RotaractMUN 2016 ECOSOC study guide

THE ECONOMIC AND SOCIAL COUNCIL SOFIA, 23-30 JULY 2016 TOPIC A: LOW OIL PRICES AND THEIR IMPACT ON THE GLOBAL ECONOMY prepared by Alexander Sohl TOPIC B: IMPLICATIONS OF SLOWING GLOB

THE ECONOMIC AND SOCIAL COUNCIL

SOFIA, 23-30 JULY 2016

TOPIC A: LOW OIL PRICES AND THEIR IMPACT ON THE GLOBAL

ECONOMY

prepared by Alexander Sohl

TOPIC B: IMPLICATIONS OF SLOWING GLOBAL GROWTH FOR

THE GLOBAL ECONOMY

prepared by Plamen Patchev

Table of contents

THE ECONOMIC AND SOCIAL COUNCIL 3

TOPIC A: LOW OIL PRICES AND THEIR IMPACT ON THE GLOBAL ECONOMY 4

INTRODUCTION 4

RECENT HISTORY AND IMPLICATIONS ON THE OIL PRICE 7

2003-2014 8

2014-today 9

OUTLOOK DEMAND AND SUPPLY 11

SITUATION AND OUTLOOK FOR MAJOR OIL PRODUCERS 12

THE OPEC 12

DESCRIPTION OF THE OPEC 12

OUTLOOK SUPPLY 13

ECONOMIC SITUATION 13

NON-OPEC PRODUCERS 17

NORTH AMERICA (US, CANADA, MEXICO) 17

OUTLOOK SUPPLY 17

RUSSIA 17

OUTLOOK SUPPLY 17

ECONOMIC SITUATION 18

OTHER IMPORTANT ACTORS 19

THE IEA 19

THE IEF: A PLATFORM FOR DIALOGUE 20

IMPACT ON THE GLOBAL ECONOMY 21

FOOD PRICES 21

OIL DEMAND AND DEVELOPMENT 21

QUESTIONS A RESOLUTION SHOULD ANSWER 24

BIBLIOGRAPHY AND RECOMMENDED READING 25

Dictionary 26

TOPIC B: IMPLICATIONS OF SLOWING GLOBAL GROWTH FOR THE GLOBAL ECONOMY 27

INTRODUCTION 27

NATIONAL ACCOUNTING 27

IMPORTANCE OF THE GROSS DOMESTIC PRODUCT 31

STATUS QUO- SLOWING GROWTH AND ITS IMPLICATIONS 31

POSSIBLE APPROACHES TO THE PROBLEM 38

IS GROWTH FAIR? 42

IS GROWTH GREEN? 43

IS GROWTH IMPROVING OUR LIVES? 43

QUESTIONS A RESOLUTION SHOULD ADDRESS 44

BIBLIOGRAPHY AND RECOMMENDED READINGS 45

TOPIC B: ANNEX ON HISTORY OF GLOBAL ECONOMIC GROWTH 47

THE ECONOMIC AND SOCIAL COUNCIL

“Making ECOSOC a truly meaningful organ that has the capacity to make a difference calls for new approach This is so especially now, during times of hardened economic uncertainty that ECOSOC`s role and relevance is ever- increasing”

H.E Mr Miloš Koterec President, ECOSOC 2012

The Economic and Social Council (ECOSOC) was established under the United Nations Charter as the principal organ to coordinate economic, social, and related work of the 14 UN specialized agencies, functional commissions and five regional commissions The Council also receives reports from 11 UN funds and programs ECOSOC serves as the central forum for discussing international economic and social issues, and for formulating policy recommendations addressed to Member States and the United Nations system It is responsible for:

 promoting higher standards of living, full employment, and economic and social progress;

 identifying solutions to international economic, social and health problems;

 facilitating international cultural and educational cooperation; and

 encouraging universal respect for human rights and fundamental freedoms

It has the power to make or initiate studies and reports on these issues It also has the power to assist the preparations and organization of major international conferences in the economic and social and related fields and to facilitate a coordinated follow-up to these conferences With its broad mandate, the Council's purview extends to over 70 per cent of the human and financial resources of the entire UN system The Council meets in alternating years at UN Headquarters

or at the UN Office in Geneva The ECOSOC serves as the central forum for discussing international economic and social issues, and for formulating policy recommendations

addressed to member states and the United Nations system A number of non-governmental organizations have been granted consultative status to the Council to participate in the work of the United Nations

The Council has 65 member states out of the 193 UN member states, which are elected by the United Nations General Assembly for overlapping three-year terms Seats on the Council are based on geographical representation with 18 allocated to African states, 13 to Asian states, 8

to East European states, 13 to Latin American and Caribbean states and 13 to West European and other states.1

