 Thank you, everyone. My name is Michelle Dunn. I'm from the Middle East program here at the Carnegie Endowment. Welcome to Carnegie for a discussion of the global implications of lower oil prices. The occasion for this event is a new IMF staff discussion note, which I hope you've all taken, on this subject. And we're very pleased to have with us the primary author of that note, Asim Hussein, Deputy Director in the Middle East and Central Asia Department of the International Monetary Fund and Chair of the IMF Interdepartmental Oil Group. We also have two people to comment on the topic. Mark Finley, at the end of the table, is General Manager for Global Energy Markets and U.S. Economics at British Petroleum. And Ori DaDouche is my colleague here, a senior associate at the Carnegie Endowment. This is a particularly good time, I think, to discuss this. We've had oil prices drop yesterday and today. They've dropped down to lower than they have been for a few months, apparently on the strength of the expectations yesterday and today, the announcement of an agreement with Iran on its nuclear program. And they're getting close to their low point in January 2015 after the fall in prices that began about a year ago. So what we're going to talk about is how long low oil prices are likely to persist, how we'll know that, what effects they've had on global economic growth, what are recommended policy approaches for our oil exporters and importers in this environment. I also hope to tease out from my colleagues here on the panel their thoughts about the Iran deal and the dynamics in the Middle East region and what that will mean for oil markets. So we're going to go ahead and get started with Asim, who's going to brief us about his paper. Okay, thank you very much, Michelle. First of all, thanks to the Carnegie Endowment for agreeing to host us here. And then thank you, Michelle, for being the host. And to Uri and Michael for agreeing to talk about the paper. So this paper brings together work being done at the IMF on oil related issues, which no surprise have been pretty central over the past year since oil prices have started declining so rapidly. So much of what's in the paper has come out in other IMF publications in the recent past, including our flagship World Economic Outlook in Global Financial Stability reports. But then there's a lot of new things in the paper as well. And I'm going to focus more on the new things that are in the paper and try and connect them with the other stuff. So I am not going to try in the short amount of time that Michelle has told me I have to cover everything in the paper. I'll leave that, you know, hopefully I'll be able to wet everyone's appetite for you guys to plow through it at your leisure. Instead I'm going to focus on particular aspects and try to find and draw out those things. So overall my remarks today are going to focus on what we see as the global economic impact of the drop in oil prices. And in a nutshell, I'm going to talk about how we figure this out. So one thing that's going to be important is what is the persistence of this oil price shock? How long it's going to last? Another important element that determines the economic impact across the world is what is the nature of the oil price shock? Is it because of greater supply or is it because of lower demand and why does that matter? Then another aspect that determines the impact of the oil price shock on the global economy is the extent it has passed through to consumers. So it's all good and well for crude oil prices to drop. But if we don't see it at the pump or in our heating bills or whatever, then does that affect how we spend and in turn does that affect economic growth? And then last but not least, another aspect I think that's pretty important for how the oil price shock affects the global economy is those people that are seeing changes in prices, what are their initial conditions? To what extent are they ready to spend additional money that they get as a result of lower oil prices? For example, if they're heavily indebted, if they're overextended in terms of their mortgages or their credit cards, maybe this is an opportunity to pay down some of that debt rather than actually spend. So that's going to in turn affect what happens to the global economy. And then at the very end I'm going to draw some policy implications but I'll then leave that for some of the discussion perhaps. So to start with oil prices, around the middle of last year oil prices started to drop pretty fast. The red line in the left chart is spot oil prices. The blue line is four year futures. Now two important things there. First, futures prices so which is what markets expect prices will be say four years from now are not the same as spot. The timing of the declines are also not the same. So around mid-year spot prices started to fall a lot. But the four year futures really didn't start to fall in a big way until October. And then at the end of November with the OPEC decision not to cut production both the long-term futures and the spot prices fell a lot further. And so much so that at one point towards the end of the year early January spot prices were a lot lower than futures. What does this mean? One conclusion that one can draw from this is that there will be some recovery, at least markets expect some recovery of spot prices to say the level that is implied by four year futures over time. But because of the big decline in long-term oil prices this recovery in oil prices that's going to happen is not going to be full. We will not go back to 90 or $100 oil even four or five years from now. Instead we'll go back to something like 70, $75 oil. So this is a shock that's going to stay. It will persist. Another way to see this persistence is looking at the prices of oil firms versus the spot oil price. So oil companies typically large oil companies also own a lot of reserves of oil in the ground. So the valuation of those companies reflects at least in part the value of those reserves that they have in the ground. And that's not just the oil being produced today but the oil that's going to be produced over the next many years. Those prices which are in the right hand side in the blue show that at some point say in 2008, in mid-2008 spot prices got a lot out of line with international oil company equity prices. So either people who were holders of equities were thinking, were more pessimistic about oil prices than traders in the oil market or the other way around. Over time these two do tend to move together. Now lately it seems that oil prices are a little low relative to international equity prices. International oil company equity prices nowadays are consistent with roughly $70, $75 oil similar to what is implied by futures markets. This I have to warn you is a very rough graph just to illustrate the point that the drop in oil prices is not just something today. It's something that's going to last. And there are two different ways to think about that. Now it's important to remember though that there's a high degree of uncertainty. $60 a barrel was considered virtually impossible last spring. So we do these fan charts every year or every six months in our world economic outlook publication of what oil prices are expected to be based on options and futures prices. And so in April of 2014 we were looking about a year and a half, two years out. And we had a very large range that