Oil and Petroleum Products

Elizabeth Munn is the Spring 2019 volunteer intern with the Africa program at the Council on Foreign Relations in Washington, DC. She is a student at George Mason University, studying global affairs and African studies. On February 20, the UN Commission on Human Rights in South Sudan issued its third report. Despite the peace deal signed six months ago in September, it documented an increase in cases of rape and sexual violence over the past year, concluding that the crimes had “become quite normalized” in South Sudan. Driving much of this is oil.  According to the report, the state-owned oil company, Nile Petroleum Corporation (Nilepet), has demonstrated a “total lack of transparency and independent oversight” in its diversion of oil revenues into the hands of government elites. The structure of the company is deliberately designed to allow for autocratic control: it is run by a managing director who is accountable to a board of directors whose members are appointed by the president. To the board, the government has appointed loyalists, particularly individuals from the National Security Services (NSS), which has been accused [PDF] of human rights abuses. This process has allowed Nilepet‘s oil revenue to be diverted to the security services, who in turn purchase weapons and other military equipment. In fact, a majority of Nilepet’s revenues in 2015 were used to fund over two hundred thousand soldiers stationed in conflict areas near oil fields. Further, Nilepet received a letter from government elites asking for $1.5 million for military expenses in 2016. South Sudan produces around ninety million barrels of oil a year and the vast majority of the revenue finds its way back to political and economic elites, while, according to 2016 data from the World Bank, the poverty rate stands at 82 percent. With oil income accounting for about 98 percent of the government’s budget, the parties in conflict have targeted oil-producing states and facilities in efforts to gain money and power. The struggle has entirely neglected the needs of the average citizen. A report by Global Witness documented how some South Sudanese must resort to the black market to obtain fuel, where prices can reach 300 South Sudanese pounds ($2.30) just to fill a one-liter plastic bottle, equivalent to almost $9 a gallon. Although Nilepet is under the complete control of the government, it is considered a private company, meaning it is not subject to the same oversight as a government agency. The UN Commission on Human Rights in South Sudan advocated for increased accountability and transparency in oil companies, such as Nilepet, to overcome deeply-rooted corruption in oil-rich nations. This likely requires international support against corrupt practices.  The U.S. Commerce Department has designated foreign and domestic oil entities operating in South Sudan as threats to U.S. national security because of their role in the conflict. These other state-owned companies, which dominate oil production in South Sudan alongside Nilepet, are the Chinese National Petroleum Company, Petronas of Malaysia, and the Indian Oil and Natural Gas Corporation. Unlike those of China, Malaysia, and India, many other international companies have abandoned oil production in South Sudan altogether.  South Sudan is home to one of the worst humanitarian crises in the world. International efforts, such as those of the U.S. Department of Commerce, are needed to call attention to the severity of the issue and push South Sudan to implement accountability and transparency in the oil industry and among the security services.   

Amin Nasser, Chief Executive Officer of Saudi Aramco, whose shareholder is a sovereign nation, weighed in this week with a warning against U.S. and European activist shareholders who are making demands of the world’s largest publicly traded oil companies. Nasser told an industry audience in London that the oil industry faces a “crisis of perception” among its stakeholders that puts at risk its ability to supply energy to billions of customers around the world. In a speech to International Petroleum Week in London Tuesday, Nasser outlined “urgent, collective effort” the oil industry must take to counter the perceptions crisis. Such steps would include pushing back on narratives that oil is a bad financial investment because demand might peak soon and offering the development of cleaner fuels that respond to consumer concerns about environmental, social, and governance issues. The speech comes on the heels of an active proxy season in the United States and Europe where shareholders of the largest oil companies, whose stocks are publicly traded, have asked the firms for transparent reporting on  how they will reduce the carbon footprint of their products and operations in line with the 2 degrees Celsius Paris climate accord goals, including setting concrete short, medium and long term targets for reductions. ExxonMobil has formally asked the U.S. regulatory agency, the Securities and Exchange Commission (SEC), to reject the shareholders efforts to bring the resolution to a vote at ExxonMobil’s annual meeting in May. Royal Dutch Shell has already adjusted its strategies to reflect similar requests and will link future executive pay to emissions reductions achievements. The company announced recently that it was buying German residential solar battery maker Sonnen and investing in electric vehicle charging stations in Europe in addition to its hydrogen fuel business in Germany. BP is also moving into the EV charging business, and has agreed to demonstrate how its business will align with Paris climate goals including executive remuneration based on emissions reductions. Chevron’s shareholders are asking for information on the company’s strategic vision and response to climate change risks and opportunities. Goldman Sachs is under pressure from activists this year to reduce the carbon footprint of its loan and investment portfolios. France’s Total whose stock performance has outpaced others in the last year, tweeted today that “It’s not about putting a green paint on @Total’s logo but a real evolution of our energy mix”, projecting that the company will hit 10 to 20 percent low carbon electricity by 2040 on top of 45 to 55 percent natural gas, leaving liquid fuels (oil and biofuels) at only about a third of the company’s product mix by 2040. The oil industry has trendlines to point to in its narrative that oil is hard to move away from. Global oil use climbed 1.3 million barrels a day in 2018, according to the International Energy Agency, amid stronger oil use in China and India. IEA projects similar growth for 2019. China’s oil use rose by 440,000 b/d last year, despite a 17 percent decline in car purchases. More surprising was higher U.S. oil use, which topped 540,000 b/d in growth last year as the American economy expanded. New academic studies reveal that economic expansion is once again linking to a rise in U.S. vehicle miles traveled (VMT) since 2012, dispelling the notion that millennials might drive less. U.S. Federal Reserve Bank economists are finding that millennials have the same consumption preferences as past generations, including interest in buying cars, but are less well off than members of previous generations. Some U.S. cities are also finding that use of ride hailing services can potentially increase VMT, rather than lowering it. These latest trends suggest that wild predictions that global oil demand would peak by 2020 will likely be off the mark. Still, the possibility that oil demand