TOPIC A: LOW OIL PRICES AND THEIR IMPACT ON THE GLOBAL ECONOMY

INTRODUCTION

Many of us may still be able to imagine a time without the internet or cellphones, but most of

us will not be able to imagine a world without oil Children’s toys, pharmaceuticals, agricultural products and almost every good you can buy have one thing in common: their transport and the packaging, if not the product itself, need materials produced from petrochemicals So even though we have so many touchpoints, we hardly ever think about the world’s most important commodity, except for when refueling ours cars maybe

Mankind has been using oil for over 2000 years The first reports about oil use date back to Babylon and ancient Persia, where it was used in medicine and lighting The latter use case was

century the discovery of various distillation products and mainly kerosene from crude oil changed the industrial landscape Kerosene was used as lamp oil back in the day while today you may know it as jet fuel

1 http://www.unep.org/newyork/IntergovernmentalPolicyCoordination/EconomicandSocialCouncil/tabid/52272/

Figure 1: World primary energy usage (Mtoe) http://www.tsp-data-portal.org/

With new use cases and exploration of oil wells worldwide, oil soon became the world’s most traded commodity and replaced coal as most important source of primary energy Almost 2/3

of all produced oil products go into transportation, relating the increase in consumption to the increase in demand for transportation Other important consumers are the chemical industry

(non-energy use) and

Consequently the regions consuming most crude oil are developed and developing nations Therefore the demand is highly dependent on their economic success The demand for oil in most of the developed and developing countries exceeds their local supply Therefore they are depending on imports from oil-rich regions in the

Middle East, Russia, Africa or Latin America (see fig 3) This discrepancy between local supply and demand is the origin of the global hydrocarbon market

Figure 3: Oil Production and Energy consumption by Region source yearbook.enerdata.net

0 2 4 6 8 10

TOTA L E NE RGY CO NSUMPT I O N BY REG I O N

RECENT HISTORY AND IMPLICATIONS ON THE OIL PRICE

In addition to the geographical factors there is a lot more to consider when it comes

to the question of determining the price Since modern economies are highly dependend

on the availibility of oil, the market has also a political dimension, making it even more complex The figure 4 below shows the most important events with an influence on the oil price between the years 1841-2014 Events and developments influencing the oil price have become more frequent and drastic with the process of globalization

However, for the purpose of the Sofia-Serdika Rotaract Global MUN 2016, the ECOSOC

is recommended to address only the developments from the year 2003 onwards Nevertheless, it should be borne in mind that the event preceding the year 2003 can be seen as origins of many current developments

Figure 4: History of Crude Oil Prices 1861-2014 Source: Goldman Sachs Global Investment Research

2003-2014

From the mid-1980s to September 2003 the inflation adjusted price for a barrel of crude oil was under 25$ In the early 2000s the Chinese demand for oil increased due to an acceleration in economic growth, leading to a higher industry demand and a wealthier population with more vehicles on the road At the same time, aging oil fields and a lack of investment in the U.S decreased the production Similar developments can be observed in the United Kingdom, Mexico and Indonesia, leading to an increase to almost 30$/bbl in 2003

In 2003 the invasion of Iraq marked a significant event for the oil markets The war shortened the supply for oil even further and slowed down global oil production in the region The markets reacted to this scarcity and uncertainty with a dramatic increase in the oil price over the following years Until June 2005 the price broke the psychological barrier of 60$/bbl, reaching 79$/bbl in mid 2006

2005 marked a tipping point in price development Before 2005 the supply matched the demand

of crude oil, leading to elastic prices However, oil thirst in the BRIC countries continued to increase dramatically, leading to an excess demand for oil Drastic price swings and therefore inelastic prices are the consequent effect The price volatility in the following years is largely explained by shifts in demand for crude oil

This market situation is also an ideal breeding ground for financial speculation In the short term, financial speculations in the future markets may lead to price increases Some sources argued, the increase prior to the 2007/2008 financial crisis was also due to speculations in the future markets:

Interesting fact: During 2004-2007 the profit of all 6 supermajor companies (Exxon, Total, Shepp, BP, Chevron, ConocoPhilipps) totaled 498,8 billion $ and now over 250,000 oil workers have lost their jobs

Meanwhile, conflicts in the Middle East continued The situation in Iraq has still not settled and Israel and Lebanon went to war Additionally, North Korea started its missile launches and nuclear tests and tensions in eastern Turkey arose, followed by tensions in Nigeria On 2nd

July 2008 due to fired shots at an Iranian boat and speculations about an Israeli attack on Iran