oil prices with 95 percent confidence would be somewhere between $0.75 and $140 a barrel. So 95 percent confidence is everything, right? It's virtually impossible for oil prices to go outside that range. Well, look where we went. Okay, so what this today, the range is somewhere between $40, maybe $35 and $105. So I just want to put a little bit of a dose of skepticism on what futures prices do tell us. But I think one thing is clear that oil prices have moved down and they're not likely to go back up to where they were a year ago anytime real soon. Okay, so the second thing I was going to talk about is supply versus demand. Back in 1986 when oil prices collapsed by a similar order of magnitude, it was mainly supply. OPEC and in particular Saudi Arabia had been cutting back production very substantially in the years running up to 1986. And by 1986 they were producing at a very low level, less than a third of what they had been producing a few years earlier. And they decided that this is not sustainable. And at that point they just increased supply very substantially, oil prices fell massively. That was a major boost to the global economy because it was a supply shock. Everyone benefited. Similarly, or conversely, in 2008 when the global financial prices hit demand for oil collapsed as did demand for a lot of other things. And at the time oil prices also collapsed. It was a completely demand induced drop in oil prices. And it reflected a very sharp slowdown in global economic activity rather than bringing about a change in global economic activity. So it mattered a lot whether it was supply or demand. The supply shock was really good for the global economy in terms of boosting growth. The demand shock reflected decelerating or contracting activity. Now it turns out in 2014 the oil price drop is a combination of both supply and demand mattered. In the second half of 2014 economic data coming in in various parts of the world in emerging markets in Europe was coming in weaker than anticipated. That translated into less demand. But at the same time supply factors importantly were also pushing down prices. So in particular the shale oil revolution people were finally beginning to realize this is here and this is really here. Lower extraction costs for oil were finally becoming clear to everyone. And so supply factors were affecting things a lot. So we did two different disaggregations using empirical methods to disaggregate between supply and demand. And in both cases supply came out to matter a little bit more. Supply being the stuff in red. Okay now what else matters in terms of economic impact. What how much of the decline in crude oil prices gets to the consumer. Now what we call this pass through which is the change in consumer prices relative to the change in international crude oil prices. What we find this time around which is the bars in gray or black and white the pass through has varied a lot across the world on average it has been about a half. And the reason for this is that in many countries oil prices are regulated or retail petroleum product prices are regulated and in some countries are even fixed. So you don't get changes in those prices automatically when crude oil prices change. Now the biggest pass through for a region as a whole has been in Europe at about 80 percent. In North and South America about 50 percent. Now that disguises a little bit of the variation within the region in the United States it's been virtually full. But in other countries in North and South America it's been much less on average about half. In Africa and in the Middle East much less pass through. What does this mean what this means is that if the consumer doesn't get the benefit then it's unlikely that his or her spending is going to change in a big way. So that's not going to help growth. But then someone will get the benefit. It could be the government who has less subsidy to pay. It could be state enterprises who would have who'd make either fewer losses or make larger profits. In those cases the government benefits and the state enterprises benefit and depends on what they do with those benefits. Do they turn around and finance other types of spending. Do they turn around and save that money and so on. So the pass through matters a lot for for the economy. Even when private individuals get lower prices they may not actually turn around and spend it. As I said at the very beginning it depends on how indebted they themselves might be. So after immediately after the global financial prices for example when many consumers were over indebted it may at that time maybe a little bit lower oil prices might not have translated into more spending necessarily but rather paying down of debts. That is true in some parts of the world now where consumers are still over indebted and are trying to work off on their balance sheets. Now how does this translate into global growth. So we did some calculations and in our estimation about if prices are fully passed through it would boost global growth by about one percent in about a year. Point A actually rising to one percent in about a year. However we know the prices are not fully passed through or the price declines not fully passed through to the consumer and if assuming the pass through is only half you get a growth impact of only half as much. Now it is fair to say that we haven't even seen that kind of an increase in our global economic growth projections in the recent past. And the reason for that is that there are of course other shocks working in the opposite direction. So for example in the second half of last year there was news coming in about growth being weaker than expected in many large emerging markets China Brazil and so forth. There's also news coming in that in many parts of Europe growth was less than expected. That was independent of the oil price effect. Now if oil prices had not declined then perhaps growth would have been weaker still. It's just hard to know what the counterfactual is. I will wrap up just two more slides. So one very interesting slide that I want to show which is what happened in 1986-87 which was the blue line. Back then oil prices fell very sharply and as you see growth chugged along at about whatever level it was for four or five quarters and only after about a year did growth start to accelerate. So whether it was other shocks that did it after about a year perhaps but I think part of the reason was that consumers may respond to lower oil prices with a lag. It may be that they first adjust their balance sheets. They pay down debts and only after a while once they realize that this is a permanent price change then they start to spend and you don't get the effect on oil price on economic growth until about a year later. I'm going to flip through some of the other slides. There are some financial effects in particular oil producing countries who have been accumulating large amounts of reserves and investing them in financial markets across the world are now less able to do that. They're not, their oil revenue is much less and therefore they're able to accumulate much less reserves. In fact many of them are drawing down reserves. So that may have effects on global financial markets. Lastly I'm just going to refer you to this. How should we think about what countries need to do in response to lower oil prices? Clearly it depends on whether you're an oil producer or an oil consumer. If