will plateau or even decline in the long run cannot be dismissed out of hand. That’s because in multiple sectors – across vehicles, manufacturing, freight and even plastics – digital technologies are transforming the way things are made, shipped and used, with large disruptions to current use patterns possible. Last summer, Citi published a report suggesting countries across the globe are beginning to strengthen restrictions on single use plastics, noting that China’s decision to stop imports of plastic waste last year. “With China no longer importing plastic waste and other countries unable to absorb the high level of supply, exporters will likely be forced to expand on domestic recycling infrastructure and/or cut back on the level of waste being produced,” Citi noted in its report. McKinsey & Co. estimates that recycling and substitution of biomaterials could shave 2.5 million b/d off rising oil demand for plastics manufacturing by 2035 and that 60 percent of plastics used by 2050 could come from production based on previously used plastic. Changes in global trade and freight practices could also substantially lower oil use in the future. In its “Less Globalization” scenario, BP projects that the rise in global economic expansion would lag about 6 percent, compared with a business as usual projection for 2040, translating into about a 2 percent loss of oil demand, if tariff wars and rising populism were to continue to dent global trade. That estimate for a minimal effect on oil use could prove optimistic, since next generation manufacturing technologies, increased use of optimization programs for logistics, increased use of alternative fuels in trucks and delivery vehicles and rising protectionism for jobs could mean bring much larger changes in oil use for aviation, shipping and on-road freight. Our modeling, in partnership with University of California Davis researchers, indicates that there are still many policy levers that could change the trajectory for oil use in transportation. We found, for example, that the possibility that proposed bans on new sales of internal combustion engine cars by 2040, mooted in Europe and even discussed in China and India, could shave 5 million b/d from future oil demand, if implemented broadly. In one scenario, utilizing the International Energy Agency’s mobility model, we defined the parameters of an internal combustion engine (ICE) sales ban policy as one where non-plugin, ICE-powered new vehicle sales go to zero in Europe, China, India and California by 2040. Plug-in hybrids are assumed to be exempt from the sales ban, as well as commercial freight vehicles, emergency vehicles, and 2/3 wheelers. Closing geo-fenced areas of major global cities to gasoline-powered cars, potentially in favor of electric vehicle ride sharing or greater use of public transit, could double this effect, our research concludes. New policies that promote use of alternative fuels for buses and in on-road trucking, a policy already underway in China, would also curb growth in oil use significantly. The bottom line is that a combination of rapid technological disruption and shifting geopolitics has the potential to adjust the trajectory for oil demand, potentially downwards, but also, without strong policy intervention, possibly upwards. That is creating great uncertainty for investment in the oil sector. Historically, investors have favored oil company shares and oil commodity financial derivatives because they felt that the sector would face future scarcity of both produced supplies and physical reserves. This view of peak oil supply propelled billions of dollars in capital investment in search of new reserves. Oil company reserve replacement was highly valued and rewarded. Now this presumption that oil demand could only flow one way – upward – is more uncertain and notions of long run oil scarcity look more doubtful as the industry unlocks the technical ability to produce more oil and gas from “source” rock, rather than from large already discovered reservoirs. These two new realities are not fantastical “perceptions.” They are the outcome of new uncertainties created by rapidly accelerating changes in technology. As shareholders pressure international oil companies (IOCs), they are increasingly positioning themselves to respond. A recent Wood Mackensie consultants report suggests that renewables could represent one fifth of total capital allocation for the major oil companies most active in the alternatives sector after 2030. That should be a cautionary note for national oil companies (NOCs) thinking that the oil majors can be the financing backup plan if their own attempts to expand (or possibly just to maintain) oil production capacity fail in the next few years. Increasingly, the majors will judge possible long-range mega-projects with a tougher eye, now that booking large reserves is not currently rewarded as it once was by Wall Street. That could create future difficulties for countries like Venezuela that are counting on foreign direct investment to bail it out of mismanagement of its oil sector. Thus, Mr. Nasser may be correct. Oil supply could prove volatile in the coming years (or even in the next few months) as national oil companies face increasing problems. But that problem won’t likely be tied to misperceptions by the shareholders of the IOCs. It is more likely to be related to how Saudi Aramco and its peers manage their current revenues and future investments.

Back in 2013, Venezuelan state oil company PDVSA had ambitious plans for expansion of its oil production capacity. Its leaders envisioned eight new projects in the Orinoco Belt region that would require $108.3 billion in new investment to increase production to 4 million barrels a day (b/d), according to the state firm’s business plan covering 2013 to 2019. At the time, to facilitate this rise in production, capacity expansions for the heavy oil upgraders needed to convert the tar-like Orinoco extra heavy oil to a lighter mixture for transportation and refining was estimated at $23 billion. Today, the four heavy crude upgraders installed in the 1990s and operated with minority partners, Total/Equinor, Chevron, and Rosneft, have an official nameplate capacity to process 700,000 b/d of Orinoco oil. In reality, output from the upgraders has been running below that level. For example, the Petrocedeno upgrader, where Total and Equinor are minority partners, was closed temporarily in early February due to mechanical problems with a pipeline and pump. PDVSA’s Petro San Felix upgrader, expropriated by the state firm from ConocoPhillips in 2007, has been out of service for months. In the same Orinoco region, a fire last week at a crude oil pumping station interrupted the transportation of oil from the Petrocarabobo oil field, a joint venture between PDVSA and Repsol, and from Petroindependencia, which Chevron is a partner. Gasoline supplies are also expected to sink as currently arriving international shipments made by oil traders prior to recent U.S. sanctions start to dry up. Venezuela is also having trouble finding new buyers for its crude oil exports that were previously going to the United States. India, which is purchasing about 360,000 b/d now, faces refining constraints and is therefore unlikely to be able to process much additional oil from Venezuela. PDVSA only has storage for 44 million barrels, a little more than roughly one full month of production at current output, so continued marketing problems could affect production rates. The longer the situation goes unresolved, the more Venezuela’s