Until the financial crisis took hold in July 2008, prices for oil plummeted to as low as 32$ in December that year The crisis left its marks mainly on European countries The European economy contracted and so did the demand for oil, impacting also the American economy, which reduced the demand even further A strong dollar also contributed to the development But the global excess supply was a short phenomenon As a reaction to the development of the global economy, the OPEC decreased its production, which lead to an oil price of 100$ in December 2010

In 2011 the Arab Spring with political turmoil in Egypt, Libya, Yemen, and Bahrain broke out Together with a weak dollar, this drove the prices back to 114$/bbl in May 2011 Especially supply problems in Europe held the European oil price high Libya was a major source for European oil imports, but production was halted after the civil war On the other side the pessimistic outlook on the European economy and concerns about another global recessions lowered the price to below 100$

With the European debt crisis still stunning the global economy and rising tensions with Iran, after sanctions due to their nuclear program, the price of oil stayed near 100$ The European debt crisis was the main influence factor for price swings during 2012 between 85 and 107$ The impact of the Libyan conflict still caused European oil prices to be higher than the U.S counterparts

In 2013 good economic data from the U.S., China and Europe drove prices Furthermore, trouble in Egypt and the Syrian conflict made investors uncertain, resulting in a high of 100$/bbl Global conflicts continued in 2014 The dispute over Crimea, the rise of IS in Iraq, Libya and Syria caused prices to stay high

2014-today

In 2014 a turning point was reached and the prices plummeted from over 106$ in June to as low

as 26$ in February 2016 But why did this price drop occur?

This complicated question may be reduced to the main economic principle: Supply and demand Since 2014 the production of oil has been significantly larger than consumption, ergo the markets react to this significant excess oil with a fall in prices

Figure 2 Oil Production and Consumption Balance, source: Short-term energy outlook May

2016 eia

The explanation for the excess demand on the other hand, is not so easy But, as always

in recent history, one could start with looking at the United States

With new platforms in the Gulf of Mexico connected to the grid and the exploration of shale gas and oil, the domestic production of oil in the US has nearly doubled over the last couple of years The Arabian, African and Southern American oil that once was sold in the United States

is now competing for Asian markets, and the producers are forced to drop prices

Canadian and Iraqi oil production and exports are rising year after year Even the Russians, who are heavily stricken by economic problems, manage to keep pumping at record levels and Iran,

in need for foreign currency, increased production after the agreement on easing sanctions in

2014

Figure 3: Top 5 oil producing countries source yearbook.enerdata.net

OUTLOOK DEMAND AND SUPPLY

Analysts expect that oil consumption in the OECD to stagnate this year and to resume its structural decline from 2017, driven by demographic and income trends, as well as by efforts

to improve energy efficiency

Meanwhile, demand growth in emerging markets will stand at 2.2%, its lowest rate since 1998 This predominantly reflects moderating economic expansion and declining energy intensity in China Furthermore, the boost to apparent production provided in 2015 by purchases for China's strategic petroleum reserves is likely to ebb Troubles in other major emerging economies—including Brazil and Russia, which are both forecast to face a second consecutive year of contraction in 2016—will further constrain demand growth outside the OECD This will be only partly offset by buoyant demand in fast-growing India In 2017 global demand growth will pick up slightly, to 1.4%, in line with a stronger world economy

US oil consumption is expected to rise by 0,3% in 2016, supported by steady economic growth and low fuel prices

On the Supply side 2016 and 2017 will be particularly challenging for oil producers globally as

a deepening plunge in prices hurts profitability and forces firms to slash costs, including on investment Reflecting these challenges, the world oil production is expected to slip marginally

Top 5 crude oil producing countries

in 2016, marking the first decline in seven years The fall will be entirely driven by non-OPEC producers, predominantly in the US Many non-OPEC producers managed to sustain—or even increase—output in 2015, despite depressed prices In part, this reflects an unwitting consequence of OPEC's strategy By focusing on maintaining its own market share over the global price, OPEC has encouraged its competitors to do the same The US output in particular

is expected to fall sharply in 2016 as shale firms face growing pressures from falling revenue and tightening financing conditions

SITUATION AND OUTLOOK FOR MAJOR OIL PRODUCERS

In the panorama of international institutions, the absence of a universal institution dealing with energy is quite remarkable Historically, the OPEC was established as first institution dealing with oil and its membership restricted to oil exporting countries

THE OPEC

DESCRIPTION OF THE OPEC

The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization of 13 nations, founded in 1960 in Baghdad by the first five members, and headquartered since 1965 in Vienna The 13 countries account for 40 percent of global oil production and 73 percent of the world's oil reserves, giving OPEC a major influence on global oil prices