you're an oil producer lower oil prices clearly hurt. If you're an oil consumer lower oil prices clearly help. But beyond your production or consumption of oil what matters is whether your fiscal position is vulnerable or whether you have a strong fiscal position. What matters is whether your external position is vulnerable or whether you have a strong external position whether you have high reserves, whether your exchange rate valuation is about right and so forth. Lastly what matters is your growth outlook or in particular your inflation outlook and whether you are growing in line with the economy's potential or by less or by more. When you put those three things together policy implications come out I think the one that I will just point to now is for oil producers. Clearly a lower persistently lower oil price outlook for oil producers means that they are not going to be in a position to finance as much spending now as they were when oil prices were expected to stay at 100 and so they will need to adjust to the new oil price reality. Many of them but certainly not all of them have accumulated large buffers so they have time to make this adjustment. Those that have not accumulated the large buffers have less time and will need to make that adjustment rather quickly and we've seen that in market movement squares for some oil producers in the recent past. Michelle sorry for going over to that. No that's okay thank you very much. Thank you very much Asim and I hope in the discussion we'll tease out a little bit more these policy implications for governments of oil exporters and oil importers and also whether they are taking the kind of advice that the IMF puts out including in this paper because we have a little bit of time now at least half a year or so when people were aware that these prices would be going on for a while. We're going to go now to brief comments by Mark and Uri on the paper and then I want to warn each of the speakers that I'm going to ask you very briefly for a comment on the impact of the nuclear deal with Iran on oil markets and then of course we'll go to your questions. Mark you're up now I welcome your comments and also perhaps could you say a little bit more about the supply factors and particularly in the Middle East North Africa region where I think that what has been going on with supply has been in some senses surprising. Happy to. Thank you and Michelle thank you for to you and the endowment for the invitation for organizing today's discussion and I'd also like to thank Asim and the team at IMF for the timely and insightful paper. I especially commend the IMF team for their work on trying to develop a flexible and transparent policy framework for how to deal with the change in oil prices. My remarks today are going to focus on the energy market dimensions of the IMF's work. Part of my job is to manage the production of BP's annual statistical review of world energy for those of you who may not be familiar with it. The statistical review has provided objective global energy market data for 64 years now and my remarks will include references to the data from the 2015 edition which was just published last month and is available at the company's website. First, I think it's useful to reflect on the factors that have driven the oil price decline as Asim and his colleagues have noted. The source of the shock is important in understanding the macroeconomic implications of lower prices but also in reaching a view on what the future might hold for prices and our review of the data suggests a slightly different emphasis than the IMF team have offered and in particular to us lower oil prices in 2014 and so far this year have been very much a supply side story. In 2014, global oil consumption growth may have performed, underperformed relative to some analysts' expectations but at the end of the day, growth was almost exactly in line with the long-term historical average. Supply, on the other hand, was exceptionally strong. In fact, global oil production grew that more than twice the historical average growth rate. All of that net growth, by the way, came from outside OPEC countries. The United States, of course, led the way with the Shale Revolution, driving the biggest increase in oil production in the history of the United States and in fact, in 2014, the United States surpassed both Saudi Arabia and Russia to become the world's largest oil producer for the first time since 1975. But it wasn't just the US. Both Canada and Brazil, for example, saw record increases in oil production last year and both countries achieved all-time record levels of oil production on average in 2014. And it was this exceptional growth of non-OPEC supply, in fact, the biggest growth of non-OPEC supply on record, combined with OPEC's decision last November to defend market share that have resulted in the rapid accumulation of oil inventories around the world and sharply lower oil prices. This year, even as global demand and non-OPEC production have begun to respond to lower prices, a substantial increase in OPEC production has meant that the market remains significantly oversupplied. And of course, this is even before we think about additional volumes potentially coming from Iran given today's headlines. The fact that the oil market remains significantly oversupplied suggests to us that, while of course, oil prices are unpredictable, it is prudent to expect an extended period for the market to work through this state of oversupply. In this, I think the IMF team are right to note market expectations for, and I lifted this quote directly from the report, a substantial part of the oil price decline to persist into the medium term. But with that, one final thought on oil prices, we need to be humble. The report's discussion about the importance of the persistence of the shock strikes me as very important, but also unfortunately unknowable. The only thing we can really predict about oil prices is that they will be unpredictable. And in BP, we actually use a range of long term oil price assumptions to evaluate potential investments. And I think this might actually be a useful tool from a policy perspective as well. It is important that any policies be either robust across a range of prices, or be able to adapt to potentially rapid, significant, and unexpected price changes in the future. From an oil market's perspective, another factor that I think we need to keep an eye on is the elevated level of supply disruptions that we've observed in recent years, most of which are well known, the countries involved, most of which are well known to friends of the Middle East program. Indeed, our data shows that if we include volumes lost over in recent years due to Iran sanctions, that oil supply outages in recent years, largely from the MENA region, have been some of the biggest disruptions the oil market has ever experienced. And I think it is an entirely fair question to ask how lower oil prices might play into the factors that have driven these supply disruptions. Let me turn to the economic implications of lower oil prices. And again, I think the IMF team rightly flags that lower oil prices are likely to be a net positive for the world's economy, but like them, I and many other researchers are very desperately trying to understand how exactly countries and individual consumers choose to save or spend that windfall. I think it's also interesting to think about