production is likely to fall, potentially leaving exports at close to zero. Why it matters? The oil situation does not bode well for a smooth financial transition, even if the current political stalemate in Venezuela comes to a peaceful end. In the latest development, Juan Guaido called on his supporters to surround Venezuela’s military bases and peacefully demand “the entry of humanitarian aid.” It will be tempting for Washington policy makers to assume revitalization of the oil sector will help Venezuela dig out from its current economic woes under a Guaido-led transition, followed by democratic elections, but that process could be a drawn out one. Presumably, before it can bring in new investment by other companies, the interim government will need to organize new elections. The next government then will need to pass a new constitution to be followed by a revised hydrocarbon law that can be the cornerstone to new foreign investment. It is possible that companies currently still operating in the Orinoco Belt could extend their existing contracts to inject more investment, but that presumes those players will be willing to sink more money into the country where they already have high exposure and political risk. It is unclear if China, which is still owed $20 billion by Caracas, will be willing to add even more oil investments in the country under a new government that might have stronger links to the United States. What’s Venezuela’s best-case oil scenario? In 1992 when Venezuela announced it would open its oil sector to foreign investment for the first time since 1976 when it nationalized its oil industry, the line of firms interested in investing was long. Thirty- three companies signed service agreements to develop Venezuelan oil and gas fields in exchange for a fixed fee for service, including ExxonMobil, Shell, BP, Equinor (then Statoil), Total, Repsol YPF, China National Petroleum Corp. (CNPC). ExxonMobil and ConocoPhillips also negotiated profit sharing agreements for newer fields such as La Ceiba and the Coronoco field, respectively. In addition, four consortia formed extra heavy oil upgrading associations to exploit the prolific Orinoco Belt. But even if Venezuela manages to shift its government and reinvigorate its national hydrocarbon law to attract new foreign direct investment, it will have a harder time than during the 1992 Apertura Petrolera initiative. That’s because the North American shale revolution and the advent of electric cars has dispelled the notion of resource scarcity that drove massive capital investment in search of new oil reserves in the early 1990s. Many international oil companies are less interested in amassing large reserves that take many years to develop and might become stranded assets that won’t be needed in twenty or thirty years. Companies estimate that it would take three years for international corporations that still have ongoing oil production joint venture contracts to expand their operations, mostly in the Orinoco region, to add 1 to 1.5 million b/d to oil production levels, now at 1 million b/d and falling. The Western Maracaibo Basin, where PDVSA produced 1.5 million b/d back in 2002 from three main fields – Bachaquero, Lagunillas, and Tia Juana- suffered natural field declines of roughly 25 percent in recent years and are mainly shutdown. PDVSA used to spend $3 billion to $4 billion a year just to arrest wellhead declines in mature fields but has failed to make needed repairs and maintenance of its fields in recent years. Younger fields in Venezuela’s Eastern Basin, such as El Furrial and Santa Barbara, which used to produce 1.8 million b/d prior to the election of Hugo Chavez, have suffered from underinvestment and have sustained reservoir damage.  Implications for U.S. Policy If restoring oil revenues could be a lengthy process, the United States, together with the International Monetary Fund and other regional countries, are going to need to fashion other strategies to finance humanitarian assistance to Venezuela. Any recovery strategy is going to need to consider structural economic reforms, coupled with generous international financial assistance for food, medicines and other badly needed humanitarian aid, and a revitalization of the Venezuelan private sector. Loose talk that Venezuela has “large” oil reserves that can collateralize the country’s future will do disservice to the Venezuelan people who need to rebuild their country by utilizing a broader economic base to prevent another resource curse disaster in the future.

Congress is considering a bill that could punish countries for artificially boosting oil prices. What could that mean for warming ties between Russia and Saudi Arabia?

At a business breakfast on February 7, Doyin Salami pointed out the elephant in the living room of Nigeria’s economy. The country is not oil rich; rather it is oil dependent. He asked attendees to acknowledge this distinction. Dr. Salami did the math. He estimated that Nigeria could produce 800 million barrels of oil per year, which means that for every one of the Nigeria’s roughly 200 million people, the country produces four barrels of oil. He also estimated a population of 200 million. That meant four barrels of oil per year per Nigerian. Filling in the blanks with some of my own math, at $45 per barrel, that equates to about $180 per person per year. He then turned to Saudi Arabia. He estimated that it would produce 4 billion barrels each year, but with a population of only 30 million, the kingdom would produce $6,000 for every one Saudi person, or over 130 barrels per person per year.  This sentiment is not new. Former finance minister and foreign minister Ngozi Okonjo-Iweala has made the same point in the past, as have many others. The reality is that Nigeria remains a very poor country, despite a handful of very rich Nigerians. As successive government have urged, the country must diversify its economy if it is to break out of the poverty trap.  Nigeria remains "Exhibit A" of the so-called resource curse. At the time of independence in 1960, Nigeria exported food to West Africa, but now, it is now a net importer. In 1960, Nigeria had a significant manufacturing sector, especially in textiles, furniture, and other goods. With the coming of oil, which began in earnest in the 1970s, fiscal and economic policy were distorted, and oil sucked-up domestic and foreign investment at the expense of other sectors of the economy.  Government borrowing when oil prices were low led to debt. Military governments punctuated by coups resulted in policy instability and uncertainty and facilitated whole-sale looting of the state. Government revenue increasingly came from oil. With the coming of civilian government in 1999, there has been some recovery, but government revenue remains hostage to fluctuating oil prices. Corruption, if less chaotic and rampant now than under the military, has become institutionalized at almost every level of government. The bright spot, if small now, has been a proliferation of good governance presidential candidates and other Nigerians who are challenging king oil, politics as usual, and are shining a light on systemic government corruption. Foreign friends of Nigeria should support their efforts. 

Test your knowledge of Nigeria, from its economic heft to its struggle against Boko Haram.

The staying power of Nicolas Maduro’s embattled government may hinge on three critical allies: Russia, China, and Cuba.

Test your knowledge of Venezuela, from its role in global oil markets to its increasing political instability.