OPEC's stated mission is "to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economical and regular supply of petroleum to consumers, a steady income to producers, and a fair return

on capital for those investing in the petroleum industry." As of June 2016, OPEC's members are Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia (the de facto leader), United Arab Emirates, and Venezuela Two-thirds of OPEC's oil production and reserves are in its six Middle Eastern countries that surround the oil-rich Persian Gulf

OUTLOOK SUPPLY

OPEC supply will continue to increase this year The much-anticipated meetings between OPEC countries (excluding Iran and Libya) and Russia (until 5th June) were flops Saudi Arabia insisted that any deal to freeze output should include Iran, which refuses to accept any such curbs as it attempts to rebuild its production following the removal of sanctions Nothing was agreed and consequently leading producers such as Saudi Arabia and Iraq keep pumping at record levels, while Iran will gradually raise output and exports back crude oil to pre-sanctions levels

The Saudis have all but said outright that their national priorities in energy would always trump OPEC priorities So the strategy can be summed up as “pump as much as you can, don’t let the shale boomers get a breather” have not led to a clear victory They have not led to a sharp rise

in prices, which was expected to take place after the shale producers threw in the towel But U.S shale companies have lasted much longer than expected The International Monetary Fund estimates that the revenues of Saudi Arabia and its Persian Gulf allies will slip by $300 billion this year

Technical issues and small production declines in Nigeria, Iraq and the UAE in February-March

2016 and a strike in Kuwait in April have highlighted how output in most OPEC members is close to sustainable capacity and thus vulnerable to disruptions

tougher Oman has told all state-owned enterprises to remove perks such as cars Qatari companies including Al Jazeera and the Qatar Foundation, a cultural organization, have laid off employees With such tweaks Kuwait, the UAE and Qatar, which have small populations and high foreign-exchange reserves, can get by for a decade

But the other three states are in a trickier position Oman and Bahrain have relatively low reserves Oman posted a larger than expected budget deficit in 2015, at almost 16% of GDP

By the end of 2017 Bahrain’s debt is expected to reach 65% of GDP It needs an oil price of

$120 to balance its books The two have other concerns, too Bahrain’s Shia-majority population bristles at being ruled by a Sunni monarchy There is a lack of leadership in Oman; Sultan Qaboos is, again, in Germany being treated for suspected cancer

Though, predictions that the oil price will not rise quickly are focusing minds on all sorts of structural reforms “This is good for the Gulf; it will be a rich period for policy-making,” says Nasser Saidi, an economist in Dubai The UAE cut fuel subsidies last year, and other states are following suit Bahrain removed subsidies on some food items Saudi Arabia raised the cost of electricity and water Oman is printing the cost of the fuel subsidy on household electricity bills

to prepare the population for paying the whole lot

But with real prices now near the subsidized prices, there is less room for savings from cuts than there was a few years ago And outgoings remain high It is not just that the Gulf states are committed to large infrastructure projects—metros, financial centers, ports and railways They spend billions of dollars on wages and handouts to their rapidly growing populations The relatively young states need to spend cash on education And they are embroiled in costly wars in the region

Making matters worse, cuts in spending affect the nascent private sectors where, apart from the UAE and Bahrain, most activity is linked to oil, such as services to the industry; and to public spending, such as construction Economic growth is slowing “The lack of countercyclical measures is amplifying the pain,” says Mr Nasser Banks are getting tougher on loans just when the state wants to encourage more small businesses By some reckonings, the private sector in the Gulf contributes less to GDP now than in earlier decades

The GCC countries need to do much more if the books are to balance in the future Diversification, long talked about, has to happen now, although it is harder to do it in bad times

Plans look good on paper—encouraging tourism and logistics, for example—but more uncertain in real life Saudi Arabia is not keen on Westerners trampling around the kingdom

A modest value-added tax, long discussed, of up to 5%, will be introduced across the region by

2018 Oman has raised corporate tax from 12% to 15% Other states are considering taxing expatriates’ incomes But above all, the public sector has to stop acting as the main employer That would be a big shift Gulf citizens have got used to earning without doing much Private firms are not creating enough jobs to keep up with the number of young people graduating from university, and large expatriate workforces provide tough competition Gulf rulers fear that cutting spending would alter the social contract in which largesse buys their people’s quiescence

But they have no choice A new generation of younger leaders, such as Saudi Arabia’s Muhammad bin Salman and Muhammad bin Zayed in the UAE, are more willing to make tough changes The GCC states have had amazing few years in which they built up infrastructure and savings But they did too little to prepare for a post-oil future Now they must catch up

Other OPEC countries are confronted with even more severe challenges The hardest-hit large producers in Latin America, Ecuador and Venezuela, are facing dramatic economic, social and even political consequences following the recent drop of oil prices The Ecuadorean economy, which still has to deal with the consequences of a heavy earthquake in April, is suffering from persistent fiscal weakness in the wake of low oil prices

