Kuala Lumpur, 16 April 2020 – Malaysia is set to lose more than RM 300 billion in fiscal revenues over the next ten years if oil prices remain low. This is because the oil industry is facing an unprecedented crisis that will reverberate across countries and supply chain, leading to lower fiscal revenues and investment cuts.
This was discussed in a webinar organised by the Centre for Market Education (CME) and supported by IDEAS titled “Oil Economics in Times of Crisis and Energy Transition” held today. The speaker was Prof. Renato Lima de Oliveira, CME’s Board Member, IDEAS Senior Fellow and Assistant Professor at the Asia Business School (ASB). The event was moderated by Dr Carmelo Ferlito, CME Director and IDEAS Senior Fellow.
Prof. Lima-de-Oliveira explained the short-term causes and long-term threats to the oil industry and the impact of the COVID-19, OPEC infighting and energy transition. According to him, based on a field-by-field study, if the price of oil stays around the $30 mark from today to 2030, the world can expect a decrease, on average and per year, of US$170 billion in capital investments in new production capacity and US$616 billion in government revenues from crude oil, compared to a scenario of $60 prices. Also on average and per year, Malaysia is expected to lose US$1.7 billion in new capital investment and reduce the fiscal revenue from O&G by US$ 7.1 billion. This will put further pressure on the country’s finances.
In the short-run, the oil sector is suffering from a decline in demand from the COVID-19. About 57% of all oil demand is used for transportation and lockdown measures have put mobility to a halt. “Stay at home policies hit the oil sector particularly hard,” says Prof. Renato Lima-de-Oliveira, who teaches a course on energy markets at the Asia School of Business. At the same time, in March, Saudi Arabia initiated a price war with Russia and OPEC partners. At the time, there were less than 150k cases of COVID-19. In a matter of days (March 12), the World Health Organization declared it to be a pandemic and more and more countries adopted mobility restrictions, which further created a surplus in the oil market. To Prof. Lima-de-Oliveira, the Saudi decision was badly timed, but it is linked to a long-term strategy of monetizing their large reserves.
“OPEC had always to walk a fine line between restricting output too much (which encourages oil-to-oil competition and substitutes) and producing too fast, which would accelerate reserve depletion and decrease prices,” he said. OPEC members have enough oil reserves to produce, at current rates, for 86 years, while non-OPEC members (like the United States, Brazil, Norway, etc.) for 24 years. With the perspective of an accelerated energy transition, OPEC countries may end up with worthless reserves, unless they accelerate their rate of extraction now and occupy the market share currently taken by high-cost producers like shale from the US or ultra-deepwater from Brazil. With the rapid cost decline of renewable energy and advances made in Electric Vehicles and battery technology, Saudi Arabia and other OPEC countries may shift their calculation from restricting output to preserve reserves on the ground to increase the rate of extraction and monetize reserves at the same time that it attempts to delay the energy transition (by reducing the costs of fossil fuels). “The energy transition is underway and to sit on 80+ years of oil reserves may not the best commercial idea,” he added.
Prof. Lima-de-Oliveira concluded that for Malaysia, this scenario shows the importance of diversifying its sources of revenues (become less dependent on oil), innovate in the O&G sector to reduce costs and monetize the current resource-base and invest in building capabilities in the renewable sphere to create and preserve jobs in the energy sector.
*The recording of the webinar can be found here: https://youtu.be/NY7ThgzyRiQ
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