potential feedback loops of lower oil prices from a policy perspective. Does it feed through, for example, to lower inflation expectations and therefore impact monetary policy? One final theme in the IMF's report that resonates with me is the importance of national policies for pricing fuel for consumers and businesses. And here, let me simply observe with some data from this year's edition of the statistical review. Over the past decade, global energy consumption has risen at an annual rate of about 2%, but for the world's main oil and gas producers and exporters, it's been a very different story. For example, among the OPEC members that we itemize in our energy consumption tables, annual energy consumption growth has averaged 4.7% exactly, so more than two and a half times faster than the world as a whole. And I know that many of my friends in the energy and economic ministries of these countries are very concerned about the rapid growth of domestic energy consumption and what it means, for example, for the ability to sustain the availability of fuel for export as well as the broader macroeconomic risks and distortions introduced by that. There's so much more to discuss, but let me end there. Hopefully I've left some time for questions and discussions. Thank you again for the opportunity to share BP's perspectives on this. Thank you very much, Mark. Now we turn to you, Ori. Again, welcome your comments on the overall issue. Also, policy implications, how governments should handle this. This is something you've written about quite a lot. You have a recent paper that sort of focused on Morocco in that respect, but I'm curious, I thought you had some interesting ideas there on how governments can, in a way, pass on the benefits to consumers without creating some of the problems Mark was just talking about about overconsumption of energy and so forth, so. Thanks, Michelle. I'm very grateful that iconic colleague actually made my paper. Thank you very much. First of all, I want to congratulate the IMF team. I think this is a very nice report. It's comprehensive and it's balanced. It builds very well on the previous analysis by Areski Blanchard at the IMF and also the World Bank's excellent assessment of the phenomenon. I agree broadly with the statement that we're going to have oil prices lower for a significant period of time. I also agree with Mark that in the short term, the supply effects have been more important than the demand effects, but I also think that if you take a longer-term perspective, the demand effects, longer-term perspective, the demand effects have been very, very important. The substitution and conservation effects over the last 10, 15 years have been really, really impressive in terms of depressing, so to speak, oil consumption relative to the growth of GDP. But one point I want to make about policy is that although we spend a lot of time thinking about what caused the oil price, for most countries, for the vast majority of countries, what really matters is that the oil price fell. And this is much more important than just about anything else, including for most countries the evolution of economic activity if you actually just look at the multipliers for a country like Morocco, for example, or not to mention Saudi Arabia, the fact that world GDP goes a quarter of a percent more or less is completely secondary to the income effects of lower oil prices, whether on the high side or the low side. So I wanted to stress that point. The second point that I wanted to stress is I'm a little skeptical about the IMF's assumption that there is a persistence of positive impact on global GDP in the out years after the oil shock. And that is because I believe by far the most important reason that oil shocks are stimulatory of global economic activity in the short term is that they redistribute income towards people who consume more with high propensity to consume. But that only lasts so long. And we are already seeing in the United States, and in fact, I believe that one of the reasons that we've had this disappointing performance in the United States in the first quarter, somewhat surprisingly, is that actually there was a very big reaction on investment and they're going to be, and there are already very significant cutbacks, both on the investment front in energy and on the consumption front of countries, for example, Russia, that are big oil exporters. And I do not believe, I know there are other arguments we talked about it for persistence of the positive shock, but I believe that those arguments like the supply side argument that you make is actually a secondary order effect. Oil is only about 2% of world GDP when you look at what goes into the production of stuff that's distinct from consumption. And I don't believe a loyal price, even by 50%, has that kind of stimulatory effect on world supply. I just don't believe those numbers. So therefore, now that's important because it means that the stimulus is short-lived even if you have a high pass through. So we need to bear that in mind. The other point I want to make is, see I'm looking at this, the other point I want to make is that what really matters for policy, in my view, is not so much the cause, as I said, of the oil price but the persistence that you assume. And you do need to make an assumption about persistence. So my friend Mark here, I'm going to disagree a little bit, you know? Don't tell me, you know, 95% interview, $40 to $120, that doesn't tell me anything. I could tell you that before you even came into the room. So you need to have a view, we have a view, I have a view anyway, I think the IMF has a view, I believe BP has a view, that the oil price will stay low. In this case, and this is one of my critiques of the IMF paper, why don't we actually do a rigorous economic calculation under that baseline scenario, and you can twiggle it, if you like, up and down, of what this actually should mean for the consumption of both oil exporters and oil importers, and you can do that. You know, there's a thing called the permanent income hypothesis, right? And you can calculate that if you assume that the oil prices stay at $70 or so for six or seven years, that indicates of the United States, the effect on permanent income of the United States, or if you like, the wealth of the United States, is equal only to something like half a percent of GDP a year. That gives you an order of magnitude of the sort of adjustment. For Russia, it may be, I don't remember the exact numbers, but they're in my paper, 3%, for Saudi Arabia bigger than that, for Morocco, it's a positive, of course, Russia is negative, for Saudi Arabia is negative. For Morocco, it's a positive one to two percent. That gives you an order of magnitude of the sort of adjustment that is needed, and it's actually relatively modest. Final point I wanna make is that the IMF analysis is incomplete. This is a case of bureaucratic separation of powers I'm very familiar with it, having worked at the World Bank for many years. The IMF paper ignores the other very important paper written by the IMF that talks about the effects of oil prices on climate, and what the IMF should be saying in this paper is that a very important consideration right now should be to try and keep the oil prices high, and that means not only reducing subsidies in developing countries, but increasing taxes in advanced countries, and then they should close