Venezuela, where electricity is being rationed, the work week has been shortened and the government even changed the time zone to reduce evening electricity usage, remains rooted in

a profound political and economic crisis which is following years of economic mismanagement While oil prices have been slowly recovering for the past months and hit their highest level since October in May, oil prices remain too low to shore up public finances or mend the economy

While the International Monetary Fund (IMF) is convinced that lower oil prices should translate into higher spending and therefore support global economic growth, oil drilling countries keep

a wary eye on the current developments The role of energy, especially oil, in the states’ economy, the available mechanisms to hedge against the decline in oil prices and the impact of

low oil prices on private and state oil companies are three significant factors shaping the future

of highly oil dependent states

Venezuela and Ecuador, both dependent on the oil price as major exporters, are highly exposed

to the effects of low prices as their GDP depends significantly on oil rents (23,8% Venezuela, 17,5% Ecuador) The comparison with other major oil producers illustrates that the percentage

of oil rents adds significantly to the effects of policy mismanagement of a country's resources Oil rents in the United States (0,9%) and Brazil (2,5%) and even in Mexico (6,8%) make up only a small percentage of their GDP which gives clear evidence to the importance of a diversified economy

Major oil producing countries also have to rethink their strategies how to brace themselves for long-lasting low points of the oil price Sovereign wealth funds and long-term contracts could not proof to have an efficient buffering effect Venezuela implemented a macroeconomic stabilization fund in late 1990’s which mostly failed to help the state being largely spent on domestic consumption and increased government spending Others such as Mexico sought for help on the international financial market to insure against low oil prices

These states need to find a future strategy which will be partly made up by a mix of budget cuts and borrowing of international capital Unfortunately, this won’t be possible for those countries which have already drifted too deep into an economic depression as their status is mostly evaluated as risky investments The advantage a country could gain from a low oil price is difficult to establish, as low prices hurt domestic oil producers while it benefits major domestic energy consumers This will be problematic for heavily indebted state oil companies for example in Venezuela

In September 2015, the Venezuelan president Maduro demanded a minimum oil price of $70 and sought a fair price that would support economic growth and energy demand 95% of Venezuela’s export earnings dependent on crude oil which exposes them most brutally to any fall in the oil price Therefore, Venezuela called for an emergency meeting which was refused

by Saudi Arabia and other states as they were not ready to agree to a production limit, necessary

to achieve such rise of prices Analysts presume that the point where Venezuela could balance its country’s budget lies at $89 per barrel

Qatari energy minister Mohammed bin Salet al-Sad follows his example in May 2016 demanding a “minimum price of $65 a barrel for oil” Such increase of the oil price would be

“badly needed at the moment” according to the head of OPEC He suggests that member countries halt production to force the price of oil up The last meeting of the OPEC failed to result in a production freeze after Saudi Arabia backed off This is another proof of how the cartel has stopped existing as a united organization since major producers see themselves confronted to strong rivals like Russia and especially the USA If the distribution of power remains as it is, an agreement on a price and thus on a production limit seems very improbable

OUTLOOK SUPPLY

Russian producers will make every effort to sustain output in 2016-17, for two reasons at least First, both state-owned firms such as Rosneft and private companies face political pressure to continue contributing to the federal budget Second, many of Russia's most politically powerful

oligarchs are involved in the oil services and pipeline industries Their contracts depend on investment spending, which means that they vigorously oppose any decline in oil output But

EU and US sanctions, raise the cost of financing and prevent the export of high-end technology needed to maintain the current output

ECONOMIC SITUATION

Russia’s economy, which depends heavily on oil revenues with oil and gas accounting for 70

% of export incomes, is in recession The Kremlin’s desperation for higher prices is palpable; the country is committed to two wars, in Ukraine and Syria Heavy military spending has added

a further strain on the economy At home, wages are being cut, bringing signs of social unrest ahead of a parliamentary election in September With its GDP contracting by 3.7 percent and the value of the ruble falling about 127 percent in 2015, Russia is now in the midst of a severe economic crunch Various factors like falling oil prices, economic sanctions, and a weak domestic market have contributed to the ongoing downturn

The country’s status as an oil and gas producer, which previously helped its economic growth, has now emerged as its major challenge Russia’s energy minister, Alexander Novak, who attended the Doha meeting, has been a crucial supporter of a freeze A role assigned to Mr Novak was to bring in Iran, but he has failed so far

