(MENAFN- Arab Times) The former assumptions that the demand of crude oil would continue to rise, that supply would become increasingly difficult to find and the degree by which new supply would be discovered would run parallel to high costs leading to an increase in the price of oil are being proved wrong. Dr Edward Morse, managing Director and Global Head of Commodity Research at Citigroup USA believes that demand for crude is not on the rise but will rather reach a tipping point globally with abundant supply.
The cost of finding and developing oil outside the Middle East will continue to fall leading in a price reduction. North America is becoming the new Middle East, he stated, speaking at National Bank of Kuwait's annual symposium on 'Navigating Global Risks' with speakers from its International Advisory Board at Sheraton Hotel, Saturday evening.
The US has become the fastest-growing oil and gas producer in the world on account of the discovery and exploitation of the Bakken Shale resources. "Five years ago, the state of North Dakota produced virtually no oil, today it is almost a million barrels a day."
In the US, reserve base estimates according to the industry about100 billion barrels of oil which are more than reserve holdings of Kuwait, he informed. He also pointed out that it is estimated that the shale resources of the state of Wyoming although is difficulty, is estimated to contain 1,500,000,000,000 barrels of oil, estimates on the reserves that have been discovered are such that the state of Pennsylvania is estimated to have at least as the state of Qatar.
Rapidly unfolding technology has created a surge in US production of oil and natural gas, as a result of this, the US is pushing out light sweet crude oil. Morse indicates a compression in the spread of light sweet crude owing to the reduction in value pointing out that Nigerian flows have already reduced to 200,000 barrels a day.
Another threat on the horizon is the change in ratio of natural gas to crude oil. This presents a series of dilemmas for OPEC producers signaling a day of reckoning that will require diversification of the economy to sustain growth, he warned. Despite the good news in the energy sector, the US faced significant short run problems.
Martin Feldstein, President Emeritus of NBER and Professor of Economics at Harvard University, stated that the long run looked positive for the US because of the structure of the economy and its labour markets as well as the entrepreneurial spirit of the country and the capital markets that support that.
However in the short term, the US faces major problems of a slow growing economy with high unemployment and problems of fiscal and budget imbalances. Five years after the start of the recession, the US GDP per capita is lower now than when it turned down.
"This year in 2013, we are going to be lucky if we see a real GDP growth as high as 2 percent", he said, despite positive changes coming from energy sector and a turn around in housing, noting that they were strong enough to outweigh the negatives and lead to higher growth.
The weakness of the household sector with high unemployment which officially stands at 8 per cent is actually higher, going up to 15 percent considering those who haven't looked for work recently or those who are involuntarily working two or three days a week; a large fraction of this number has been out of work for six months or more.
It is also important to take note that those who are employed have not seen their incomes rise. "Average weekly earnings are no higher now than they were a year ago and a broader measure of income will disposable personal income per capita has also gone up less than one percent.
The only reason that consumer spending has held up is because households have been willing to cut their savings range, down to less than 2.5 percent", he shared. If consumers, that represent 70 percent of the GDP in the US, are not expanding rapidly, he inferred that businesses are not going to invest to increase capacity.
Trade, impacted by declining GDP in Europe and slowdown of GDP in Asia will lead to weaker exports. "But the major drag in 2013 will come from the change in fiscal policy, we longer have the stimulus that was enacted in 2009 and lasted for three years.
Instead, we will see a significant reduction in government spending and increase in taxes," he stated adding that they represented nearly as much as the increase in growth last year. The monetary policy of the Federal Reserve, he deemed, will not be able to offset that. The rise in fiscal deficit and debt to 7 percent of GDP and 73 percent of GDP is cause for worry if there isn't policy to change that.
In ten years, the fiscal deficit will be at 5 percent of GDP even if the economy is back at full employment and interest rates at normal levels and debts will be close to a 100 percent. The chances of improving that, he adds, are not very good because improvement in the fiscal outlook will require legislation which seems impossible in light of a divided US Congress.
Euro Zone
Josef Ackermann, Chairman of Zurich Insurance Group in Switzerland and Former Chairman of Deutsche Bank Group, stated that the destruction of the Euro zone would prove to be more expensive than further construction urging that a united Europe was necessary to negotiate at a high level with other major regions in the world and political will to maintain the current system is strong.
He expressed his view that the Euro zone had done well in reducing the Greek debt to a sustainable level of Greece, putting up a firewall to absorb contagion risks, recapitalizing the banking system to make it more resilient to external shocks, injecting liquidity so that the funding of the financial system could be improved and developing its governance.
"The EU has made tremendous progress in a relatively short period", he stated, adding that markets at present seem too positive considering the fundamental challenges that still exist.
The two major incidents of the European Central Bank's injection of a trillion euros of liquidity in the financial system and secondly its commitment to do whatever is needed to save the Euro, as stated by the Governor of the ECB has reassured the people concerning the political will.
However, risks do exist, firstly that of creating resentments between different parts of the Euro zone. Secondly, too much focus on austerity has led to low job creation and compounded a lop sided labour market with youth employment in some of the countries risen to an alarming rate of over 50 percent or even 60 percent with the chance of security risks stemming out of that.