In early 2003, when debate was surfacing in the United States whether to invade Iraq, a Council on Foreign Relations working group drafted a monograph outlining the problems that such a policy would face. As I explained at the time as part of that effort, Iraq’s oil industry was in tatters and it would take years, not months, to restore it. It was clear prior to the 2003 war that Iraq’s oil could neither pay for the war, nor be nearly enough to fund its reconstruction. Given the news that the United States has recognized the speaker of the democratically elected National Assembly Juan Guaido as interim President of Venezuela in defiance of ruling strongman Nicolas Maduro, the question about how long it would take Venezuela to restore its oil production under a new government is likely to arise. Like Iraq, Venezuela will need massive amounts of money to rebuild deteriorated national infrastructure. Also like Iraq, Venezuela’s oil industry has suffered serious damage, and the damage could arguably be harder to restore than in Iraq. The invasion of Iraq took place in 2003. Iraq’s oil production is now gaining ground, but that positive trajectory took almost a decade to establish, as seen in figure 1.  It might seem relevant to note that Iraq faced a destructive war in 2003, followed by years of civil war and more recently, a battle to expunge ISIS and therefore its oil installations took a military beating that won’t be analogous in Venezuela. That is certainly true. But the fact is that there has been tremendous violence on the ground in Venezuela with multiple armed groups looting and raiding the country’s key infrastructure, and the oil sector has been targeted across the country. The violence has caused many of the international oil companies previously operating in the country to withdraw. One challenge that will face any new government, were one to be able to emerge, is that there are multiple renegade armed groups operating inside Venezuela, including Cuban mercenaries and others deeply entrenched in drug trafficking. This has made and will continue to make guarding Venezuela’s oil industry a major challenge. Further complicating any oil sector transition, the Venezuelan military has virtually taken over as the gate keeper on the operation of the oil industry. The employment ranks of state firm PDVSA is said to now total as many as one hundred and sixty thousand people, up from its normal ranks of forty thousand in the years prior to the election of Hugo Chavez. Organizations like the Military Corporation for Mining, Petroleum and Gas Industries (Camimpeg) created in 2016 actively intercept the flow of income from the oil sector. Camimpeg’s soldiers have been working to suppress strikes by oil workers unions at oil fields around Lake Maracaibo, and Petroleum Intelligence Weekly is reporting that soldiers often siphon off barrels and engage in illegal smuggling for payments for stolen oil being included at Venezuela’s ports in larger shipments to Russia and China. Last week Guaido bravely told a public rally that “We will not permit the continued use of public funds by a gang of thieves so they can continue stealing,” but acknowledged that gaining control of Venezuela’s offshore assets like Citgo Petroleum in the United States would take time. In fact, Guaido’s opposition government will need time to develop the leadership and capable administrative staffing that it would require to run an industry as technically complex as oil and gas.   The condition of Venezuela’s oil industry is dire. Of its four refineries, only one is running. Fires, explosions, looting and mis-operation has shuttered most of Venezuela’s refining capacity. Refining throughput is estimated at just under three hundred and fifty thousand barrels per day (b/d), mainly from the large Amuay Bay facilities, compared to its prior operational capacity of 1.5 million b/d. The Cardon, El Palito and Puerto La Cruz facilities face equipment failures and manpower shortages. PDVSA has also abandoned the Isla refinery on the Dutch Island of Curacao, which it had operated under a lease. The refining problems have led to gasoline and diesel shortages across Venezuela. Venezuela has experienced a sharp oil production decline over the past two years, dropping from 2.2 million b/d in early 2017 to about 1.1 million b/d currently, as is seen in figure 2. The declines result from chronic technical mismanagement and underinvestment in the sector over a decade or more and massive arrears to suppliers such as international drilling companies and equipment suppliers who have slowed activity in Venezuela over the past year or so to limit unpaid bills. Other more recent problems are also taking their toll, including shortages of basic equipment, logistical problems on export loading ports, corruption, and labor unrest, worker desertions, and mass resignations. Historically, Venezuela’s conventional fields near Lake Maracaibo have required constant intervention because their natural decline rate is among the highest in the world at 25 percent. Venezuela’s heavy oil extraction operations are labor and equipment intensive and requires cash purchases of diluent on the international market. Estimates are that it would take an injection of over $20 billion of new investment to reverse the current downward path on production. Given this cost, the extent of existing damage, and the deterioration of PDVSA’s workforce, a reversal of Venezuela’s oil industry woes might prove more difficult even than war-torn Iraq.      The United States had previously banned U.S. entities from trading in new Venezuelan government debt beyond the thirty days customary for letters of credit for oil trade. U.S. entities were similarly banned from trading in existing debt held by the Venezuelan government as well as trading in new debt instruments with maturity beyond ninety days. Citgo, as a U.S. entity, was forbidden to make financial distributions back to Venezuela. Last week, U.S. National Security Advisor John Bolton reiterated the Trump administration goal to disconnect “the illegitimate Maduro regime from the sources of its revenue.” With the U.S. recognition of Guiado as interim President of Venezuela, one option will be to establish a special purpose bank account for the opposition government in the United States, to include revenues that involve payments by American firms involved in business dealings in Venezuela. U.S. refiner Valero has been a major importer of Venezuelan crude, and Chevron Corporation has ongoing oil field operations in the country. The U.S. Department of State has already served notice to the U.S. Federal Reserve to recognize Guaido as the primary agent for access to Venezuelan financial assets in U.S. banks.  The practicalities of implementation remain to be seen. There is speculation that Venezuela will stop shipping any oil to the U.S. including to Citgo to avoid transfer of any funds to the Guaido-led interim government. That means in effect the current U.S. actions have already in effect embargoed imported Venezuelan crude to Citgo and other U.S. buyers. In a sign that Maduro regime is already taking a different approach, state PDVSA issued a tender early last week for the open market sale of four million barrels of Venezuelan crude oil slated for delivery in late January and into February. Black market sales of oil and refined products either by truck or otherwise have been a staple of declining oil regimes over the last few decades, and could possibly sustain Maduro with some cash even if his regime has difficulty maintaining official government exports. The situation with Citgo Petroleum is also a sticky problem with the Trump Administration. The wholly Venezuelan owned U.S. refiner also imports crude oil from Venezuela and purchases Canadian and other crude oil for its three refineries. Citgo is among the largest U.S. branded gasoline marketer in the United States. Citgo’s refineries produce roughly 4 percent of U.S. refined petroleum products. At its peak, Citgo supplied close to 9 percent of annual sales of U.S. retail gasoline. The firm is a major supplier to the Chicago area. Prior to the recent political events, investors who hold Venezuela’s unpaid bonds in Citgo had been organizing and were expected to push for a restructuring. Canadian miner Crystallex won a legal judgement against Venezuela last year that would have facilitated it to seize and sell Citgo as compensation for Venezuela’s 2007 nationalization of a gold mine. Venezuela still has $1.5 billion in settlement payments to make to ConocoPhillips as part of its 2007 nationalization of the American oil company’s assets in Venezuela’s oil sector. It is unclear how the unraveling of Citgo’s financial structure would proceed under a new Venezuelan government. Guaido has specifically announced plans to create a new board for Citgo but has been mum on how it might restructure the liens against the company’s assets and revenues. In 2016, Caracas used a 50.1 percent stake in Citgo as collateral for new bonds. Russian state oil firm Rosneft also has a $1.5 billion lien on the other 49.9 percent share of Citgo. Additionally, Venezuela remains highly indebted to China, which extended over $60 billion in aid during the rule of Hugo Chavez. To date, Venezuela has been repaying this latter debt slowly over time in the form of oil shipments. Geopolitically, the oil situation in Venezuela presents a difficult and complex challenge for U.S. diplomatic and treasury officials. On the one hand, the United States is helped by the fact that the Organization of American States (OAS) issued a resolution declaring Nicolas Maduro’s January 10 reelection “illegimate.” The United States has been leaning on allies and the United Nations to address the humanitarian emergency that has been created by the exodus of several million Venezuelans to neighboring countries. But China and Russia, which have invested heavily in the Maduro regime, are likely to push back on efforts to topple it, arguing at the U.N. Security Council that wider intervention is interfering with sovereign internal affairs. Both countries are heavily embedded in the Venezuelan oil sector.   Given the complexities of how Venezuela has tried to insulate itself over the years from U.S. pressure using friendly oil investors as leverage, it will be tricky for the Trump administration to proceed to back a Guaido presidency without creating a disruption in Venezuelan oil production and exports as an unintended result. Presumably, a new government would be in a position to receive some debt forgiveness combined with a broad restructuring of its government debt. In doing so, the demands of Russia and China will have to be factored in to ensure a lasting resolution of Venezuela’s indebtedness. The obvious importance of Citgo inside the U.S. refining system and as a key preserved asset for Venezuela should give pause to all parties about the relative stakes of failing to find a creative diplomatic solution to the current stand-off. Implementation of a political transition on the ground inside Venezuela, given the multitude of rogue military gangs operating within the country, may still make geopolitical deal-making just the tip of an iceberg for restoring stability to either the country and to its oil industry.  

