WHY THE OIL DEAL IS NO BIG DEAL

To tackle the supply glut in the oil market, producers need to cut, not cap, their current production. This is not happening even in a best case scenario wherein Iran and Iraq fall in line with Saudi Arabia, Russia, Qatar and Venezuela, and everybody commits to a global deal

On Tuesday, Saudi Arabia and Russia, along with Qatar and Venezuela, decided to freeze their oil production at January 2016 levels, so as to stabilise oil prices, which have plunged in the past two year because of a supply glut. From a high of $115 per barrel in 2014, prices were down to $27 per barrel this January, and if the markets continue to be so awash in oil, it is possible that the prices would go down to $20 a barrel.

The impact of this price drop on oil-producing and exporting countries, which depend heavily on petrodollars to fuel their economy, needs no explanation. Indeed, the situation had become so dire that even resource-rich Saudi Arabia was feeling the pinch. This forms the backdrop to Tuesday’s deal.

The deal is the first in 15 years between members of the Organisation of the Petroleum Exporting Countries and a country that is not part of the cartel. The deal also gains significance because the two countries leading this agreement, Russia and Saudi Arabia, are generally not on the same geo-political plane. In fact, for months, they have been competing with each other in the oil market. While Riyadh has recently stepped into Moscow’s turf and sold oil to eastern Europe, Russia has jumped Saudi Arabia in oil exports to China. Outside the oil market, the two nations are also on opposite sides in the Syrian civil war.

However, while on paper the deal seems like a major development, on the ground, it may not be that big a deal after all. There are two reasons for this.

Missing Pieces: The deal does not include Iran and Iraq — yet. These are the other major oil producers in the world, and without their cooperation, the supply side of the oil price mechanism cannot be controlled. Indeed, the activation of the deal itself is pegged to the assumption that the other players will fall in line.

Iran: Having just been freed from Western sanctions (following an agreement with the P5+1 powers on its nuclear programme) which previously curtailed its oil exports, Iran, the Opec’s the fifth-largest producer, is now looking to leverage its proverbial black gold so as to resuscitate its economy. In the words of Iran’s Opec envoy Mehdi Asali, it is, therefore, “illogical” to expect the country to freeze production.

Indeed, oil production has already been boosted, and by the end of Iranian calendar year (March 20), it is expected that production will reach a record high of 5,00,000 barrels a day. On Monday, Iran sent off its first Europe-bound crude cargo in four years. And over the next 48 hours, it exported more than 7.1 million crude barrels, setting a new record, according to the Managing Director of Iranian Oil Terminals.

Still, on Wednesday, Opec president Mohammed bin Saleh al-Sada, who is also the Qatari Minister of Industry and Energy, met with Iranian Oil Minister Bijan Zanganeh to discuss a freeze by Tehran. They were joined by the Venezuelan Oil Minister and the Iraqi Oil Minister. While Iran did not commit to a freeze, it still took a positive stance on the issue. “The decision ... to stabilise the market and prices for the benefit of producers and consumers, is supported by us,” Mr Zanganeh told the official news agency after the meeting.

This means that while Iran may have publicly dismissed the idea of a production freeze for now, it may eventually still agree to some sort of a special capping arrangement. This will be for two reasons — First, Iran too is adversely affected by the  low prices, and second, it will only be able to increase production overnight to a certain level; beyond that, it will require large-scale, long-term investment, forcing its production abilities to plateau in the meantime. Hence, if the other producers make a good enough offer to Iran at the point, Iran is expected to at least consider it in all seriousness.

Iraq: In the popular imagination, Iraq may have been written off as besieged by the Islamic State terror group, but on the ground, it has made some significant recoveries and simultaneously also ramped up oil production. In January, Iraq’s output was a record 4.35 million barrels a day, and the International Energy Agency estimates that this figure may still increase. Sure, there are doubts about transporting the oil out of the country but even then, Iraq remains a major player. For now, Iraq is amenable to the deal and can be expected to officially join in, if the others also commit to a cap or a cut.

Inadequate measures: The second reason why the deal isn’t going to be a gamechanger is that even in a best case scenario, with Iran and Iraq on board, it is unlikely to change the oil price trajectory in a significant manner. This is  because the deal proposes a cap, not a  cut, in current production levels. In other words, even if the deal is implemented, the market will still have a over-supply of oil.

In this context, it in interesting to note that most Opec countries, such as Russia and Venezuela, are already pumping record high levels of oil. They are stretched to the maximum, and would have had to slow down even without a deal.

And then there is America’s shale oil factor: To understand the US’s role, one needs to go back a few steps. Historically, the OPEC cartel has managed to keep a strangle-hold on oil prices because demand far outstripped supply. The shale oil boom in the US, however, threatened to change that dynamic. Opec responded by striking at the one major weak point in the shale story: The relatively high-cost of production. The oil cartel pumped up production and deliberately depressed oil prices, hoping that American shale would become unprofitable in comparison.

While the shale industry did feel the pressure, the impact wasn’t as intense as Opec had calculated especially as shale prices continued on a downward path. Any let up at this point in the Opec’s efforts to keep oil prices low will give US shale companies just the breather they are looking for to get back into business.

Past experiences: A third problem with any Opec deal is cheating. In general, Opec members are not particularly transparent with their production figures and this leads to mistrust within the group. Non-Opec members are no better either. The last time there was a global deal of this sort — in 2001, when Saudi Arabia convinced Mexico, Norway and Russia to commit to production cuts — Russia went back on its word and, in fact, raised exports.