The country’s isolation from international markets and financial sanctions have only worsened the impact of falling oil prices However, it is the policy uncertainty within Russia that raises the largest questions over its short-term growth Russia’s 2016 budget was made in October last year on the assumption of $50 a barrel prices for oil The current prices stand at less than $30 per barrel, which means that the government has no other alternative but to make cuts

The Transatlantic Trade and Investment Partnership (TTIP) is also a matter of concern for Russia The TTIP is bound to impact the energy market, which works against Russia European stakeholders have long been interested in accessing the U.S crude oil and natural gas If the United States is able to supply these resources, it would reduce Europe’s dependence on energy imports from Russia According to World Bank forecasts, the Russian economy is expected to continue to contract in 2016, albeit a little less than last year Slow yet positive growth is expected from 2017 onward

OTHER IMPORTANT ACTORS

THE IEA

The International Energy Agency was created in contraposition to OPEC in 1974 as a response

to the 1973 oil crisis Its mandate is much broader as it deals with all forms of energy while comprising 29 member countries of the OECD The period of its birth was marked by deep conflicts between the US and some European countries Until then, mostly national policy measures were available to react to fluctuations on the oil market Although the original motivation as a bastion against OPEC is nowadays less important, IEA plays an important role primarily in the organization and management of the Emergency Response System and as a

“soft power” in the context of the global energy debate

Ensuring security of supply and solidarity among the major industrial countries is a core objective of the IEA, which makes its Emergency Response System a central feature of the organization Emergency oil reserves, programs of demand-restraint measures and oil allocation among IEA countries are part of the key strategy which was crucial during shortfalls

in Libyan production in 2011 for instance

The IEA established itself as a competent source of shared knowledge with respect to various technologies and the publication of scenarios about global energy futures Such scenarios are regularly elaborated by oil companies by OPEC and he US EIA, but access to them is only limited Therefore, the IEA scenarios published in the World Energy Outlook (WEO) are the most widely quoted and thus allows the IEA to shape the global energy debate Its involvement

in the G-7 meetings and contribution to the climate change agenda, energy poverty and other international policy debates are equally based on these scenarios

While oil is still the most important component of the global energy supply, its role is shrinking and thus the dialectic IEA-OPEC is no longer representative for conflict or cooperation between energy supply and demand Furthermore, the OECD is no longer the most important component

of demand Thus the IEA at times acts as if it were the universal energy agency, but due to its limited membership, it will never fully establish its position as universal organization The IEA will rely on its soft power which it could proof many times with its collaboration with IMF and World Bank

THE IEF: A PLATFORM FOR DIALOGUE

The International Energy Forum, also known as IEF, is the world's largest recurring gathering

of energy ministers The 88 Member Countries of the Forum are signatories to the IEF Charter, which outlines the framework of the global energy dialogue through this inter-governmental arrangement Covering all six continents and accounting for around 90% of global supply and demand for oil and gas, the IEF is unique in that it comprises not only consuming and producing countries of the IEA and OPEC, but also Transit States and major players outside of their memberships, including Argentina, Brazil, China, India, Mexico, Oman, Russia and South Africa Originally a sequence of conferences, the IEF now is promoted by a permanent Secretariat based in the Diplomatic Quarter of Riyadh, Saudi Arabia

The first years of the producer-consumer dialogue were mainly spent on slow confidence building after years of tense confrontation on the oil market Having built up their secretary, investment in oil and gas became important topics in IEF’s second decade With demand growing, concerns about supply being able to meet growing demand were mounting Prices were never discussed, because in the decade of liberalization it was believed that these were best left to the market and some countries did not wish to discuss them in such a forum While security of demand is a big issue for producing countries, consuming countries mostly sought

to intensify discussions when confronted with higher prices and the fear for secured supply Since the Amsterdam meeting in 2004, each IEF meeting has been accompanied by a business meeting The Charter, signed in February 2011 has elevated the status of the IEF further securing the engagement among the signatories The third decade of dialogue is challenging the dialogue as newcomers of producer and consumer countries bring new dimensions to the dialogue The establishment of the Joint Oil Data Initiative (JODI) is another visible example

of success of IEF addressing the issue of market data transparency Data collection methods in different countries must be improved with the assistance of the Secretariat

Twenty years after the first meeting took place in Paris in July 1991, the IEF has evolved into one of the most inclusive platforms for dialogue bringing closer together the two main consumer and producer organizations and ensuring their cooperation with the Charter: OPEC and IEA Although the IEF has achieved a certain degree of institutionalization structuring the dialogue without affecting the informality of the dialogue

IMPACT ON THE GLOBAL ECONOMY

FOOD PRICES

On average, oil prices roughly quadrupled during 2002 and 2008, triggering widespread protest activities A similar price surge for petroleum-based fertilizers contributed to the 2007–08 world food price crisis and further unrest