Mohammed Barkindo, Secretary General of the Organization of Petroleum Exporting Countries (OPEC), is worried about the U.S.-China trade war. Even though oil prices seem to be stabilizing, Barkindo told CNBC News that OPEC was “concerned about the lingering trade disputes.” Last week, it was reported that China’s car sales fell by 6 percent in 2018, the first annual decline seen in more than twenty years, amid signs that China’s economy could be slowing down and consumer sentiment turning more pessimistic. Chinese oil demand, which represents over 12 percent of total world demand, is a linchpin to global oil markets. When China’s economy slows significantly, the effect on oil prices can be dramatic, potentially leading to single digit prices, which has happened in the past. Typically, an economic slowdown in China has historically sent shockwaves through the rest of Asia, weakening oil demand across the region. Oil traders, OPEC, and just about everyone else is hoping that Beijing’s planned stimulus will be sufficient to turn trends around, staving off what is feared to become broader global recessionary pressure. But this time around, the situation is more complex than what a Chinese stimulus could be able to address. Larger, more geopolitical issues are looming. These geopolitical factors will be harder to resolve and could easily become structural. Bruce Jones of Brookings argues that U.S.-China relations are at a turning point which he defines as the “closing of an era of expanding cooperation.” Jones argues that President Xi Jinping’s more assertive global and military strategy, combined with his crackdown on domestic dissent and internment of Xiajiang Muslims, is prompting a reevaluation of China, not only by the Trump administration but by a larger cross section of American political leaders, academia and business leaders. The previous American assumption that the deepening of commercial, diplomatic and cultural ties between the United States and China would transform China into a status quo power and liberalize China’s internal political development is now being seriously questioned. China’s flirtation with consumerism has not produced a society trending to openness and its nascent local environmental movement has not spurred on democratic principles, as previously supposed. Rather, what was ten years ago a decentralizing political culture has snapped back to central authoritarian rule revolving around a strongman leader who has removed term limits for his post. In a sign that progress on trade issues is not moving in the right direction, the U.S. Department of State and Canada’s Foreign Ministry recently issued a travel warning for China due to arbitrary enforcement of local laws and possible special restrictions on U.S.-Chinese dual nationals. The warning comes in the wake of the arrest of Meng Wanzhou, the chief financial officer of the giant Chinese tech firm Huawei, in Canada, at the request of the United States. The Chinese firm, China’s largest telecom equipment maker, has been under U.S. investigation for alleged violations of American trade control laws with Iran. China issued a similar warning to some of its state-run companies to avoid business trips to the United States, Britain, Canada, Australia and New Zealand.     The arrest of Meng Wanzhou is just a small part of a larger policy afoot to rein in China’s voracious appetite for sensitive American technologies. The Trump administration is giving high priority to the U.S. national security implications of China’s push into artificial intelligence, automation, and information technology as well as Beijing’s willingness to gain sensitive U.S. technology by a variety of means, including outright intellectual property theft. Last year, the Trump administration blocked Broadcom, the Singapore-based chip maker, from taking over American firm Qualcom, citing Broadcom’s relationship with foreign entities such as Huawei. The U.S. Commerce Department also banned Chinese telecommunications equipment firm ZTE from using U.S. components amid accusations that the Chinese firm had violated U.S. sanctions against Iran and North Korea. The ban was lifted after ZTE paid a hefty fine, replaced its leadership and agreed to U.S. compliance inspections.  But the U.S. administration’s views on U.S.-China trade are wider than the specifics of telecommunications technologies like 5-G. At issue is a broader view on the security of globalized supply chains. Some louder voices inside the administration’s internal U.S. trade policy debate argue that the United States should shrink dependence on China for U.S. and global supply chains. They argue that China’s massive Belt and Road Infrastructure Initiative (BRI) and its industrial policy, China 2025, could threaten the U.S. ability to maintain reliable and cost competitive cross border trade on which the U.S. economy and the military rely. Disruption to U.S. international supply chains could have serious consequences for the U.S. economy, jobs and the competitiveness for U.S. companies, for example, as became apparent for businesses that relied on components produced in Fukushima, Japan when it was hit by a tsunami back in 2011. The U.S. military is also vulnerable to supply chain disruptions involving materials and products from China, especially strategic minerals. Conservatives are starting to beat the drums regarding these risks. China’s BRI has proven an effective mechanism to get Beijing preferential access to investments in ports and other transportation infrastructure. Almost 70 percent of global container traffic flows through Chinese owned or Chinese invested ports, according to a survey by the Financial Times.  But China’s investment in logistics businesses include more than sea ports and warehouses. It also covers energy infrastructure and pipelines, trucking, railways, airports, and shipbuilding. The United States has been forced to respond with an infrastructure fund of its own, despite President Trump’s previous distaste for foreign aid programs. But it is unclear if the U.S. will be able to counter the pernicious financial devastation that can be wrought when a major Chinese infrastructure project goes badly in the developing world, especially in oil for loan deals in Latin America and Africa. It is important to understand this wider context when evaluating how U.S.-Chinese trade negotiations could progress in the coming weeks. Temporary hiatus in conflicts has been seen as good news for oil exporters but it could belie larger problems ahead. If the United States is thinking about how to dismantle its reliance on Chinese supply chains, it is safe to assume Chinese strategists are doing the same. That’s bad news for American oil and gas firms that were counting on China as a steady customer for rising exports. China’s imports of U.S. crude oil averaged 377,000 barrels a day (b/d) in the first seven months of 2018 but were zero by September of last year. That’s out of over 2 million b/d of total U.S. crude oil exports and 9.6 million b/d of Chinese imports. U.S. sales of liquefied natural gas were only 4 percent of China’s total 1.53 million tons of LNG imported in 2017, but tellingly, were the third largest market for U.S. sellers. Going forward, U.S. oil and gas exporters alike were expecting their sales to China to be much higher. Access to the Chinese market was also considered critical for the success of future natural gas export projects in terms of financing and end-demand. Lingering uncertainties about U.S.-China trade issues are making it harder for American LNG export promoters to push forward credible deals to beat out Qatari and Russian gas sales ahead of looming multi-year contract renewals. It’s not just the threat of more tariffs that could plague U.S. industry in the future or even the slowdown in Chinese demand for oil and gas more generally, though these would be a problem for U.S. producers as well. It is also that the rougher the U.S.-China divorce over technology supply chains and logistics infrastructure, the less likely China will feel comfortable relying on American oil and gas supplies. The days when U.S. and Canadian energy to China could have seemed like among the most secure sources could well be over, at least for now, reducing the value to Chinese firms of a 5 year or 10 year contract with an American firm, even if backed with an invitation for an upstream or export facility equity investment. A temporary truce in the trade war could produce an immediate home for some U.S. spot cargoes in China, but it’s going to be hard to inspire confidence for lengthier contractual commitments.  American oil and gas will have to shift to other markets. At first glance, this could seem like good news for Russia or Saudi Arabia who will have an easier time selling energy to China. But the longer process of dismantling of intensive trade links between the United States and China could eventually produce major headwinds to both the U.S. and Chinese economies. As markets start to wake up to such risks, it will be harder for the price of oil to rally, even with supply cutbacks. OPEC Secretary General Barkindo expressed "cautious optimism" on U.S.-China trade disputes being favorably dispensed because both countries “want to see these issues resolved.” But chances are it will be a long, drawn-out process of recalibration.

