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Opinion & Analysis

Qatar blockade unlikely to impact on oil prices

A ship offloads crude oil at the KPA’s jetty in 2011. FILE PHOTO | NMG
A ship offloads crude oil at the KPA’s jetty in 2011. FILE PHOTO | NMG 

When the world has surplus oil, geopolitical happenings in the Middle East will have minimal impact on global supplies and prices.

This is of course unless there is significant physical disruption of oil production or blockage of export routes.

The ongoing diplomatic and economic embargo on Qatar by the four Arab states of Saudi Arabia, United Arab Emirates (UAE), Bahrain, and Egypt — who accuse Qatar of funding terrorism — is unlikely to significantly impact global oil prices as the world is currently over-producing.

It will be difficult for commodity trade speculators to justify “talking up” prices on the basis of the ongoing Middle East crisis.

According to recent data, Qatar produces about 1.9 million barrels per day (bpd) while the Organisation of Petroleum Exporting Countries (Opec), of which Qatar is a member, produces about 38.2 million bpd out of global production of 91.7 million bpd.

Qatar’s production share is not significant enough to influence the global supply and demand balance.

However, it is in the natural gas production and trade that Qatar is in global leadership.

Although a relatively small peninsula, the country has expansive offshore acreage which contains the third largest natural gas reserves (13.1 per cent) in the world, after Russia and Iran.

Qatar is the number one global exporter of LNG (liquefied natural gas) and hosts an elaborate network of petrochemical industries.

If anything, it is natural gas related trade that is likely to be impacted by the ongoing Gulf stand-off. Contrary to expectations, in the past week oil prices have actually been softening below $50 (Sh5,150) per barrel. This is because the Opec “unity of convenience” to limit crude oil production is threatened by the ongoing Middle East disagreements.

Iran, which is an unwilling participant in the Opec oil production pact, may find a strong excuse to wriggle out of the production quota obligations.

If the Opec driven agreement does not hold, it may result in free-for-all over-production which will tempt prices to drop.

Upstream investments

Days are gone when the slightest geopolitical upset in the Middle East would set oil prices in a panicky upward trend. The world has since the mid-1970s gradually weaned itself from over-dependence on Middle East oil as new oil production basins opened up.

New upstream investments and technologies have led to a global oil over-supply which in mid-2014 sent prices plummeting from over $100 to as low as $25 barrel.

Currently, prices are oscillating around $50 per barrel.

In Kenya, interest on the subject of global oil prices is bipolar. On one hand we have the oil exploration and production investors and stakeholders who are anxiously hoping for an upward oil price recovery to support investments.

And on the other, we have the oil importing Kenyan economy which delights in downward oil price trends. Cash savings from oil imports today are more useful to the economy and consumers, than anticipated oil export revenues five years from now.

Funded by its hydrocarbon resources, Qatar has an expansive sovereign fund with surpluses available for global investments.

Kenya has been working hard on trade and investment opportunities with the Qataris, and this is why any prolonged economic disruptions in Qatar would hurt Kenya’s prospects.

Qatar is also a major employer of Kenyan skills and labour. President Uhuru Kenyatta made an official tour of Qatar in 2014 to pursue economic ties with that country.

However, it is the allegations by its protagonists that Qatar could be sponsoring and funding terrorism that should worry Kenya, a country that has and continues to experience disturbances from terrorism.

Kenya will therefore need to soberly listen and watch the unfolding events in the Middle East without rushing to any uninformed conclusions.

The way I see it, the world will ensure that the Middle East situation does not escalate to a point of global trade disruptions, nor degenerate into a regional humanitarian crisis.

Qatar will need to be given a fair chance to defend itself with respect to the “terrorism support” accusations. In the meantime, the ongoing global oil over-supply is expected to cushion the world from a price spike.

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