order management and make serious profits. “Telasi” made no serious investments in this business and cannot keep the voltage until now, frequent disconnections take place and they blame others for that. “RAO EES” has serious problems in its country as well, it is not an enterprise with advanced technologies and modern know-hows. There have not been many changes at “Azoti” either, except for the fact that they have gas and they are seriously represented on the European and American markets, since they have got rid of whimsicality and are doing their business independently. The same situation is at “Madneuli”, there are no serious investments, only a slightly improved management and deliverance of local disturbances. What are the new owners of gas going to do? – According to the available information, they are going to make a 80 million investment, out of which they will buy expensive French meters for 40 million (though rather effective meters of slightly worse quality are produced in Georgia) and 40 million worth of gas in Kazakhstan. The city networks, especially medium pressure gas-mains, control over the subscribers, gas quality and its caloricity, damaged pumps and outdated management system will remain a problem. The Kazaks have serious specialists in this sphere, and their coming here would bring much benefit to Georgian consumers. But are they going to bring here their management and technical personnel? According to the existing information, they are not! According to experts’ calculations, with rising in price of electric power, gas and oil, business became more expensive by 22.5% from June 1, that is the amount of alterable expenses in calculation has increased, which is sure to increase the price in the end. It is a catastrophe from the viewpoint of export, since our goods, except for nuts, become noncompetitive. This means dropping of production on the internal market and reduction of profitability in legal business conditions. The way out – lessening of the tax burden for all three energy products, and secondly – inculcation of the wholesale consumer system – those that will consume 2000 kw. of electric power, 3000 m3 of natural gas should have lower tariffs with the purpose of business promotion.
At the end of May the first tanker will be loaded from Baku-Jeikhan oil pipeline. And in the middle of July this project of the century will be officially opened. It is very important for of independence and security of the world energy market and Georgia as well. The gas pipeline from Baku through our territory is at the completion stage, and an intensive talk of the new mega project – through the Black Sea and Ukraine to Europe – has started. We wrote about it in the 10th issue of 2005. None of these projects is free from the influence of world prices. And there 1000 m3 of gas cost not 110 USD but exactly twice as much. Proceeding from the relations between Russia and Georgia, we have to expect that Russia will again raise the price of gas to 170-190 USD. Hence, it is necessary for Georgia to work out a tactical and strategic plan with a single purpose – lessening of the burden of increasing energy prices for business and production, including with the purpose of retaining and raising of the export production’s level.
In April the International Monetary Fund published World Economic outlook with the purpose of reviewing and forecasting of different countries’ economies. The whole attention was attached to the July G8 meeting in St. Petersburg (that will be hosted by Russia), and inflation management recommendations were given to the countries. In connection with rising of oil prices the Fund has introduced the new method of inflation calculation – non-oil (core) inflation, that is inflation without oil products’ prices, and according to analyst Abheek Barua, in 2004 this indicator made up 1.5% and in 2006 it increased to 3% in the world. He says that in 2005 the core inflation indicator made up 3.8% in spite of the fact that oil prices sharply increased in September 2005. That is inflation indicator becomes threatening even without oil prices.
A similar situation is in Georgia, where inflation is calculated in accordance with the international methodology – the prices of 349 goods minus the prices of 41 basic consumer goods.
According to export calculations, the basket of goods not only in Georgia but in all former soviet republics consists of:
1. Meat and meat products
2. Milk and milk products
3. Chicken meat and eggs
4. Cheap fish products and canned goods
5. Sugar
6. Groats and flour products, including bread
7. Oil and fats
8. Potatoes and vegetables
9. Gasoline and diesel fuel
10. Electric energy and gas
11. Drugs and medical treatment
So we should calculate inflation in accordance with it.
Let us take a look at incomes
According to economic history, in 1913 the average salary in the Russian empire, including Georgia, made up 22 tsar’s rubles (according to the exchange rate after Vitte’s reform). Out of this basket, a person could 13 times buy 9 descriptions of the basket’s goods. Till 1927 the lower class had an income with which it was possible to buy the same component 19 times.
In 1985 he could buy this ration 29 times
In 1990 – 15 times
In 2004 – 12 times
Today, according to the data of 2005, the average salary in USD on this territory makes up:
Estonia – 593; Lithuania – 490; Latvia – 420; Russia – 302; Belurus – 262; Kazakhstan – 260; Ukraine – 220; Azerbaijan – 140; Armenia – 115; Moldova – 101; Kyrgyzstan – 60; Georgia – 50; Uzbekistan – 50; Turkmenistan – 40; Tajikistan – 36.
In these conditions it is difficult to make analysis of real inflation as well as objective and subjective factors. The fact is that in Georgia the salary of people employed in public administration sector has increased by 200-350%, and it includes 80 000 employed people. Pensions has increased twofold, but none of these indicators will provide for overcoming the inflation rate if the profitability level and the total number of employed people, hence the average salary is not increased.
The word “inflation” becomes more incomprehensible day by day not only for the population but for businessmen as well. I suspect that 90% of workers of the Ministry of Economy and the National Bank, if we do not say anything about the parliament, cannot understand it either and this aggregation irritates everybody. Why? Because they have not understand what increasing of prices and stubbornly steady inflation speak about. Is it good or bad? By what methodology? And generally, does it tell us anything? It will, if we calculate it by the adapted method, but we shall have another indicator for currency emission, but a real one. This real indicator will make us create the anti-inflationary program aimed at production increasing and business support and fulfill urgently fulfill it. It will not be a long-term one since, in view of booming oil prices (not only of oil but gas ones as well), we do not have much time left for retaining of the economic growth’s rate and solving of social and balance liquidity problems. Forecasting is a thankless matter, especially in the present world, but a program and economic strategy in relation to what is going on on the world market is necessary. Oil and food prices on the world market will increase still more till the end of the year, while the rate of production growth is decreasing there as well with the purpose of retaining of the optimal inflation rate. But what are we doing?