This oped was published in The Pioneer on February 18, 2016

IN NAYPYIDAW, DEMOCRACY DAWNS

Last week, Myanmar took one of its most definitive steps towards democracy: It swore in a Parliament comprised mostly of civilian lawmakers, brought to power through a largely free and fair election. However, the new Government still faces many challenges

Ruled by the military junta for five decades, and under a semi-military Government that secured its mandate though a rigged election for the last five years, Myanmar last week took one of its most definitive steps towards becoming a functional democracy: It swore in a new Parliament comprised mostly of civilian lawmakers brought to power through a largely free and fair election. In the 664-seat legislature, political icon and Nobel laureate Aung San Suu Kyi’s party, the National League for Democracy, which won a landslide victory in the parliamentary election held last year on November 8, has 390 members, while the military-backed Union Solidarity and Development Party, which was previously in charge, has only 42.

However, this does not mean that the military has been marginalised in Parliament since Army-appointed representatives still hold 25 per cent of the seats that were not open for election. But even factoring in this block of unelected members, it is noteworthy that the NLD still has a clear 50 per cent majority in Parliament.

The much-awaited big decision now is: Who will be the next President? NLD chief Suu Kyi is barred from taking the top job, as her sons hold British passports and the Constitution of Myanmar prohibits those with foreign nationals in their immediate family from the Presidency. This clause was specifically inserted to keep Ms Suu Kyi out of the presidential palace and it is possible that in due course of time, the Constitution will be amended.

But for now, there is no clarity on who will be the next leader. Ms Suu Kyi, who has long expressed her desire to be President, is holding back channel talks with the military and The New York Times has reported that the NLD may be offering the Chief Minister’s post in three key States to the USDP. But it’s difficult to tell how these talks are progressing. If the talks fail at least for the time being (keeping the option open for Ms Suu Kyi to take over the presidency later in the term), the focus will be on a proxy President: Ms Suu Kyi has no clear deputy in the party but more importantly, she has already said that irrespective of who wears the President’s tag, it is she who will be the leader of any NLD Government.

Either way, the new Government faces many challenges. First is Government formation. Having been in opposition for so many years, NLD members have no experience in national governance or institutional reform. This will make it enormously difficult for the new Government to guide the country through this crucial period of transition and deliver meaningful change and progress. The public, of course, has high expectations and it will be a huge setback to the democratic process if the Government fails to deliver, and at the end of the next five years, there is much public resentment.

Second, the NLD will have to carefully manage its relations with the military, which remains a powerful force. Ms Suu Kyi has done this with aplomb in recent years. She has a good working relationship with outgoing President Thein Sein  an important factor in the steady democratic transition of the past five years. Remember, when the parliamentary election was held in 2010, Ms Suu Kyi’s NLD, having been unlawfully denied the opportunity to form the Government even after having won the election in 1990, had boycotted. However, since 2012, after election laws were reformed, the NLD participated in several by-elections, all of which it won.

So, to that end, the NLD is off to a safe start. However, one mustn’t undermine the challenges ahead. For one, the possibility of a proxy President will add another variable to the mix and there is no telling how that it will affect the carefully-set equation between the NLD and the old military establishment. Moreover, the military is expected to keep the key portfolios of Defence, Home and Border Operations. This will further complicate matters of day-to-day governance and can easily become a source of friction. It could even lead to a full confrontation that may undermine Myanmar’s democratic transition especially since the military still has emergency powers.

Outside politics, the big issue for the new Government is fructifying the peace process with the ethnic armed groups. The Thein Sein Government made major progress in this regard last year when it signed a peace deal with the ethnic armed groups. However, fighting has continued despite the agreement to cease fire and violent clashes in Shan and Kachin States are threatening to undermine the peace process. This could lead to large-scale economic turbulence that Myanmar is hardly prepared to deal with. 

Also, the situation in Rakhine State, where most Muslim Rohingya are disenfranchised, remains volatile. At home, any decision of the NLD Government on this issue will be viewed through a nationalist lens but outside Myanmar, it will be seen as test of character for the peace laureate-politician. Notably, Ms Suu Kyi has maintained a studied silence on the Rohingya issue which hasn’t gone unnoticed in the international community.

Another long term challenge before the new Government will be dealing with China. Myanmar was close to becoming a Chinese satellite state when the junta decided to the reverse course. This has led to some cooling of ties between China and Myanmar but the latter is still deeply entrenched and unlikely to back away without a fight.

Ms Suu Kyi and the NLD will need deft diplomatic skills to shepherd Myanmar’s ongoing re-engagement with the West, without rocking the boat with a more assertive China that is presumable concerned about its interests being harmed. For this geo-political re-orientation to succeed, the Western countries must also understand that while do have a significant role to play in bringing positive change in Myanmar, and the new Government will, of course, dip into the large reservoir of support and goodwill but everybody needs to be cognizant of domestic and regional sensitivities.

This is also where India comes into play. Myanmar stands at the crossroads of India’s Neighbourhood First and Act East policies; and it is crucial to the development of India’s own North-Eastern States as well as its relations with South East Asia. However, India is still only a minor player in Myanmar despite its longstanding historical and civilisational ties. Though New Delhi has been pragmatic enough to do business with the junta since the 1990s, this has been far below potential. Meanwhile, other regional powers such as Singapore and Thailand, not to mention China, have soared ahead.

India has a lot of catching up to do but a good place to start will be accelerating the transport connectivity projects that are already in the pipeline. At the top of the list is the Rs2,904-crore Kaladan project, which includes a 225km-waterway on the Kaladan River from Sittwe Port to Kaletwa and from there, a 62km-roadway from Kaletwa to the India-Myanmar border. The India-Myanmar-Thailand highway and the Bangladesh-China-India-Myanmar Economic Corridor are the two other important projects that require immediate attention.

This article was published in The Pioneer on February 8, 2016