A Time To Plan

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Nations should think of this recession as a backdraft (if you missed the 1991 movie starring Robert De Niro, that occurs when a fire sucks up all the oxygen until suffocating).

This is the time to invest in securing every country’s most basic needs, starting with energy (before the fire reignites explosively when it reencounters oxygen, also known as a flashover).

The logic is simple. The global downturn that started in the second half of last year has slowed production, reduced investment, and increased output spare capacity in just about every industry. That trend will continue throughout this year and part of 2010, but eventually economic growth will pick up.

Meanwhile, global urbanizations trends and population increases will continue for years to come, according to the United Nations, and that entails more consumption of just about everything, especially energy. A one percent increase in economic activity is almost equal to one percent energy demand boost.

That means this recession, however dire it feels, is really a step back before another voracious growth cycle. And it’s also an ideal time to take advantage of bargain prices and lower capital investment costs so some can boost production and others can secure future supplies. In other words, this backdraft is a critical time for nations to position themselves for the flashover, especially for those with the means to do so.

Some countries are already planning for the long-term, way beyond the painful recovery that is still pending and even farther along than an eventful return to full-steam growth. Unfortunately for most emerging nations, their options are constrained by limited resources and dried up credit.

But for oil producers, this is an extraordinary opportunity to learn from the past and to modernize their economies.

Oil prices are a good litmus test since commodities are broadly indexed to crude markets. Opec has been incredibly disciplined in cutting overall production, creating a 7 million barrels a day spare oil production capacity, equivalent to 8 percent of global demand, according to a recent Bank of America-Merrill Lynch report. This while non-Opec production continues to contract as a result of falling investment and lower biofuel production.

But rising demand will eventually tighten the current spare capacity and the buildup in oil inventories throughout the world will begin drying up (most believe starting in the second half 2010). Energy prices will again soar, along with other commodities, and capital investment costs. That means that the demand for oil and gas in the next few decades will not only recover, but steadily increase, even if its share in the global supply mix shrinks slightly at the expense of renewable sources, nuclear power or clean coal. And that means now is the ideal time for producers to buildup capacity and for consumers to secure future crude supplies.

China is a good example. It has pledged nearly $50 billion this year alone in a flurry of loan for oil deals with Russia, Kazakhstan, Venezuela, Brazil, Ecuador, and Angola. And Beijing said it plans to allocate billions more for energy security, using its nearly $2 trillion war chest in foreign reserves from years of export surplus.

China is anticipating a nearly four-fold increase in oil demand by 2030 by negotiating crude supplies today with cash-strapped producing countries that want to profit from precisely that future run-up in prices. China is also using its financial muscle to gain access to meet demand of vegetable oils, metals, and other commodities, while opening up more export markets.

On the other end of the spectrum, Brazil intends to boost investment in its oil sector through 2013 to $174 billion, despite adversity in the credit market. It wants to profit from the future run-up in oil prices to remodel its economy. But it is also simultaneously investing in other industries, including biofuels that will allow it to export even more crude.

For their part, Persian Gulf countries are largely keeping with investment plans in their oil and gas sectors and have even gone bargain shopping for energy assets globally like China. That is coherent with the expected surge in demand.

The region has invested in diversifying their economies slightly by boosting downstream production of fuels and petrochemicals. And it has even increased efforts globally to secure other basic commodities, like cereals.

But Gulf countries remain stubborn when it comes to modernizing their economies. For example, this would be a good time to gradually decrease indiscriminant subsidies that are distorting the economy, consuming a good share of government budgets, and skyrocketing energy demand.

Doing so would not only free up more gas and oil to export, but it would help address rising energy security concerns in several Gulf countries. For example, Saudi Arabia is one of the world’s biggest natural gas producers, but it barely meets local demand.

It’s true some Opec countries were smart to save loads of cash from years of high oil prices. But a lot of that money has gone into real-estate, mirroring the already discredited U.S. boom, and to sovereign funds that have spent billions in a myriad of foreign investments. The priority should be developing more productive sectors of the economy, outside oil and gas.

Iran is moving in that direction, albeit out of international pressure forcing it to seek as much self-sufficiency as it possible can. Iraq too appears to be heading in that direction, but unchecked growth in the rest of the Gulf based on luxury and brick-laying will only exacerbate problems in the future, regardless of the price of oil.

Western countries are already investing billions in new sectors of the economy, especially in developing more renewable energy sources that will add to the energy mix, not compete with fossil sources. (Although it’s equally true that a disproportional part of US stimulus funds have gone to the financial sector, instead of more productive sectors.)

There are still other countries, like Venezuela, that have squandered a lot of their wealth through inefficient economic models and populist policies that have even destroyed oil production capacity. And others, like Ecuador, which seem on track to balance investment in the economy with social welfare plans.

Whatever the model, the recession should trigger economic restructuring in all nations. Each country, each region will have different opportunities and challenges. Some will use it to perpetuate inefficient models. Others to redefine themselves.

And long-term planning will make the difference. All it takes is thinking in 10-year cycles. Even five, if a decade is too long. At the end, the globe’s biggest challenge is not the current recession, but how to fuel growth in the future.

Andres Cala- Madrid-based freelance journalist and regular contributor to U.S. publications, including the New York Time. The Christian Science Monitor and Energy Tribune. A political scientist and former Wall Street Journal writer, he regularly covers Middle Eastern and European policy, as well as global energy issues.


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