The Organization of Petroleum Exporting Countries (OPEC) decision to cut oil production by 1.2 million barrels a day (b/d), together with Russia and a few other non-OPEC producers, may have garnered the organization’s members a few extra dollars temporarily, but it belies larger problems ahead for the 57 year old cartel. OPEC has weathered many geopolitical and economic challenges in the past, not the least of which was surviving land wars between countries in its membership and multiple crashes of oil prices below $10 a barrel. But, like many things changing in the current world order, OPEC’s mission is starting to look increasingly anachronistic and events swirling around the meeting last week in Vienna foreshadow conditions that might require more introspection than the organization or its members will be able to muster. The United States’ response to OPEC may also seem effective in staving a rise in oil prices this autumn, but Washington also needs to give further examination to its long run strategy regarding the cartel. Two of the big side disruptions at OPEC’s latest December gathering was the appearance of Brian Hook, Special Representative for Iran and Senior Policy Advisor to the Secretary of State at the U.S. Department of State, at the sidelines of the meeting and Qatar’s surprise announcement it would be quitting the organization. Mr. Hook confirmed to reporters just ahead of the OPEC meeting that the U.S. had to grant waivers to Iranian oil sanctions “to ensure we did not increase the price of oil.” The envoy said ahead of the OPEC meeting that he expected a “much better-supplied oil market” in 2019, when he said the U.S. would be in a “better position to accelerate the path to zero [Iranian Oil Exports].” The role of the United States in choosing the pace at which to eliminate Iranian oil from the market explicitly based on oil prices raises all kinds of thorny problems both for OPEC and for U.S. policy makers.  U.S. sanctions on Iran and any waivers were clearly a factor OPEC has had to consider in forecasting global oil market supply, but the appearance of Mr. Hook at the sidelines of the OPEC meeting in Vienna last week was problematical because it implied, perhaps accidentally, a level of coordination that goes beyond just jawboning allied oil producers to put out more oil to replace Iranian barrels. The controversy surrounding Mr. Hook’s visit to Vienna calls attention to the age-old question that has plagued OPEC in recent years: what oil price should be considered too high or too low? One might have thought that issue would have been front and center in OPEC’s recent deliberations. As prices rose to $86 in October, the ramifications for emerging market economies looked dire. U.S. President Donald Trump took to twitter and both publicly and privately the U.S. made the point that oil prices above $65 would be problematic for the global economy. There seemed to be evidence to that view as economic growth and oil demand appeared to falter in the months when oil prices were climbing. Earlier this year, Saudi Arabia indicated that oil prices of $70 to $80 might be more to its liking, begging the question whether the kingdom’s own economic pressures would prompt it to view the world’s ability to absorb higher oil prices too optimistically. OPEC has used the vocabulary that it is just trying to “stabilize” oil prices or “balance” the market but those terms are meaningless without a reference to a price range at which that stability would be defined. Certainly, OPEC and Saudi Arabia specifically, can ill-afford pushing oil prices up to costs that would harm the health of the global economy and thereby crater oil demand more extensively. In that regard, the United States and Saudi Arabia should be seeing eye to eye. Moderate oil prices seem to be in OPEC’s long run interests, not only to avoid a massive drop in oil demand, like the one seen in 2009 during the world financial crisis, or like in 1998 from the Asian flu, but also to stave off the acceleration of competing technologies that might someday bring about a peak in global oil demand.  The higher the oil price now, the more unconventional oil and gas is likely to leave U.S. shores in the coming years, and the more large logistics companies and others will shift to optimization technologies that will limit oil use. There is also the bevy of alternative transport fuels waiting in the wings for the new oil price spike, including electric batteries, natural gas and hydrogen.   The very concept that these alternative technologies exist has changed the politics of U.S. oil-for-security alliances from within U.S. domestic political leadership circles. U.S. Democrats are far more vociferously questioning the usefulness of the U.S.-Saudi alliance these days. Importantly, Democrats are still highly committed to the clean energy transition so any arguments that Saudi Arabia is an important U.S. ally on oil prices falls on deaf ears. Oil price volatility is a defacto raison d’etre to support electric vehicles and the full left-wing agenda on clean tech. Thus, President Trump’s rhetorical comment that a failure to resolve U.S.-Saudi differences constructively could lead to $150 oil fails to stimulate concerns. High oil prices promoted by OPEC would undoubtedly hasten the clean tech revolution while at the same time stimulating U.S. jobs in the shale industry. If U.S. motorists don’t agree, the U.S. Congress has a piece of legislation to sell that would authorize the U.S. attorney to file anti-trust charges against OPEC for manipulating oil prices. That legislation weighed into OPEC’s deliberations in Vienna and might be one reason Qatar has chosen to quit the organization since passage of the legislation could affect U.S. infrastructure assets such as LNG export terminals and refineries owned by OPEC members. In early October, Qatar’s current energy minister told the press that peak oil demand was real and that the world was “pushing oil away as much as possible.” Other OPEC countries have expressed similar concerns privately, pitting them against fellow members who might favor policies that produce short term revenues. As Democratic leaders have been suggesting, there is a coming wave of energy innovation that could mean Saudi Arabia will play less of a role in changing global energy markets. The Saudi leadership is well aware of this existential problem and it is likely one of the reasons its role in global affairs has become more erratic. But while these technological gains are transforming global energy markets, they are not a spigot. Their exploitation requires the investment decisions of dozens of independent private companies who are following market signals and government incentives that have been unsteady of late. The gradual nature of the digital energy transformation means that temporary events, most recently the economic crisis in Venezuela and U.S. sanctions on Iranian oil, can give OPEC, and even Saudi Arabia on its own, substantial, albeit brief, market power. This proved an uncomfortable fact for U.S. President Donald Trump this fall and for the fragile global economy more generally. It is the reason the U.S. Congress is looking at legislation to defang OPEC. As the U.S. Congress debates various options, it should continue its policies supporting U.S. makers of electric cars especially because alternative engine technologies help wean the global economy off its reliance on OPEC oil more rapidly. As recent commodity price volatility and OPEC’s recent deliberations shows, that will take more than just exporting two or even three million barrels a day from U.S. shores given ongoing instability in many oil producing regions. In trade talks with China and European automakers, the Trump administration should shift to be a leading voice promoting advanced automotive technology, including for trucks, and adjust any proposed tariff rates accordingly to incentivize advance of new technologies. Congress should protect policies promoting advanced automobiles in the U.S. and consider stronger efficiency standards for delivery trucks and large freight vehicles. Congressional leaders should also press the Trump administration to quickly settle favorably with California on standards for diversified fueling options. The administration must give more weight to the fact that use of alternative fuels at home in cars and trucks (electricity, natural gas and biofuels) would free more U.S. oil for export to water down the importance of Saudi oil. It’s time to recognize that it is no longer wise to say the United States must back erratic actions of oil producing states because of their premiere role influencing global economic trends. More direct U.S. leadership to reduce the world’s vulnerability is needed, not only for one OPEC meeting, but for a more strategic future.