the circle by saying that, however, we have to worry about the aggregate demand effects of these policies, and the way to do that is to compensate higher, maintaining higher prices in the advanced countries and in the oil importers more generally, and compensating that with tax cuts, which is the recommendation I have in my paper. And so if I was Christine Lagarde sitting here, I'd be saying to our team and his team, why don't you guys coordinate? Thanks. Okay, Ori, thank you very much. We're just about to come to the audience for questions, but before we do that, I want to ask each of the panelists to comment very briefly one minute about the Iran thing. Iran has the fourth largest oil reserves in the world, about 10% of the proven oil reserves, with the assuming that if the US Congress approves this deal and if it goes through and if sanctions are lifted, I think within a year or so we'd be seeing, and we're already seeing prices reacting to the deal, but we should actually see a difference in markets. So tell me what you think it will mean, starting with you, Asim. So Michelle, as you say, it depends, first of all, on whether there's approval of the deal, not just by the United States, but I think also by the Iranians' government. And then the second step is whether it's actually implemented. And of course, so far, we don't even know the details of the deal and what implementation is required. But assuming all this happens, I think it is safe to say that it means more oil on the market at some point. It's at this point unclear how quickly, how much more oil could be brought on, but certainly over the longer term, one would have to believe that more Iranian oil will be available for the world. Now, this may require lots of investment to substantially increase Iran's production capacity. But even in the short term, in principle, some of the capacity that is already there that they cannot use for exports should mean more supply. Now, the deal has not come as a surprise. So markets have known this, markets react every day. I'm not sure how much to sort of think that the near term reaction will be, even for that matter, in which direction. Although, presumably, in a little bit of a downward direction, because now it's certain that a deal has been agreed as of yesterday was still a little bit uncertain. But I think the important thing to draw from the Iranian deal, if it goes through and is implemented, is another reason to think why the drop in oil prices is likely to persist, right? Oil prices will probably not go back to the levels that we had seen in the absence of large shocks in the opposite direction, because more oil will be on the market in over the longer term. Okay, thank you. As Mark, your thoughts, and also regarding Iranian supply, I mean, there's the question of Iran taking more out of the ground, but isn't there also a lot of Iranian oil sitting on tankers ready to go, or tell us what you... You anticipated part of my response. Oh, sorry. Yeah, no, I think I... I'm not gonna give you a straight answer, but I'm gonna give you kind of the three key variables that we're looking at and thinking about as we try to gauge the market's response to this. One is the timing of, is there an agreement? What are the details of the agreement? What kind of provisions are there for a timing of a return of Iranian oil? Second is, what are the capabilities? Current, well, in 2014, Iranian production was about 800,000 barrels a day below what it was in 2011, i.e. before sanctions were implemented, but have those facilities been maintained? We don't know. What is the capability to increase production rapidly? We don't know. Another dimension in the short term is apparently Iran has built up a significant buffer of crude and other liquids that are stored on ships, and estimates I've seen range from 30 to 40 million barrels, and how quickly can that oil be brought to market? Our perception is that it's likely to be some of the first oil sold, but again, it will depend on the provisions of this agreement. And then the third dimension of uncertainty is how do other OPEC producers respond to this? Is it a short, intense increase in production? Is it long and drawn out and phased in? And how do other OPEC producers respond to that? Do they accommodate that increase or not? But I think the starting point, again, as Asim mentioned, this is a dramatically over-supplied market already. So any volumes, any incremental production would just add to a market that has already significantly over-supplied. Thank you. Ori. Yeah, not much to add. I mean, I basically agree with what has been said. Let me just stress that I think I believe that the other big argument, in addition to what we've just heard, that oil markets will stay, oil will stay weak, is the, I refuse to believe that the shale oil revolution is going to be limited to the United States. Right. Yeah, and so I just wanna stress that. I know somehow when Mystique has been built in this country, that only we, the Americans, have the frameworks and the technology and the interest. Well, I've heard that one before in many contexts. And I think that's wrong, and so the point is that if the oil price goes much further up than it is at the moment or even stays at this level, there will be a lot of opportunities around the world to do some shale oil at the margin, which will increase. And I also believe that there's a lot of new technology coming along on the consumption side, both in the production of renewables and also in consumption. Like I just was in San Francisco at a technology conference and I got to sit in the first Mercedes-Benz driverless car. And it was absolutely delightful. I strongly recommend you to purchase it as soon as it comes into the market. And the driverless car will, in my view, significantly reduce the demand both for automobiles sitting there and will make travel just much more efficient than it is at the moment. Okay, thank you, Ori. Okay, so now questions from the audience. We have microphones, so please put your hand up if you'd like to ask a question. Just please identify yourself and then let me know if your question is directed to a particular speaker. Gentlemen in the back. Hi, my name is Kevin. I'm an intern in the South Asia Department here. I remember seeing a few reports a while ago, I think most notably by Citigroup that Saudi Arabia will possibly become a net oil importer by the year 2030 or around then. I am wondering whether you can comment on both the domestic and international implications of that or the study itself. Thank you. Okay, do we have any other questions right now? Let's take one more. Hello, I'm Bill Marsteller with the Export-Import Bank and this is a question for Mr. Hussein. I'm very intrigued by this pass-through data and I'm wondering if you could maybe tease out some more details that would reveal some of the policy performance of various countries. You gave, I think, the average and what I think would be interesting to note is, does that differ significantly when prices are going up versus when prices are going down? And then also for producers versus consumers, both up and down, are there any significant differences? Okay, let's start with those two. Why don't you start with that question to you, Asim, and then we'll see, Mark, perhaps you can answer the Saudi question. Okay, and actually part of my answer to this question may relate to the Saudi