The connection between food and oil is systemic, and the prices of both food and fuel have risen and fallen more or less in tandem in recent years Modern agriculture uses oil products

Figure 5: Correlation of the food price index and the oil price index, source: FAO

to fuel farm machinery, to transport other inputs to the farm, and to transport farm output to the ultimate consumer Oil is often also used as input in agricultural chemicals Therefore, Oil price increases put pressure on all these aspects of commercial food systems

OIL DEMAND AND DEVELOPMENT

The global food price is a

demonstrate the impact of oil in sectors that affect everyday life Mostly, the oil price has a remarkable influence on transportation costs in general, as well as

on the industry sector, the commercial/agricultural/ residential sector and the electricity sector

Figure 6: Oil demand by sector in the OECD, source: OPEC

While the demand for oil is foreseen to decrease in the OECD countries until 2040, the outlook for developing countries differs significantly

Figure 7: Oil demand in Developing countries by sector, source: OPEC

High oil prices typically affect less-affluent countries first, particularly the developing world with less discretionary income There are fewer vehicles per capita, and oil is often used for electricity generation as well as private transport The World Bank has looked more deeply at

the effect of oil prices in the developing countries One analysis found that in South Africa a 125% increase in the price of crude oil and refined petroleum reduces employment and GDP

by approximately 2%, and reduces household consumption by approximately 7%, affecting mainly the poor

Looking at the table above, one can recognize that the future of developing countries highly depends on oil and thus, a stable oil price Many developing countries require large amounts of oil to promote their own progress Depending on the degree of development a country can achieve in the next years, oil demand for road transportation will grow as more and more people get access to the middle class and wish to benefit from newly gained mobility Adding to this, population growth will intensify these trends Furthermore, the need for food production and transportation in areas with weak infrastructure will increase It is also this primary infrastructure for which construction will rely on oil generators as electricity supply is still not guaranteed in many regions of the world The lack of electricity affects over one billion people

in the world, while three billion people rely on wood, coal, charcoal or animal waste for cooking and heating

Oil and other liquid fuels are often considered energy carriers of choice when it comes to establishing reliable back-up or peak demand power generation support systems This is not only true for developing countries but especially for states that are currently expanding into alternative power generation e.g solar and wind As long as fluctuations in power supply and demand are not fully balanced, there might be the need for fossil fuels and a reliable and fast back-up system To achieve Sustainable Development Goals, it is crucial to ensure access to affordable, reliable, sustainable and modern energy for all and promote innovation and green technologies especially in the transportation sector Nevertheless, oil won’t be easily replaceable in a few years – if it will ever be- , but it must be included into a sustainable process that does not endanger energy supply or economic systems

QUESTIONS A RESOLUTION SHOULD ANSWER

The dependency on a stable supply from the Middle East is evident This region holds half of the global oil reserves and is responsible for 1/3 of the current production There are ever new conflicts arising in the former colonial region and a new rivalry due to strong US oil drilling Could the future of the oil market lie within the hands of an international organization to find agreements on oil drilling regulations or will the oil market function as a free market? Which role could OPEC, IEA and IEF play in the future?

The Latin American states illustrate the complex situation in which highly oil dependent countries are stuck and the possible and necessary strategies such as diversification and borrowing that have to be considered to avoid an economic collapse in the following years of uncertainty on the oil market More efficient tools need to be developed by delegates of highly oil dependent countries How can these economies be stabilized? Which countries or institutions might have a great interest and the necessary measures to secure the position of such countries and which role could bilateral, regional or multilateral agreements play?

Since the price drop of 2014, the debate about new regulatory actions, especially an agreement

on a minimum oil price, was revived Nevertheless, Saudi Arabia, Iran and Non-OPEC countries continue their drilling activity without any sign of hesitation For many oil dependent economies within the OPEC this might soon endanger their economic and political stability How could an agreement be reached? Which price limit is desirable or necessary for the different states? Negotiation partners should elaborate on their own interest to find binding measures to limit future oil price fluctuations

And last but not least thinking one step ahead: To reach the 2°C climate goal, renewable energy technologies, green technology solutions for transport and many more innovations are needed Meanwhile, to achieve the basic Sustainable Development Goals, human development must be promoted quickly and efficiently How can oil resources help to realize the energy transition

many highly developed countries pursuit in the next decades? How can oil contribute to the construction of key infrastructure and electricity supply to promote basic human development?