Relations between the two countries, long bound by common interests in oil and security, have strained over what some analysts see as a more assertive Saudi foreign policy.

This is a guest post by Jareer Elass, an energy analyst who has covered the Gulf and OPEC for 25 years. He is a regular contributor to the Arab Weekly.  As the 2019 budget season approaches, Saudi Arabia has made a point of announcing strong figures for the first three quarters of 2018. In a sign that Riyadh would like to continue this robust economic health into 2019, Saudi Oil Minister Khalid Al-Falih on Sunday announced Riyadh’s plans to cut crude exports by five hundred thousand barrels a day (b/d) next month. This effort would counter any buildup of oil inventories going into next year. The minister made his remarks in Abu Dhabi on the sidelines of a technical market monitoring meeting of the Organization of Petroleum Exporting Countries (OPEC) and other producers including Russia.  The Saudi minister’s statement was meant to signal Saudi Arabia’s desire to push the oil producer coalition towards an agreement to make a new round of oil production cuts at its upcoming full meeting in December. Agreement would help ensure oil prices don’t collapse, particularly as U.S. crude production continues to surge. That strategy, however, could put the kingdom directly at odds with the Trump Administration, which continues to voice concerns about high oil prices. When announcing temporary waivers for Iranian oil sanctions last week, U.S. officials specifically noted the necessity to delay full implementation of the new sanctions to prevent global oil markets from overheating. Some OPEC officials were miffed by the U.S. waivers, which they didn’t anticipate in their calculations earlier in the fall to increase production which is now contributing to the fall in oil prices. Strong economic showing is important to the Saudi government, which is now benefiting from its smartly conservative budget process for 2018, as well as fiscal reforms that have brought in more non-oil income. The Saudi Finance Ministry reported in its third quarter budget analysis that the kingdom had slashed its deficit by 60 percent from $31 billion to $13 billion in the first nine months of 2018 when compared to the same period last year. The ministry credited substantial growth in both oil and non-oil income. The kingdom’s total revenues for the first three quarters of 2018 grew by 47 percent compared to the same period last year to nearly $177 billion. That included a similarly large jump in oil revenues during the first nine months of this year to $120.5 billion compared to the same period in 2017. Saudi oil revenues rose 63 percent between the third quarter 2017 to third quarter 2018 to around $41 billion, attributable to not only higher oil prices but to the kingdom’s high production rates in recent months. However, the Saudi government believes the strides made in non-oil income so far in 2018 deserve particular credit. Non-oil income grew 45 percent from third quarter 2017 to third quarter 2018 to total $18.5 billion. Referring to the third quarter 2018 budget analysis, Saudi Finance Minister Mohammed Al-Jadaan said, “While clearly assisted by improvements in the oil price internationally, these figures also show the fruits of the successful implementation of many initiatives to develop non-oil revenues and improve spending efficiency.” The Saudi regime reported that even though the deficit had fallen in the first nine months of 2018, government spending rose by 25 percent from the first nine months of last year to nearly $190 billion in 2018. Riyadh highlighted the new Citizen’s Account social benefits system that was established at the end of 2017, as well as higher living allowances and infrastructure spending for the rise.  The Citizen’s Account system covers approximately three million families and 10.6 million beneficiaries -- the equivalent of half of the kingdom’s population – and was intended to blunt the repercussions from fiscal reforms, including reductions in domestic energy-related subsidies and the introduction of both a “sin tax” and a 5% value-added tax (VAT) -- the latter of which was implemented last January. The government anticipated spending as much as $8.5 billion in 2018 in monthly Citizen’s Account payments to recipients, who are comprised of lower- and middle income Saudi nationals. The government does not seem to be planning on curtailing the welfare assistance program in the coming year. When the Saudi government announced its 2018 budget last December, it had forecast a deficit of $52 billion. But last month, the finance minister reported that the kingdom would see a deficit closer to $39.5 billion. While fiscal reform has certainly helped – including an expected windfall of $6 billion from a year’s implementation of the VAT – the improved deficit benefited from the fact that the Saudi government conservatively based its 2018 budget on a Brent oil price of between $51-55 a barrel. Spot Brent prices are expected to average around $20 a barrel higher than that in 2018. However, as upbeat as the latest figures are, the Saudi economy still faces challenges ahead that have been exacerbated by the circumstances surrounding the death of Saudi journalist Jamal Khashoggi. In the week ending October 18th, the Saudi Tadawul stock exchange saw sell-offs totaling close to $1.1 billion. The Tadawul continued lose foreign owned stocks the following week before the Saudi government was rumored to have swiftly intervened to restore market stability.  A healthy stock market is one of the central pillars of the Saudi government’s plans to restructure the kingdom’s economy away from a dependency on oil revenues. The Tadawul has been touted as an integral component of the much-awaited initial public offering (IPO) of Saudi national oil company Saudi Aramco. The sudden drop in the Saudi stock market in light of the Khashoggi affair has raised concerns anew about whether the Tadawul has sufficient liquidity to handle Saudi Aramco shares, especially if it could be vulnerable to domestic uncertainties. Foreign direct investment in Saudi Arabia has also been dropping, reportedly by as much as 80 percent between 2016-2017 – declining to a 14-year-low. Capital flight from Saudi residents has also been on the upswing. According to a JPMorgan report, which was published prior to the Khashoggi scandal, capital outflows from residents in Saudi Arabia was expected to reach $65 billion this year, or 8.4 percent of GDP. However, this figure is notably lower than the previous year’s figure of $80 billion. Reduced foreign direct investment and increased capital flight would mean the Saudi government will have less flexibility on oil prices. Senior U.S. officials have called on Riyadh to wind down the costly Yemen war, but it remains unclear how events on the ground in Yemen will proceed. As a new U.S. Congress takes its seat and the U.S. president makes his position on oil prices well-known, OPEC is taking a cautious approach to how it communicates about oil prices. In oil markets, all eyes will be on Saudi Arabia as its policies towards OPEC and Yemen will be watched closely.