question. Pass-through varies across countries and I'm not sure if I have an answer for you in terms of whether there's a significant asymmetry between upward price movements and downward, but there is a big difference between or across countries and the biggest reason for the difference is, of course, regulation. In many countries prices are controlled and in many countries prices are just fixed as in many of the oil-producing countries where prices are fixed at very low levels. Now in many oil-producing countries, prices may be fixed at very low levels that still cover cost because their cost of production is very low, but they certainly don't cover opportunity cost in the sense of they could sell that oil elsewhere for a lot more. Now, when countries are faced oil-producing countries with a new oil price reality and their revenues are much lower than their expenditures, they have to adjust their fiscal balances, one of the ways to do it is to look especially at these energy pricing elements and by increasing domestic energy prices you of course increase the revenues and therefore help balance your budgets, but what you also do is you discourage overconsumption and prevent the possibility of something like what you suggested, Saudi Arabia becoming an oil importer in 2030, which I think is probably a far cry, maybe under some particular assumptions that could possibly happen in particular products, but surely not for petroleum as a whole. Specifically on the Saudi question, today Saudi Arabia is by far the biggest oil exporting country in the world and yes, while it's true that it does have very rapid growth rates of domestic consumption, I guess the question would be if Saudi Arabia were to import oil from whom would it import? And certainly when I travel to the kingdom, I see a lot of work being done within the kingdom on efforts to slow the growth of domestic consumption, to increase the role of natural gas in the economy, to reduce the amount of oil, for example, that used in power generation, to increase dramatically consumption of renewable energy, and to diversify the energy mix, in addition to finding ways to improve efficiency of the energy use. So I should mention that we have a companion piece of work to the statistical review as a long-term world energy outlook, which is also available on our website. We do not have in our reference case the Middle East and Saudi Arabia becoming net importers by 2035, which is as far out as our forecast goes. Yeah, I'm gonna differ a little bit from my colleague. Of course, I believe that you should cut energy consumption in every possible way, oil consumption in every possible way, because of its many adverse effects. But I do wanna say that the argument that Saudi Arabia should consider its opportunity cost of not consuming this oil also needs to take into account the fact that you're facing a globally inelastic demand curve. And so in reality, the opportunity cost for Saudi Arabia, at least in the short term, is actually very low from consuming that oil, because if they put it on the market, the oil price would fall. I'm not disagreeing with the thrust of your recommendations. I just wanted to be economically clear why we're making this recommendation. Thank you. Okay, more questions. Anthony Livanius from US Energy Stream, an oil and gas advisory. My question will be addressed to all speakers. In this low oil price environment, what will be the role of US crude oil experts? Do you see US crude oil experts as an important element to make the US sale oil revolution more sustainable? And what will be the global implications of US crude oil experts? Okay. Thank you. Thank you. Is there a question right there? Ari Sillman from Securing America's Future Energy. And my question relates to OPEC output targets in a persistently low priced environment. So I was wondering what you all see as potential consequences for inter-OPEC dynamics in a low price environment, especially given potential and past disagreements that they had at the last meeting. Okay, great. We'll take one more gentleman in the front here. Thank you. I'm Randall Doyle of Georgetown University. I want to ask two questions, geopolitical questions, dealing with China. And part of the justification for China's aggression in the East China Sea and the South China Sea was of course the acquisition of gas and oil. Now that we have plenty of both, and as in your opinion, maybe your internal studies, BP and so forth, will that edge to Chinese foreign policy be somewhat diminished? They won't be quite as aggressive in the region in essence because there really isn't that kind of desperate need for these resources anymore since they're so plentiful. Number two, dealing with the Middle East, obviously China, United States and Europe are taking steps to somewhat distance themselves from being more and more, you know, being dependent on Middle Eastern gas and oil. What does that mean for the Middle East? I mean, despite the degree this morning with Iran, when you have three of the major consumers of Middle Eastern oil and gas, obviously constructing policies to distance themselves more and more from the region, but for various reasons that we all know about, what does that mean for the future of the region itself? As it deals with this, as some people call it, the 30-year war going on right now, trying to figure out where its future lies, what's that gonna mean for the region when their major consumers are starting to distance themselves? They have all this oil and gas, but the markets are starting to diminish. Okay, great. So we have several questions on, related to sort of geopolitical dynamics OPEC as well as the role of U.S. crude oil exports. Mark, let's start with you this time. Shelly, just run through a quick response to each. Is that? Yes, if you have something to say on each of those points, go ahead. Okay, crude oil exports. I mean, what's happened in recent years as U.S. domestic oil production has increased dramatically is that U.S. import, net import dependence has fallen sharply, U.S. import, net imports have fallen by half. In the process of adjusting to this, U.S. refineries have maintained high levels of operation even with generally falling domestic demand over the last decade. And so as a result, the world oil markets have already seen the impact of the U.S. Shell revolution through the fact that the U.S. has gone from being the biggest net importer of refined products in the world to the biggest net exporter. Now at some point, the capability of the U.S. refining system to continue to process more and more volumes of this light, sweet crude oil will be constrained. And so we, in our energy outlook, have penciled in an assumption that eventually policies relaxed to allow economically rational trade to continue to rebalance growing domestic production of light, sweet crude oil with the configuration of U.S. domestic refineries. But that's an assumption for the sake of the narrative. On intra-OPEC dynamics, big question. I think it's, so far, what we've seen is since last November, OPEC has said we're over to you, non-OPEC producers. We're going to defend our market share and you guys figure it out. In fact, recent OPEC production is more than a million barrels a day higher than the group's official target of 30 million barrels a day. How sustainable is that? And what might be the circumstances under which OPEC re-engages to try to manage