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In a little more than two weeks, Marina and I will once again be traveling to Windsor Castle outside London.
The annual Windsor Energy Consultation held under royal charter.
This year will mark the ninth year in which I have briefed the gathering. The importance of that meeting, and the way in which it galvanizes global energy conversations, will be something we will continue to cover over the next couple of weeks here.
But there is one matter that will be discussed there that I want to bring to your attention today…
It involves a new "energy revolution" that is already sending shockwaves throughout the global energy sector.
So let's take a look…
The Middle East's Energy Diversification
A central theme at this year's Windsor gathering will be the Middle East's move to diversify away from oil – and the impact that has on broader regional economic diversification.
No one expects crude to disappear from the regional economies anytime soon, but reliance on other energy sources is quickly emerging.
Now another voice has entered that discussion…
One with a bit more worldwide visibility – International Monetary Fund (IMF) Managing Director Christine Lagarde.
Speaking on a panel organized by the Qatari Ministry of Finance and the local university in Doha, Lagarde noted that the IMF estimated oil prices would experience a gradual leveling off over the next three to four years, requiring that the Middle East develop a different economic model.
She added that the Middle East needs to invent a new economic model, given the changes in the region and rebalances, especially in the energy sector.
The IMF projection of languishing oil prices is not shared by other estimates.
The International Energy Agency (IEA) in Paris is projecting a modest increase in prices.
The key remains the level of global demand.
There, the projections gravitate to worldwide estimates centering about Asia driving the energy picture for the next several decades.
However, when it comes to oil prices, the outlier continues to be American production.
America's Energy Dominance
As I noted last week, U.S. production will only be increasing further, resulting in the United States becoming a net exporter of energy (both oil and natural gas) for the first time in six decades – ultimately surpassing Russia as the world's leading producer as early as this year.
This puts additional pressure on OPEC's drive to limit international production as well as the likelihood that prices will continue shooting up to match the 38% rise we saw between early August of last year and late January.
Now, it's important to understand that we do not need prices to be that high to make some nice profits from the sector.
Demand will continue to rise – pulled up by Asia – and that will be enough to highlight some nice moves.
This is even the case in the United States, where the prospects of continuing exports will allow American production to reach the higher-priced Asian market.
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All of this is to say that the U.S. is rapidly usurping power from Russia and Saudi Arabia in key overseas markets… opening up massive opportunities for investors.
But the changing mosaic in global energy patterns will adversely impact countries dependent on oil sales to fuel their central budgets.
The Public vs. Private Sector Dilemma
In her remarks, Lagarde observed that the entire economic recovery for MENA (Middle East and North Africa) should come in at about 3.2% against an average 5.6%; in the Gulf region, growth is expected to recover to 1.8% this year after declining slightly in 2017 due to oil production cuts.
Compared to the United States, these figures don't appear that bad.
Yet, you have to remember that the entire region suffers from persistent low growth, high unemployment, and weak governance.
When age discrepancy is factored in (these countries have the highest percentage of populations under 25, a demographic where unemployment and unrest are even higher), the situation is acute.
Not only are the economies undiversified, the problems are also accentuated by the fact that most of what is generated in revenue comes from the public, not private, sector.
In addition to moving from being rentier states (dependent on selling natural resources without value added components), they must likewise wean themselves from public sector-driven employment.
But that's just one piece of the puzzle. There is also an added element that is – once again – rising in concern.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.