This is a guest post by Benjamin Silliman, research associate for Energy Security and Climate Change at the Council on Foreign Relations.  When the Trump administration announced temporary waivers to sanctions on Iran’s oil last week, officials cited concerns about global oil price spikes. The more cautious approach appears to have given oil markets a reprieve, but the Organization of Petroleum Exporting Countries (OPEC) may consider a new round of production cuts when it meets in Abu Dhabi on November 11th. Central to decision making for both U. S. leaders and OPEC ministers is a debate over the signs of distress in major emerging markets. Expectations for the price of oil in 2019 are particularly scattered with predictions ranging between $65 and $100 per barrel. The $100 camp focuses mainly on tail risks to oil supply, including disruptions involving the Iran sanctions, continuing loss of production in Venezuela, and questions over Saudi and Russian output. However, oil is also experiencing negative contagion effects from other markets, especially indicators of financial vulnerability in emerging economies. Severe currency devaluation threatens sustained oil consumption in some of the most rapidly developing markets, prompting some analysts to predict that the current downward move could become more permanent. Paradoxically, any sudden upwards movement in oil prices could stimulate their eventual collapse by pushing weakened economies over the edge. Structurally, technology and efficiency gains in the countries of the Organization for Economic Cooperation and Development (OECD) have been flattening oil consumption in recent years. But global oil demand has been supported by rapid growth in emerging markets. For example, China, India, Russia, Brazil, Turkey, Argentina, and South Africa are some of the largest sources of growth in the world. Together, their consumption has grown about 16% in the past five years. Figure 1 demonstrates the magnitude of growth in developing countries as compared to the OECD. Now, after years of remarkable growth, these economies are experiencing tougher times, as manifested by ongoing currency and inflationary pressure, tightening monetary policy, and U.S. inspired trade wars.   U.S. tariffs against Turkey, followed by Turkish retaliation, have stymied the flow of U.S. dollars into the Turkish economy. Without strong currencies supporting the lira, it sank nearly 40 percent against the dollar in just 8 months. But, Turkey was not the only country to see economic problems and the dollar rise affect its currency. Argentina’s peso has also fallen more than 45 percent versus the U.S. dollar in 2018 after the United States Federal Reserve raised interest rates and the country moved to dollar-defined assets. So far this year the South African rand, Russian ruble, Brazilian real, and Chinese yuan each fell more than 9 percent against the dollar. As the U.S. dollar has risen  compared to a mix of standard international currencies, oil has risen in effective price because oil is priced in dollars on the international market. Emerging market countries have been hit not only by the nominally higher price of oil, but also by lower value currency with which to purchase it. With significantly more expensive energy, some analysts are predicting a slowdown in the oil market. At a minimum, it will drive affected countries to find ways to reduce oil consumption until their currencies stabilize, hence the sentiment of slowing oil demand as we enter 2019. These seven countries mentioned above account for more than one-fifth of the world’s oil consumption. While changes to demand from currency devaluation has been small so far, rising interest rates in some of the same countries could slow new investment, thus creating concern about recessionary pressure. South Africa’s economy is already succumbing to harder economic times. Turkey’s geopolitical ally, Qatar, has attempted to mitigate a recession with a pledge of $15 billion in direct investment into Turkey’s financial markets and banks. Now all eyes are on China and India, which appear to be posting slower economic growth than expected. The global oil industry has weathered emerging market crises in the past. Thailand saw swift growth in the early 1990s owing to foreign direct investment, but then experienced a sharp economic setback when the United States raised interest rates in 1997. A shortfall of foreign currency at that time forced Thailand’s government to float the exchange rate of the baht, which dropped nearly 40% in value against the U.S. dollar to which it was once pegged. Aptly dubbed “The Asian Flu,” Thailand’s currency crisis spread to Singapore, Malaysia, Indonesia, the Philippines, and eventually China and Japan. Slumping Asian currencies began to impact regional stock markets, bringing about a full-blown Asian recession and accompanying slowdowns in oil consumption. Between 1997 and 1998, Asian oil consumption fell by 1.9%, a dramatic reversal from extraordinary growth of 4.5% between 1996 and 1997. China’s oil use fell by 0.3% in 1998, a sharp reduction from its prior growth rate of 11.5%. The sudden drop in Asian demand sunk the price of oil as low as $10 a barrel. Evidence of easing oil demand growth has started to gain attention in recent months. Figure 2 shows the relatively flat to declining oil demand trends for China, India, and South Africa. Brazil’s trends have been more volatile due to worker strikes last spring that included work stoppages by truckers. Notably, oil use growth in China has moderated this year, partly due to advancements in energy efficiency and also possibly a signal that economic growth has been slower than recognized. India saw big consumption growth earlier in the year, but it has fallen off as oil prices have risen. These trends call into question the wisdom of assuming that growth in emerging markets will continue to drive oil prices into 2019-2020. All of this means that predicting oil prices for next year may be more of a dice roll than usual. Countries must walk a tightrope in terms of trade policy, monetary policy and oil production for major oil exporting countries. Any misstep could trigger further economic deterioration and that, as the announcement of the start of U.S. sanctions on Iranian oil exports demonstrated, is constraining choices.