production and what format I think is one of the critical questions for the market going forward? On the geopolitics side, I would defer to other people on the China expertise. I would simply note that China has now passed United States as the biggest net oil importer in the world and in our outlook, China is on a trajectory to become the biggest oil consumer in the world and to have a degree of import dependence that is higher than anything the U.S. ever established on the basis of current trends. And what does this mean for the Middle East? Again, I would simply point out that the Middle East still holds half of the world's proved reserves of oil and in our data, I don't have the figures for the Middle East specifically at my hands, but for OPEC as a whole, our outlook is that OPEC more or less maintains a market share through 2035 and so since we've got a projection of a growing global marketplace, that means that the absolute volumes of OPEC production continues to grow in pace with a global market, not rapidly, but sufficient to maintain market share. Great. Yeah, I just wanna take the Middle East, the North Africa, the implications, questions, which I think is a very good question. I wanna say two things, maybe counterintuitively. Number one, there are several countries in the Middle East, North Africa that are oil importers, okay? Egypt. And Morocco, Jordan, Lebanon, et cetera. So these countries benefit. Second, in the surrounding area to the Middle East, there is Europe, which is a net oil importer. If Europe does better in general, the Middle East, North Africa, some countries anyway are gonna do better. And the third, somebody who was born and raised in Libya and saw what the Gaddafi regime did in Libya. And also I've been an observer of geopolitics. I don't mainly work on geopolitics like my friend, Michelle, but I've been an observer of geopolitics and what I know is that a lot of oil can also hurt you. Of course, economists have known this for a long time which is a disease, but I'm less concerned actually about the Dutch disease effects because I kind of as an economist say, well, give me all that money, I'll make it work for you. But the geopolitics or the politics of having huge oil reserves in small populations has been devastating again and again, created a lot of idiosyncratic behavior which simply could not be sustained like the Gaddafi regime or the Saddam Hussein regime could never have been sustained for as long as they were sustained and their behavior without these kinds of huge events. And that happens right away in other countries as well. So I'm not singing loud in the Middle East. So if you tell me lower oil prices for the next 20, 30 years, is that gonna be bad for the Middle East? My answer is probably not. So do you not agree with the idea that some of the major importers would be able to avoid supply from the Middle East as much as possible? You think China and others will be forced to be getting a lot from the Middle East even if they would rather not be because of turmoil and so forth? I don't disagree that the Middle East will continue to be a crucial supply. You just have to look at the numbers on the reserves. I'm trying to address the question what will the impact on the Middle East, North Africa be from a long-term development perspective if oil prices instead of being at $100 are at $50 for the next 30 years. And I'm not at all convinced that it's a negative effect. I think overall for the region it may very well end up being positive. Although of course there'll be a lot less mansions than I switch on by people in Abu Dhabi. I understand that. Yeah. I mean, I would just add to that Ori, the fact that this region, the Middle East region has an enormous demographic youth bulge and the highest rates of youth unemployment in the world, which are I think what's driving a lot of the instability here and it's interesting to think of if the persistent lower oil prices could in effect accelerate the kind of changes that we've seen. Okay, Asim, your turn. So I think the lower oil prices for oil exporters do present a big challenge in terms of what you just alluded to, Michelle, which is many of them do have very large and growing young populations that are either entering the labor market or will be in the near future. And so generating growth from sources other than the oil sector. And the oil sector, keep in mind, doesn't actually employ a lot of people, but what it does is it provides spending power, which governments have then used to employ people. Now that tap is if not been turned off, it's at least put on low. And so government's ability to generate employment becomes much less. And so what they're going to have to do is rely much more on the private sector. And that's going to entail difficult structural reforms to really unleash private sector growth and to make things sustainable. Now in between, there may be lots of frictions, but it has to be in that direction that they had. And I personally am in the Uri camp that I think eventually this is gonna translate into the right sort of liberal economic policies that are needed to generate vibrant private sectors. And that has to happen because that's what the demographics dictate. Just a couple of small things on the other points that were made. I think on the U.S. crude oil exports and whether sort of liberalizing that would have major impact on the global oil market. My own sense is probably not so much. Rather the first order impact will probably be on U.S. refiners. And what you might have is more crude being refined elsewhere rather than in the United States if the crude oil ban were lifted. But the total amount of crude oil being extracted or globally would not be affected in a big way with the change of that. On OPEC, my own sort of personal skepticism is with respect to cartel discipline when you have members that exceed a dozen. And if you need to cut production a lot to sustain prices at a particular level, what mechanism can ensure that cartel discipline can be maintained and so on? And as Mark observed, even today, OPEC production does run in excess of their own production target. Okay, I think we have time for one more round of questions. Here's one here. Hi, Toba Hellerstein, Mina's Associates. So we've talked a little bit about the market opportunity cost for governments that are not reflecting the price of petroleum in their domestic consumption. And this is the budget that they are, the revenue that they're not able to incur by heavily subsidizing this energy. How do you tease that out, and this is probably for all the panelists actually, how would you tease out the economic opportunity cost to the political opportunity cost of not being able to effectively use subsidies as a tool that would appease populations that are largely discontented? Okay, any other questions? Hi, Connor Sisslow with the Asahi Shimbun, the Japanese newspaper. My question is for anyone who cares to comment, but it's based on comments by Dr. Dadoosh. What are the prospects for shale development in Iran specifically, if you happen to know? And what would be your most optimistic scenario and maybe a more realistic scenario about how quickly that could come online? Thank you. Okay. Any other questions right now? Okay, I think we'll go to those two then. Why don't we start with you this time, Ori? So let's talk a little bit about the economic, but also the political... Of