BIBLIOGRAPHY AND RECOMMENDED READING

J Murray, D King, Oil’s tipping point has passed, Comment, 26 January 2012:

http://www.washington.edu/research/.SITEPARTS/.documents/.or/Nature_Comment_01_26_2012.pdf

C Krauss, Oil Prices Explained: Signs of a Modest Revival, New York Times, 02 June 2016

http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0

S Reed, A E Kramer, In Doha, Major Oil Exporters Fail to Agree on Production Freeze,

17 April 2016

to-agree-on-production-freeze.html

H Pant, Russia's Economy in 2016, 11 May 2016:

http://thediplomat.com/2016/05/russias-economy-in-2016/

The Economist, The low oil price is manageable in the short term; but the Gulf states must

make big changes to face the future, 26 March 2016

http://www.economist.com/news/middle-east-and-africa/21695539-low-oil-price-manageable-short-term-gulf-states-must-make

The European Commission, Energy Security Strategy:

https://ec.europa.eu/energy/en/topics/energy-strategy/energy-security-strategy

The United Nations, Goal 7: Ensure access to affordable, reliable, sustainable and modern

energy for all: http://www.un.org/sustainabledevelopment/energy/

Van der Linde, Coby & Luciani, Giacomo (2012): The International Energy Agency (IEA), the

Organization of Oil Exporting Countries (OPEC) and the International Energy Forul (IEF): The elusive quest for institutional cooperation in oil and gas international trade, POLINARES

working paper n° 60

Dictionary

Intermediate, Brent ICE, Dubai Crude, etc

TOPIC B: IMPLICATIONS OF SLOWING GLOBAL GROWTH FOR THE GLOBAL ECONOMY

INTRODUCTION

When speaking about growth or economic growth, a Gross Domestic Product-growth

is meant The GDP, an abbreviation for gross domestic product, is the value of all final goods

and services produced in a period (year or quarter of a year) within the territory of a country Normally, it is said, that if, for example in year 2016, the value of all final goods and services produced inside a particular country, exceeds with 2% the value from year 2015, then we are observing a 2% growth The term growth refers to the real GDP growth, that is, the value of economic output adjusted for price changes (inflation or deflation) This distinction is important

in order to remove the possible biasing of the result through inflation Presence of inflation would bias the result as inflation differs throughout the world, and the produced output of a particular country is measured in the national currency of the counry Thus, if inflation is present, the value of the output, measured in the national currency would get bigger, but a fraction of this number would be accounted to inflation and not to economic performance

An estimation of the economic growth is performed through the so called national accounts

This is in fact an accounting process done at aggregate level, that is, for the whole state as an entity As this process can get complex in its nature, the delegates should bear in mind only the most crucial issues will be outlined in the Study Guide “International Economics” by Krugman, Obstfield, and Melitz for example, provides intuitive examples based on international trade NATIONAL ACCOUNTING

National accounting may vary from country to country, however, every country has these main national accounts:2

1) Current accounts

- Production account: records the value of domestic output and the goods and services

used up in producing that output The balancing item of the accounts is value added,

which is equal to GDP when expressed for the whole economy at market prices and in gross terms

- Income account: shows primary and secondary income flows - both the income

generated in production (e.g wages and salaries) and distributive income flows (predominantly the redistributive effects of government taxes and social benefit payments) The balancing item of the accounts is disposable income ("National Income" when measured for the whole economy)

- Expenditure account: Shows how disposable income is either consumed or saved

The balancing item of these accounts is saving

2) Capital accounts: record the net accumulation, as the result of transactions, of

non-financial assets and the financing, by way of saving and capital transfers, of the accumulation Net lending/borrowing is the balancing item for these accounts

3) Financial accounts: show the net acquisition of financial assets and the net incurrence

of liabilities The balance on these accounts is the net change in financial position

4) Balance accounts: record the stock of assets, both financial and non-financial, and

liabilities at a particular point in time Net worth is the balance from the balance sheets

All these accounts may be measured as gross or net of consumption of fixed capital

It is easy to estimate the output produced by a single firm But just estimating the output from every single economic player and summing it, is not a reliable measure Example: a pasta producing company is facing 2 production scenarios in 2 years in a given region In the first year, there is one Firm A which produces 100 tons of Pasta, each ton is valued at 1000 dollars That is, total output equals 100*1000= 100 000 dollars Now let it be supposed that in year 2, Firm A reorganizes itself and splits in 2 firms- A1, specialized in making the flour, worth 30

000 dollars, and selling it to Firm A2 which carries the final production of pasta Both A1 and A2 are belonging to the same manager as in the first year However, now, Firm A2 will be producing again 100 tons of pasta, for 1000 dollars per ton But the national accounting will record firm A1 as well and would add to the total output of the region where the firms are operating, 30 000 dollars So, in the second year we will have 130 000 output, or 30% of growth Well, it is evident that this is absurd as the firm that is generating the output the same is The