The competitiveness of countries has not been tackled on account of being locked in a monetary union which doesn't allow one to alter the exchange rate and valuations.
"This is making life very difficult for most of these countries in the product range and the unit labour cost level they have achieved" said Ackermann. He continued, "We are moving from major disequilibrium through the financial markets being too behind in their assumptions in the Eurozone to a new equilibrium which is requiring a lot of adjustment processes that are very expensive."
He pointed out that Europe was now at a stage where the German government had succeeded in convincing all the participating countries that more monetary discipline was needed. But he believes the focus should be diverted to job creation in order to move to the next step. Structural reforms are needed in those countries that are lacking and the EU has to improve governance going forward towards a fiscal union and a political union in the end.
"For this, we need a new vision. The vision of only peace and no war has been a very convincing one after the Second World War and for the generation thereafter. But today's generation hasn't witnessed war firsthand in Europe", he said. So what is attractive to people today and needed to further develop a united Europe is the motivation to create a level playing field of negotiation with other major regions in the world.
European Countries on their own are too small to negotiate at a high level with the US, China or India. Rethinking the governance of Europe is a subject that political leaders are hesitant to talk about as it opens up a Pandora's Box of having to adjust constitutions if more competencies are moved to a central government.
"Many of the issues right now are stemming from the fact that politicians are elected in national parliaments and no one is really being honoured for thinking in European terms. That is one of the key issues we have to start talking not only about costs and losses of the Euro zone but also the benefits."
Germany, would have to take the lead, but is hesitant to do so for historical reasons. The key question whether this would lead to a European Germany or a German Europe is what makes people nervous in some parts of Europe and is creating resentments, he shared. He shared his view that Germany alone had the capability to do so as it was equipped with the sensitivity and psychology required for the task.
Central Banks
The equity markets contradict other markets, shared Dr Mohamed El-Erian, Chairman of the President's Council for International Development - USA, noting that investors are torn between excitement and anxiety. Central Banks, he stated, have become the equity markets allies by divorcing the equity crisis from underlying fundamentals.
Fueled by a moral and ethical obligation, Central Banks push valuations higher, triggering a wealth effect that increases individual spending and an animal effect that encourages investment. "Central banks are doing what a pharmaceutical company does when it sees an epidemic - bring the medication to market even though it has not been clinically tested. Nobody knows for sure if Central Banks will succeed but we do know that there is collateral damage", he said.
The assumptions being made are that down the road the fundamentals will come up and validate the crisis and that the costs and risks will not exceed the benefit, he shared which is based on the inclination of investors to follow the herd causing markets to overshoot.
Looking at Europe without the benefit of history, one would notice bail out fatigue where creditors are less willing to write cheques for the debtors.
Secondly, one would notice an adjustment fatigue from debtors who have seen no real benefits to their efforts. Thirdly, Al Erian shares, there is a coordination problem even within the Troika of the IMF, ECB and European Commission that are charged for finding solutions. Fourthly, not only is there a lack of growth but a lack of a growth model in countries; lastly, political tensions round off the EU's problems.
He shared that the underlying problem one car infer from all of this is that the US and EU are trying to pivot from an old model of growth that depended on debt and leverage to a new model of growth and Central Banks in order to help this pivot, are buying time for the system to adjust. "In the US there is hope that this new growth model will emerge. In Europe unfortunately, there is reason to be less optimistic," he said.
China
On the emerging market front, William Rhodes, Senior Advisor for Citigroup stated that the world had been saved from a global depression and only faced a recession instead because of the tremendous stimulus package that China put out with the greatest amount of lending the world has ever seen.
The days of double digit growth for China are gone. They are going to have to work hard to maintain growth levels above seven percent and reforms would be necessary to do so. Rhodes highlighted the changes in China with its new President, Premier and standing committee.
Corruption has become a deep problem in China with the rising middle class demanding change along with pollution of the air, water and food. The new leadership, Rhodes suggested, would have to take on the second wave of the housing bubble.
Structural economic reforms like the opening up of the financial centre more rapidly than they have in the past, freeing interest rates, convertibility of the currency were needed along with a speeding up in the increase in domestic consumption as the export driven model is being phased out.
Also present at the Symposium, were John Major, Former Prime Minister of the UK, Goh Chok Tong, Emeritus Senior Minister and Senior Advisor of the Monetary Authority of Sinagpore, Lubna Olayan, Deputy Chairman and CEO of Olayan Financing Company, Abdlatif Al Hamad, Chairman and Director General of the Arab Fund for Economic and Social Development - Kuwait, Anthony Cordesman, Arleigh A Burke Chair in Strategy at CSIS, Charles Dallara, Chairman of America's at Partners Group, Tom De Swaan, Chairman of Van Lanschot Bankiers, Cees Maas, Senior Advisor Cerberus Global Investment Advisors and Honorary Vice Chairman and Former CFO of ING Group - Netherlands and Steve Hanke, Professor of Applied Economics at Johns Hopkins University.
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