lower oil subsidies. Right, right. I'm not gonna take the shale Iran, I have no idea. Maybe BP. On the political impact, there are two things to note. Well, three things actually. First of all, some countries have done it, and apparently managed to contain the effects. We've had significant cutbacks in subsidies recently, I think in Egypt, you have these numbers. Egypt, India. Energy subsidies. Energy subsidies. Indonesia, et cetera, more or less is being kept under control. Second is you can compensate. You can compensate. And this is part of my argument that I made at the beginning, is that you can give income support instead of giving energy price support. Income support is more difficult to give because you have to target it more carefully, and it's not so easy in a weaker, administrative environment, but it is much less distorted. Okay. And compensates effectively for the higher energy prices or higher oil prices, whatever it is, get it. And the third, of course, is the observation which has been widely documented that actually a lot of these energy subsidies go to wealthier households, typically, rather than poor households. So you've got those three considerations. The empirical evidence, the ability to redistribute to compensate through incomes, and the fact that actually much of the population does not see or that the poor population sees proportionally less, to suggest that the political effect of cutting those subsidies may not be as big as many people feel. But, or let me just follow up on that a little bit because now the IMF has certainly urged oil importers to, you know, take advantage of this period of lower prices to cut subsidies and to bring prices into line with market prices. But although there have been some moves in those directions, I don't really, I don't know how much has happened. I mean, take Egypt for an example. Egypt made one big cut in energy subsidies a year ago. I don't think that's been followed up with other, they've talked about other cuts, you know, to bring them into line with market prices over a period of several years. But although low prices have persisted, I don't think those, I don't think there have been further cuts so far. And also things like cash transfer programs and so forth are really not, not really operating yet. So the question is whether, you know, whether we can begin to see at this point whether governments, whether importers or exporters are, you know, are really taking advantage of this time to do the things they should or not. Will this be a missed opportunity? Again, my impression, but I see maybe you can elaborate, but the, my impression is that there is quite a lot of it going on. Of course, when the oil prices are falling, you don't need to do the compensation so much. And so it's easier to do right now. And countries are doing it. I'm a little more familiar with the case of Morocco and in Morocco, I think the budgetary effects of the changes in the subsidy regime are in the region of 1 to 2% of GDP. So not at all trivial. One other thing that I would bring up also is that obviously the oil exporters, the Gulf States have been major, have made major contributions to a number of countries in the region and beyond. And then that's another thing we haven't brought up is to what extent that will change in an environment of lower prices, but Mark, go ahead. Just very quickly on the opportunity cost of the political versus economic opportunity cost, I'd echo or just point and just say that, observe that it's probably the political opportunity cost of failing to pass through lower prices is probably significantly different than the political opportunity cost of reforming subsidies by raising end-use prices. So easier to do in a falling in price environment. I've seen a number of countries, at least on the peninsula where I look a lot, talking about, well, maybe it's a matter of can we preserve this pricing regime for citizens versus expats or how do we maintain the equity interests of passing this benefit through to poorer people but allowing people who can afford it to pay more. And so I see some differentiated discussions around those themes and threads. On Iran, we haven't looked specifically at shale prospects in Iran and let me, we don't operate in Iran, but shale is a hard thing to do. And if you've got conventional resources, you would develop your conventional resources first because you have to work as hard to get the resource out of the ground as you do for shale. And so we have looked at prospects for shale outside of the United States and the resources are ubiquitous around the world, but the combination of factors that have led to the rapid development of them in the United States do seem hard to replicate around the world at the pace and scale that we've seen here. That's not to say that they can't make a material contribution and we go into that in more detail in our outlook. Okay, and the final word I'll ask them is to you. Thank you, Michelle. This is a point that both Uri and Mark have made, but it's really important, so I want to repeat it. And that is, with respect to the political cost or opportunity cost of subsidy reform, the rich consume a lot more oil than do the poor. So at least in principle, cutting oil subsidies reaches a lot fewer people than, say, cutting other types of spending potentially does. Whether it's politically costly or feasible is another matter, but certainly the economic growth effects could be potentially much more manageable if you're affecting a smaller segment in a big way. And what about the effects on industry in countries where industry is built on a business model of cheap energy? Yeah, so that could potentially be very significant and in fact, many oil producing countries have industry that is highly energy intensive. But eventually countries do need to move to diversify and if their non-oil industry is heavily energy intensive, it's not really diversification. So maybe the answer is do this gradually, but it does need to be done. And in the end, it will be a political trade-off between cutting subsidies or raising prices of energy versus other very high priority spending, social spending, capital projects, infrastructure, and so on. And then it's not just a matter of political cost of one thing, but it's the relative political cost and the relative economic cost of one versus the other that will need to be weighed. Those are going to be difficult decisions. Many of the oil producing countries do have the luxury of time to do them. They don't need to be done this year or even next year in many cases. There is a little bit of time. In some, there isn't time. Now on the oil importer side, I think also subsidy reform is crucial and it's easier to do in an environment when prices have dropped. If they now change over to automatic price adjustment mechanisms, when prices do go up eventually, it's a little bit easier than trying to raise prices at a time when economies may be slowing and so forth. So I think for oil importing countries, this is an opportunity, lower oil prices do mean faster growth and better balance sheets. And so if part of that can be used to take away some of the distortions in the economy, that would be good in the longer term. Okay. Thank you, Asim, and thank you very much for launching your paper here today. Also, thank you very much to Mark Finley and Ori De Dush, and thank you all for participating. Thank you.